Start-ups in the time of COVID-19: Facing the challenges, seizing the opportunities
Start-ups play a key role in OECD countries in terms of job creation, innovation, and long-run growth, but the COVID-19 crisis is reducing their creation, challenging their survival, and limiting their growth.
Policy interventions should tackle short-term challenges, supporting short-term liquidity and availability of funding, and foster the ability of start-ups to grasp new business opportunities that may arise during and after the pandemics.
In the longer-term, policies that reduce barriers to entrepreneurship, provide incentives for start-ups, and boost entrepreneurial potential could help limit the detrimental employment and innovation effects of a missing generation of new firms and help speed up the recovery.
Start-ups have emerged as key drivers of economic growth and job creation, and are often a catalyst for radical innovation. Young firms indeed account for about 20% of employment but create almost half of new jobs on average across OECD countries, and innovation by young firms significantly contributes to aggregate productivity growth, accounting for half of it in the United States.
During the coronavirus (COVID-19) crisis, start-ups have continued to play a critical role for economies. Some innovative young firms have reacted fast and flexibly to the pandemic, and have been critical in helping many countries shift towards fully-digital work, education, and health services, and have provided innovations in medical goods and services.
A few examples include: adapting commercial products (such as snorkelling masks to be used for oxygen provision in hospitals); launching a range of digital health services, including COVID-19 trackers, remote patient monitoring and remote consultations tools; introducing “no-contact” food delivery; and providing artificial intelligence solutions for researchers and scientists, remote working tools, or online learning and entertainment, in some cases provided free of charge.
Start-ups face significant challenges during COVID-19
However, most of the existing start-ups face significant challenges, as they are more vulnerable than older incumbents to the shocks brought by COVID-19. They tend to engage in high-risk activities compared with other small and medium-sized firms (SMEs), face constraints in accessing traditional funding, and have a formative relationship at best with suppliers and customers.
At a time marked by significant economic uncertainty and with their revenues affected by containment measures and significant drop in demand, start-ups may become even more financially fragile and will need support for their short-term liquidity needs, critical for their survival.1
In many countries, policy responses aimed at shielding the economy from the crisis are already targeting firm’s financial fragilities, especially for SMEs. These include measures to sustain short-term liquidity needs, such as loan guarantees, direct lending, grants or subsidies. However, policy responses should take into account the specificities of start-ups with respect to other SMEs.
Notes: The figure shows the employment losses associated to a 20% decline in the number of entrants, relative to aggregate employment in the initial year, on average across countries and cohorts of entrants in 1995, 1998, 2001, 2004, 2007, 2010, and 2012 depending on availability. The simulation is based on the decomposition proposed by Calvino, Criscuolo and Menon (2016), focusing on SNA A38 industries in manufacturing and non-financial market services. Countries included are Austria, Belgium, Brazil, Canada, Costa Rica, Finland, Hungary, Italy, Japan, Korea, the Netherlands, Norway, Portugal, Spain, Sweden and Turkey.
Source: OECD (2020), DynEmp3 database.
Some countries are already introducing measures more specifically focused on start-ups. For example, France set-up a EUR 4 billion fund to support start-up liquidity, including bridging start-up funding rounds, Germany has announced a tailored start-up aid programme, expanding and facilitating venture capital financing, and the United Kingdom has announced a co-financing fund for innovative companies facing financial difficulties.
COVID-19 is not only a challenge for existing start-ups but also for the creation of new ones. Indeed, periods of crisis usually correspond to drops in business registrations. Analysis of the most recent data in France confirms that firm creation has dropped by about 25% in March 2020, while early analyses of the latest US Weekly Business Formation Statistics seem to highlight qualitatively similar declines, with sharp short-term contractions exceeding those observed during the Great Recession.2
A reduced number of new firms, even in a single year, has sizeable and persistent effects on different social and economic outcomes, including innovation and notably aggregate employment. Simulations based on the OECD DynEmp3 database (Figure 1) show that a 20% decline in the number of new firms – a drop similar to the one experienced during the global financial crisis – leads to an employment loss of 0.7% of aggregate employment 3 years after the shock, and still of 0.5% 14 years after. Furthermore, a lower number of new firms may further amplify pre-existing long-term declining trends in business dynamism in many countries.
Although the COVID-19 outbreak is, and will continue to be, a significant challenge for the start-up ecosystem, the current crisis may also create short- and longer-run opportunities.
There are relevant opportunities for start-ups in times of crisis
Notwithstanding the significant economic disruption caused by the COVID-19 crisis, long-term effects on employment and innovation may be mitigated by taking steps now to support existing start-ups and the creation of new firms, limiting the negative effects discussed in the previous section. Recessions are often times of heightened restructuring that may ultimately lead to a stronger and more resilient economy.
In fact, even as the number of new business registrations generally drops during recessions, many successful innovative start-ups or businesses emerged from periods of crisis. Examples include Dropbox, Uber, Airbnb, WhatsApp, Groupon, and Pinterest, which were all founded during or just after the global financial crisis, or Alibaba’s Taobao that was founded during the SARS outbreak in the People’s Republic of China in 2003.
This confirms that periods of crisis are not only a challenge, but also provide new opportunities for entrepreneurship, where start-ups can help address the constraints created by difficult health or economic conditions, and respond to changing preferences and needs. Relevant examples in the time of COVID-19 are outlined below.
