European governments hope emergency funding will help avert mass collapse of startups

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France and Germany announced emergency funding pools — worth €4 billion ($4.3 billion) and €2 billion ($2.2 billion), respectively — intended to help domestic startups stay afloat during the current global economic downturn by providing short-term refinancing, according to CNBC.

Germany is also said to be considering a long-term €10 billion ($10.8 billion) fund that would help larger startups maintain operations during the economic strain caused by the coronavirus pandemic. The countries are home to two of the most advanced startup economies in Europe, and tech companies in both countries raised a record amount of venture capital funding in 2019, according to TechNation. In the first three months of 2020, global tech-startup funding experienced its second-steepest quarterly decline in a decade, according to The New York Times.

Tech economies worldwide face a funding crisis which could slow innovation for years to come. By nature, tech startups — in particular early-stage startups — are vulnerable to liquidity strain as they have yet to fully develop or commercialize a product.

Already in the US, more than 3,800 startup jobs were eliminated in March, spanning more than 40 companies that had collectively raised over $15 billion, according to CNBC. The scaling down of tech startups means that otherwise viable companies will either scale down to weather the crisis (which would delay their commercialization timeline) or shut down altogether. Both the US and UK are said to be exploring funding pools aimed at startups, but recent employment and funding figures suggest they may already be too little, too late to avoid an innovation slowdown altogether. 

The 2000 dot-com bubble and the Great Recession of 2008 lend insight into how another venture capital slowdown will impact the tech startup economy. In 2000, before the dot-com bubble burst, there were 585 venture capital funds with $88 billion in capital raised, according to PitchBook.

At the low point of that crisis in 2003, the number of venture capital funds had shrunk to 196 with only $18 billion in capital. The shock to venture capital funding was faster but less pronounced in the Great Recession, with funds falling from 443 to 338 between 2008 and 2009, accompanied by a drop in funding from $53 billion to $23 billion. In both cases, this translated to fewer IPOs and a more difficult operating environment for startups. 

Even with government intervention, we expect funding reduction in response to the current economic crisis, and likely at an accelerated pace, given what we've seen with other economic indicators. Just under 10 million people have filed for unemployment in the US in the second half of March, which surpassed the total number of unemployment filings in the first six months of the Great Recession.

The extent of the economic contraction, coupled with institutional uncertainty over how and when the crisis will abate, suggests a steep decline in access to funding. One of the most prominent venture capital firms, Sequoia Capital, told founders of its portfolio companies to "question every assumption about your business" including cash runway, sales forecast, fundraising, and headcount. Going against this general trend, we expect several mature startups will become attractive acquisition targets for companies with cash on hand, as they seek funding at discounted rates relative to pre-coronavirus valuations.

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