Government bailouts for ailing start-ups will generate longer lasting returns and create more jobs for local communities than support for larger companies and small and medium enterprises (SMEs), according to Silicon Valley-based research project Startup Genome.
“While some start-ups inevitably die… government support to startups will produce more jobs in the present and future at a lower ‘cost per job’ saved – despite the larger survival rate of SMEs,” argued the start-up focused advisory firm in a report published late April.
The rapid spread of Covid-19 has threatened start-up ecosystems around the world. About 41% of global startups have three months or less of cash runway left, according to a recent Startup Genome survey of 1070 startups from 50 countries.
Many governments have put together rescue packages to prop up struggling start-ups, offering convertible loans and direct equity injections. These measures will not only save good businesses but provide long-lasting benefits, Startup Genome argues.
“In the worst case scenario, assuming a negative 10% return on the government’s equity investment in start-ups, the ‘cost per job’ saved will be 41% lower for start-ups than for SMEs, respectively costing $14,766 and $24,928. However, governments stand to save those startups at negative cost if the return on equity investments is 13%,” the report estimated.
Resilience and rebounds
Start-up ecosystems in the US have already shown resilience and capacity to bounce back in the aftermath of the 2008-09 global financial crisis when they emerged at the forefront of the subsequent economic recovery.
By 2011, employment in the computer systems design industry had grown by 2.6% per year from its pre-crisis level, while in the overall economy job creation was negative at -1.2%, according to Startup Genome data.
The sector’s ability to lead a future economic recovery is further heightened by the nature of the changes that Covid-19 has accelerated.
“With the world’s transition to a digital economy, technology start-ups and their ecosystems have become more important and the jobs they create more sustainable, because they are better adapted to our economic future. The current crisis has accelerated the digitisation of the offline economy, making tech companies even more important.”
Moreover, start-ups offer a higher job multiplier – local jobs start-ups indirectly create – than most other industries, the report added. “This is due to their higher wages, rate of exports, and FDI – from venture capital firms into local start-ups – than other small businesses.”
VC firms closed 7,600 rounds of investment worth $63.8bn in the first quarter of 2020, down by, respectively, 4% and 8% from a year earlier, according to Crunchbase, with seed- and early-stage funding under the most pressure. The downturn is expected to continue into the second quarter of this year.