First, there are opportunities for start-ups that introduce (or upscale) radical innovations that can be useful in the short run; today, that could mean innovations in tele-medicine, remote personal care, medical equipment, home delivery, food processing, teleworking, online education, contact tracing. These short-term needs have been targeted by some policy interventions. For example, the European Commission called on start-ups with technologies related to treating, testing, monitoring or other aspects of the COVID-19 outbreak to apply for fast-track funding under the EIC Accelerator program. These however tend to ultimately address specific activities for which there is immediate demand or need.
Second, and importantly, the COVID-19 outbreak may induce persistent changes in societies, consumer habits or needs that could uncover valuable business opportunities for start-ups that are able to anticipate the changes. For instance, demand for remote working, e-commerce, education and health services may also change in the medium run, global value chains and cities may be transformed.
Policy makers should therefore consider interventions oriented at raising awareness of these opportunities, especially in industries that appear more resilient to COVID-19, such as digital intensive sectors, which are also generally characterised by higher post-entry employment growth (Figure 2) and contribute disproportionately to job creation.
These policy interventions should aim at providing right conditions and incentives for innovative start-ups and potential entrepreneurs, and boost their potential and capabilities to grasp them. Reducing barriers to entrepreneurship, such as administrative burdens, providing incentives for start-ups and entrepreneurs, ensuring that funding remains available, and boosting entrepreneurial potential and training could limit the detrimental employment and innovation effects of a missing generation of new firms and help speed up the recovery.
Notes: The figure shows the employment growth of surviving entrants in digital-intensive and other industries, on average across countries and cohorts of entrants in 1995, 1998, 2001, 2004, 2007, 2010, and 2012 depending on availability. Countries included are Austria, Belgium, Brazil, Canada, Costa Rica, Finland, Hungary, Italy, Japan, Korea, the Netherlands, Norway, Portugal, Spain, Sweden and Turkey. The figure focuses on SNA A38 industries in manufacturing and non-financial market services. Digital-intensive industries include Computer & electronics, Machinery and equipment, Transport equipment, Telecommunications, IT, Legal & accounting, Scientific R&D, Marketing & other and Administrative services.
Source: OECD (2020), DynEmp3 database.
Key recommendations
In this context, policy makers may consider the following:
Tackle short-term challenges
Support short-term financial needs of existing start-ups (e.g. with loan guarantees, direct lending, grants or subsidies) with minimal bureaucracy, and help secure jobs and incomes of their workers.
Raise awareness about existing measures and support initiatives that provide guidance to help start-ups adapt to the COVID crisis (e.g. through official platforms that centralise information on support programmes, provide advice on cash-flow management, or best practices to connect with investors remotely).
Support R&D and prizes for radical innovations to help tackle the health crisis, and support start-ups adapting their products.
Promote investments in skills and online training, to prevent skills depreciation and encourage upskilling of start-up workers.
Reduce barriers to entrepreneurship and provide the right incentives
Reduce administrative burdens for start-ups by implementing simplified procedures, and accelerating transitions to e-government. Minimise regulatory uncertainty, both during the crisis (e.g. red tape) but also after (e.g. health and safety requirements in the early recovery phase), as start-ups suffer most from these uncertainties.
Reduce possible barriers associated with the entrepreneur status, especially those that may be seen as particularly critical during and after the pandemics (e.g. related to access to health care and paid sick leave), making social protection more portable. In other words, link entitlements to individuals rather than jobs.
Ensure that funding remains available for innovative start-ups at all stages of their development, in co-ordination with private actors. For example, provide additional public funds to public venture capital umbrella-fund-investors, which can be used in co-investment with private investors for financing rounds of start-ups; take over shares from defaulting fund investors with additional public funds; or simplify venture capital financing).
Boost entrepreneurial potential
Promote entrepreneurship training, also in combination with benefits for displaced workers and lifelong learning, to facilitate (un)employment-to-entrepreneurship transitions, with particular attention to disadvantaged groups.
Promote university-business collaborations to facilitate industry applications of innovation and university-to-entrepreneurship transitions.
Promote network developments, including those linking job seekers and start-ups and those facilitating access to international markets.
Maintain investments in the start-up ecosystem, notably to ensure incubators and accelerators continue playing an important medium-term role in providing guidance, coaching, and mentoring to potential entrepreneurs and existing start-ups.
Further reading
Calvino, F., C. Criscuolo and C. Menon (2016), “No Country for Young Firms?: Start-up Dynamics and National Policies”, OECD Science, Technology and Industry Policy Papers, No. 29, OECD Publishing, Paris, http://dx.doi.org/10.1787/5jm22p40c8mw-en.
OECD (forthcoming), “How innovative STI policy approaches can help fight COVID-19”, OECD, Paris.
OECD (2020), OECD Economic Outlook, Interim Report March 2020, OECD Publishing, Paris, https://doi.org/10.1787/7969896b-en.
OECD (2020), “SME Policy Responses”, OECD, Paris, http://oe.cd/il/2VB.
OECD (2020), “Supporting people and companies to deal with the COVID-19 virus: Options for an immediate employment and social-policy response”, OECD, Paris, http://oe.cd/il/2Vx.
Notes
An early assessment based on data for the United Kingdom suggests that young firms (between one and five years old) account for three quarters of the 70% increase in the number of company dissolutions in March 2020 relative to March 2019.
