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Mar 04, 2020

How Coronavirus Outbreak Could Affect Startup Ecosystem

Coronavirus spreads around the world. Let’s consider how coronavirus affects the startup ecosystem and what can we expect in the future.

As of now, coronavirus hasn’t been declared a pandemic by the World Health Organization (however, it’s a more and more likely scenario), but restrictions on travel, quarantines, shortage of certain products and big drops of stock markets already affect billions of people around the world. But what does it mean for the startup ecosystem?

Lessons from the past

The SARS outbreak in 2002, that also started in China, was not as severe as already coronavirus is (SARS claimed less than one thousand victims worldwide), but it’s believed to decrease China’s GDP by 0,5-1,0%. However, the SARS outbreak was a catalyst for the local eCommerce industry (including today’s huge players such as Alibaba and JD.com), as people decided to stay indoors to avoid contact with the virus and started to shop online.

Current positive and negative trends

We already see similar trends with the coronavirus outbreak, but today’s technology allows not only for eCommerce to be a true subsidy for brick and mortar stores but also provides alternative for dining (food delivery services), entertainment (especially video streaming), work (tools for remote work) and education (online education). It creates opportunities for startups and big technology players, as no of applications for remote work and online education has risen in China in the last few weeks by a few hundred (such as WeChat Work), or even a few thousand percents. (like DingTalk or Lark).

On the other hand, coronavirus already has a negative impact in many parts of the world on location depended on businesses (such as brick and mortar stores, dining, entertainment, and travel In general). It affects not only big corporations and mom and pop business (the latest examples include closing stores In China by Starbucks, Apple, Disneyland or McDonalds), but also startups that provide products and services for them. Slowly, the shutdown of factories in China starts to affect manufactures around the world as their supplies of the part are running low – it relates as well to hardware / IoT startups since a lot of them rely on components or product manufacturers from China.

Impact of the outbreak on fundraising

The outbreak also has a significant impact on fundraising by startups located in regions affected by the outbreak. We see it already in China, were a lot of VCs stopped bringing new deals to their investment committees since they are not able to meet in person with founders (due to travel restrictions and concerns about their health). But investors also have concerns regarding outlook for given startup, industry and economy as the whole (some of VCs from China put already committed deals on hold). As a result, according to Preqin data, the no of VC deals and capital raised in China dropped by 2/3 at the beginning of 2020 compared to the same period of 2019. Startups in China already are slashing jobs, cutting salaries and hoping for government intervention to maintain their liquidity.

Conclusions for startups

In a positive scenario, the outbreak will not become a global pandemic and its negative impact on the economy and startup ecosystem will be short term (with V-shape rebound after the dramatic first quarter of 2020). However, in a negative scenario, the outbreak (even if by itself will not become a global pandemic) can be a true black-swan event triggering corrections on financial markets and causing a slowdown of the global economy (with the recession in key countries). Either way, founders should prepare for a lot of uncertainty in the near future, take into account potential problems with fundraising (especially if the outbreak will come to their country) and focus on maintaining liquidity.

Paweł Maj

Investment Director of bValue VC