Startups Will Be Some of COVID-19's Hidden Casualties
After Congress passed its $2 trillion coronavirus aid package in late March, otherwise known as the CARES Act, business owners sighed with relief. But recently, Congress bore public backlash for injecting supposedly “small business aid” into the coffers of successful public companies like Ruth’s Chris Steak House. Referencing such payouts, one Republican senator commented that “millions of dollars are being wasted.” In the wake of these criticisms, some large chains like Kura Sushi USA have even promised to return their small-business funds.
And as small business owners await their portion of the $484 billion in additional support approved by President Trump last week, one New York Times columnist noted that “the most heroic thing an entrepreneur can do is to carry on.” However, while small mom-and-pop shops can “stay nimble” and survive the pandemic with the help of local and Congressional aid, innovative startups may not survive without access to early-stage fundraising.
Drawing from venture capital-led fundraising data from the Great Recession, Collin West, Nihar Neelakanti, and Gopinath Sundaramurthy have released a new report on the challenges entrepreneurs launching such will face during and following the coronavirus pandemic. Appropriately titled “This is How Much Harder it is to Raise Capital During a Downturn,” the report finds that after September 2008, entrepreneurs at startups across all stages of development sold larger stakes in their businesses for smaller sums of the capital needed to make those same businesses successful. Those stages range from the “seed” round (e.g., when a friend or neighbor would ask you to invest) through “series A, B, C, and D” rounds (i.e., when companies seek to optimize products, become profitable, scale to increasing demand, and draw significant funding from groups like hedge funds)—and all exhibited the same pattern.
Though the report’s authors are careful not to draw a direct, one-to-one comparison between the Great Recession and the coronavirus pandemic, they suggest that if the past is any indication, startups will soon face similar challenges (if they aren’t already). As such, politicians in Congress might consider exercising the power of the purse to support innovative startups.
Rather than doling out dollars indiscriminately, though, they might consider designing a competitive funding scheme for startups that attempts to address any of the many novel problems posed by the pandemic. To borrow the Global Innovation Fund’s framework, such a scheme might solicit online applications from startups for capital grants, perhaps ranging from $50,000 to $15 million, and require their leading entrepreneurs to make explicit connections between their companies and the coronavirus pandemic.
Modeling such a program on already existing “innovation grants,” such as those offered from organizations including the American Society of Association Executives, pharmaceutical giant Pfizer, and the health-focused Aetna Foundation wouldn’t be hard, and politicians might even channel support to the most promising ideas generated in any one of the coronavirus hackathons happening across the country. Fostering such an innovative and entrepreneurial environment will be vital for the country’s economy and its health. In the end, as Bill Gates’ most recent column asserts, it’s “Innovation vs. the Coronavirus.”
Indeed, startups are already proving to be valuable problem-solvers amid this pandemic. Often overshadowed in the media by established companies like H&M, Ford, and GE, an array of startups have directed their entrepreneurial energies at fighting the coronavirus, improving life in quarantine and after it, and helping businesses that have been adversely affected. To begin, startups have developed health- and containment-related smartphone apps like DocClocker and TempTraq that assist those on the frontlines and track the coronavirus. Furthermore, startups focusing on automated logistics are having a field day testing robot delivery drones, including Sacramento-based Nuro, whose robots, nicknamed “R2,” are keeping folks inside by shuttling supplies to field hospitals.
A silver lining of sorts, this report optimistically suggests that crises such as COVID-19, though endemic with financial challenge, also present innovative entrepreneurs with opportunities to flourish. Companies that have reacted to consumers’ demands during the coronavirus, such as cleaning, delivery, and meal prep services and video game companies, have been drawing in droves of new customers. And to take just two examples from the past, the 2002-2004 SARS pandemic propelled then-startup Alibaba to dominance in Asia, and the 2008 financial crisis was the crucible in which companies like Airbnb and Uber (also then-startups) turned into gold.
West and Neelakanti echoed as much in “Is This The Black Swan Moment To Solve Big Problems?”, a separate Kauffman Fellows report published in mid-March, wherein the authors argued that an upshot of the coronavirus pandemic is the plenitude of opportunities it provides for entrepreneurial innovation. With any luck, this crisis will catalyze some of the “world-changing companies” heralded by businessman Mark Cuban. Crucial to that positive outcome, however, will be smart policies—perhaps like the competitive scheme outlined above—designed to support entrepreneurs and startups on the front lines of American innovation.