What’s happening to us?

Since the beginning of this covid-19 crisis everyone is out and about trying to figure out what will happen in the next few weeks and what will be the aftermath when the lockdown period is over. But giving the exceptionality of this crisis It’s kind of hard to measure.

We’ll be releasing shortly some stories about what we are experiencing as a fundraising advisor being close to both startups and investors. In this first story, we’ll take a look at the situation we’re in and try to get some insight from past crisis.

2020 = Recession

From a macroeconomic perspective, it is now accepted that we will have to give up on global growth in 2020. At first, France expected a 1% recession, while Germany was much more pessimistic by predicting at least a 5% recession for the country. Recently INSEE gave its calculations: the country’s loss of activity due to the lockdown is equal to 35%. Concretely this means that each month of population confinement represents a loss of 3 points on the annual GDP. So if the confinement measures continue for weeks and the health situation does not improve quickly, the pandemic could wreak havoc with a cascade of business failures and job destruction by thousands.

Actually, nobody really knows what to expect, especially since we don’t exactly have the figures for the impact in China and the United States is only at the beginning of its crisis.

The IMF goes further, still without estimating the global recession, saying that the coronavirus crisis will have a much worse impact than the 2008 crisis. In fact, one can try to make a comparison.

According to IMF, in 2009 the world economy was in recession by 0.6%, a recession that hit the developed countries (3.16%) and especially the Eurozone (4.08%) much harder. It would therefore seem that the estimates of the impact of the crisis given by Germany are much more realistic. Still, the IMF appears to be quite optimistic: “we expect a recovery in 2021,” said Kristalina Georgieva recently, and the reason is quite simple.

Today ≠ 2008

Most past recessions happen endogenously: something within the economy. A correction of an asset price bubble or some other kind of imbalance that triggers a recession.

For example the 2008 crisis was intrinsically linked to the subprime crisis, the toxic US housing loans. What happened is quite simple to understand: Americans found themselves in personal bankruptcy because of bank malfeasance. They bought a house with money they didn’t have and, more importantly, they couldn’t afford. When interest rates skyrocketed, these families could not pay back the loan, the banks went bankrupt and the crisis then spread to the rest of the economy. But the starting point is credit, which means money that does not exist.

The crisis we’re in is different because It’s exogenous. Meaning It’s coming from outside the economy. It’s hitting us hard like a bullet but economically speaking there is no “correction”, It’s just a seizure. It will clearly have an impact on the world economy, but it can only be temporary. Indeed, most people still have money, and will have exactly the same needs after the crisis.

Everything is put “in brackets” for a few months. The longer that bracket lasts, the harder it will be for companies and a lot of businesses without help are just going to die.

The no-bankruptcy strategy seems to be the best one

For the economy to get back on its feet quickly, the necessary condition is that companies, especially small ones, should be able to get through the crisis without going bankrupt, while their turnover plummets, debts and charges accumulate and they are not sure that customers will come back.

From this point of view, the measures decided by the government, which could be summarised as “no bankruptcies”, must be supported. The idea is that the ecosystem must not regress by 3 years and must remain as it was just before the crisis. However, they must be implemented without delay and without bureaucratic obstacles.

In a first round, french government announced some simple but effective actions :

• Deferral of taxes and charges
• Compensation for short-time working
• Mediation to recover debts or reschedule credit
• Bank guarantees

And then they rolled out a relief package of €4 billion to support French startups struggling during this difficult time. This plan includes :

• €80 million in bridge funding in order to help startups whose fundraising plans have been derailed
• €2 billion to guarantee loans with specific conditions for startups
• Startups can borrow up to two years’ worth of payroll funds for employees based in France or 25% of annual revenue
• Speed up tax returns and public support payments

France isn’t alone in seeking state-sponsored solutions to economic challenges created by the coronavirus outbreak. Last week, Germany announced plans for a €500 billion fund to help distressed German companies fend off foreign takeovers.

On the other side, the aftermath of such actions will result in increasing the budget deficit. Starting from a deficit forecast of 2.2% of GDP, we see that the French general government deficit could reach or exceed 7% of GDP, like It was the case in 2009 . But It’s the price to pay for the government to guarantee the survival of businesses and therefore employment. Hopefully this strategy will also result in protecting household’s incomes, while their consumption capacity will be reduced at the moment, thereby increasing their savings rate. French households (not unemployed)should emerge from the crisis with a savings rate even higher than the 14.9% reached at the end of 2019, which should give them enough to sustain a higher rate of consumption in the medium term.

All of these actions should limit the damages and enable these businesses to survive during the next months. Theses measures seem to be the good ones but obviously they have to make a trade-off between economic death and real death. Either way it’s a tough one and we’ll definitely have to pay for it later. Also each crisis has had the effect of bringing investment to a net halt, but that’s another story. In our next one we’ll tell you all about what’s going to happen to the VC market in the next few months.

Stay tuned !

Sharpn is a fundraising advisor supporting ambitious entrepreneurs. We aim to support startups from late-Seed to Series A round.

So if you’re interested in our killer program please contact us at contact@sharpn.eu or visit our website https://www.sharpn.eu/