The coronavirus pandemic has been notoriously difficult for startups, as both revenue and VC funding has dried up.  VC funding has fallen by around 20% globally, and the question being asked across the sector is whether this is a temporary hit to the fortunes of startups or something more fundamental.

A recent report from INSEAD explores the situation among startups in the MENA region.  The report saw a few hundred founders and investors quizzed from across a wide range of industries.  Perhaps unsurprisingly, the results highlight the bleak outlook many respondents hold for the economy, with this especially so among the entrepreneurs in the sample.

What was perhaps interesting, however, was that late-stage startups were generally more pessimistic than their early-stage peers.  This was despite those late-stage ventures suffering less financially during the pandemic, especially in terms of fundraising.  The authors suggest that the relative optimism of early-stage entrepreneurs may simply be a case of inexperience.

Covid impact

Equally unsurprising is that around 18% of startups had benefited from the pandemic, both in terms of revenue but also the ease of fundraising.  For the remainder, however, fundraising had been delayed and valuations downgraded.

For investors, their time horizon had been pulled back to the pandemic period itself, with few thinking beyond it.  The pandemic hadn’t changed their approach to investing a great deal, however, with what change that had materialized generally being around the industries targeted.  It was also more likely that VCs would add extra investment to their current portfolio rather than backing new ventures, which helps those later-stage ventures mentioned above.

Both entrepreneurs and investors agreed that the core challenges presented by the pandemic were the decline in revenues seen throughout the lockdown, the difficulties in raising funds to tide them over this period, and the challenges involved in cutting expenses.  It’s a challenging set of circumstances that the overwhelming majority believe will continue for the duration of the crisis.

Changing tack

For many startups, they have responded to the crisis by layoff staff and reducing salaries, although there has also been attempts to pivot business models, products, and services.

“For the last five years, ‘growing at any cost’ was the mantra. Now there needs to be at least a view for profitability,” one entrepreneur explained. “Don’t stress so much about valuation at the expense of losing a round or a good investor. I would say focus on profitability, hoard cash as much as you can, and raise more funding than you think you need because you never really know what can happen.”

From an investment perspective, there was an increase in caution as a result of the pandemic, and they have strived to maintain flexibility with their financials so they can adapt to any unexpected events.

As with so much of society, the startup world is clearly attempting to rapidly adapt to the huge change that has swept the world.  Some have been able to react opportunistically, while others have had to scramble to survive.

Given the rapid pace of change at the moment, INSEAD plan to follow up the survey every six months, so it will be fascinating to see how things have changed in 2021.