Why Should We Save Start-ups?
As you’ll know there’s currently a petition aimed at encouraging the government to undertake several measures to provide liquidity and relief for the UK’s startup community.
Whilst the petition does a great job of explaining how the government could save the start-up community, it doesn’t do a tremendous job of explaining why the government should intervene within the start-up community.
Given that very smart people within the industry (below) can’t agree that state intervention is definitely a good thing, it seemed to be somewhat urgent that someone puts a case forward because it isn’t clear cut.
In the absence of someone more articulate then, let me explain why it’s a smart idea that Macron has pledged €5bn to support France’s startups even though BlaBlaCar is hardly a vital national asset (no offence) and why we should follow suit.
To note, I have no skin in the game here. Impala was lucky enough to close a round pre-crisis from great investors and doesn’t expect state aid. Further my “portfolio” consists of too many pairs of shorts and an Australian Koala painting that’s as fetching as it was cheap.
The case against
Very quickly let’s summarise why you may not want to help start-ups:
- Start-ups fail all the time. There is an acceptance of risk and that you may not be here tomorrow amongst founders and employees. They shouldn’t be too heartbroken.
- They’re not economically vital. The government doesn’t generate a lot of (if any) revenue from start-ups and therefore why would they be vital to the future economy?
- The market will be different. The market that you started to build your start-up in is gone and so freezing your company and then restarting later will yield poor results and is a waste of capital.
Now let’s examine each one of these arguments a little further:
Start-ups do indeed fail all the time. The problem is that the risk models that founders and employees have employed do not and could not be expected to account for a global pandemic. If government intervention is a moral action intended to help those that could not have foreseen this risk then start-ups fall into that bucket as well.
Start-ups aren’t revenue drivers in terms of corporation tax but they do provide many thousands of jobs (and therefore PAYE, NI and general economic activity). Secondly the government sees them as a revenue driver in their ability to attract high-value players to a city (GAFA offices, accountants and lawyers that want to bask in reflected cool-ness). It’s sort-of business tourism with the added advantage that one of those companies could be exceptionally valuable to tax receipts one day.
The market will absolutely be different. I think many underestimate how the world that we knew isn’t coming back. Here however start-ups are best placed to receive cash rather than worst. No-one can pivot and change direction like a start-up, no-one can adapt more quickly to a changed customer base. If we’re turning away people on this basis then it should be companies that are far less able to adapt or change.
The strong will die with the weak
Understand that regardless of what they say most investors are not investing. Why would they? They have no clue what the world looks like now. Every start-up therefore has no access to external capital whatsoever and they can’t go to the bank like others.
Assuming it takes six months for start-ups to raise more money post-COVID and that at best from today it’s six months until COVID is seen as “over” and people start investing again, that gives you a best case scenario that means anyone with less than 12 months runway is dead.
The current median runway amongst start-ups is around 12 months. Even were all to go swimmingly with COVID-19 from here, if the government doesn’t intervene now, in the UK that’s 150k more unemployed and the death of an ecosystem that has taken more than two decades to build.
You may think that they’ll be supported by existing investors. Maybe. Very maybe. Existing investors would be signing up to throw good money into a pit with no visible ladder and they have a lot of pits right now. They don’t know if you’re going to need runway for 6, 12 or 24 months.
At the late stage even the strongest, name-brand startups may need tens of millions of dollars to sustain. Are late-stage VCs willing to make bets of that magnitude with little hope of an exit in sight? Unlikely.
This is not “the risk they signed up for”
Regardless of the economic case, there is an extremely strong moral case for governments to provide liquidity and relief to their start-up community. These are businesses like any other. These are people, with mortgages and child-care fees. These are people that have put their life-savings into the early stages of a company, who’s parents have sacrificed dreams to help them get started.
Yes, as a founder or a start-up employee you do accept a different risk profile. You understand that if you’re wrong (and you’re likely to be) or that if you fail to prepare for some macro event then you’re gone.
This acceptance however hinges on a few things:
- A founder accepts the risk because it’s controllable. They and their team can use their talents to find the right market and can also prepare properly for certain macro events by not exceeding a burn rate.
- A founder accepts the risk because broadly, they are an in-demand knowledge worker and so are their staff. In the case of failure, there is always a market for their labour.
Both of these things however are not true in the current environment. Just like everyone else in the economy they could not have foreseen this and they shouldn’t have been expected to prepare for it. Why should those that have often risked the most put up with more significant hardship than others are willing to put up with?
Silicon Local Landmark will be dead
Every country in the Western world has been delighted to talk about it’s “vibrant start-up ecosystem” for years. They do so for good reasons (mentioned above).
This will be gone unless the government steps in to support start-ups and the ecosystem now. All of that hard-work, all of that financial support and backing to create a national economic asset, dead.
It’s often tempting to think of the start-up ecosystem as the publicly known late stage founders. I would imagine like you that they’ll be fine.
For every late-stage founder that’s always on a TechCrunch stage, however, there’s a thousand small teams with SEIS funding that are going to be bankrupt, beaten and bereft at the loss of a company they may have spent years saving and sacrificing for.
The majority of these companies will fail over time and that is indeed supposed to happen. If, however, there is no intervention almost simultaneously half will fail. Crucially, not the weak half but the unlucky half.
No new companies will enter to take their place as funds and angels stop deploying capital. Our great start-up talent will relocate to where the jobs are (something Brexit is already triggering) and a service sector built up around start-ups will never come back, that’s office spaces, lawyers, accountants, bars, restaurants and coffee shops.
There are far too many people in our industry that view this like a market event. It is not. It is human and economic chaos at its most brutal. If left unchecked the strong will die along with the weak simply because of bad luck. If you’re fine with that then great but I’d make sure you’re fine with the death of an ecosystem that’s been two decades in the making.
