The meteoric rise of startups in recent years has been remarkable. These companies have changed how we live, work, and communicate. Platforms like YouTube, WhatsApp, Uber, and Airbnb—once startups—are now integral parts of everyday life.
Governments around the world have stepped in to offer financial aid to small and medium-sized enterprises (SMEs). But what does this mean for startups? Do startups qualify for this support? And even if they do, is it enough to help them survive the crisis?
There is no doubt we are living through difficult times. The COVID-19 pandemic is a unique and sweeping global crisis. Its effects have reached every corner of the economy, drawing comparisons to wartime conditions.
The full economic impact of the pandemic remains unclear. Many questions are still unanswered, especially regarding how long the crisis will last. Temporary business closures and rising unemployment have become widespread.
Although many governments are offering relief to SMEs, a subset of these businesses is particularly vulnerable—yet crucial for economic growth, innovation, and job creation: startups. These companies urgently need government assistance, but in many cases, they are left out of traditional support packages.
By definition, a startup is a company that is often still loss-making. While it may have customers and revenue, it is typically not yet generating enough income to cover its costs and requires rapid growth to survive. Consider Amazon, which was founded in 1994 to sell books online and operated at a loss for nearly a decade.
Startups that raised funding in 2019 may be able to weather the storm by adjusting expenses and carefully managing cash flow. But what about those seeking funding in early or mid-2020? For many of them, the pandemic could mean the end—not just for the company, but also for its employees, its innovation, and the local economy in which it operates.
How Were Startups Funded Before COVID-19?
Startups typically rely on two major funding sources: angel investors and venture capitalists. Angel investors provide early-stage funding. Though their individual investments are small, they are numerous and often well-informed about their chosen sectors. Some studies estimate that angel investors contribute three times more capital than venture capital firms.
How Are Angel Investors Reacting to the Crisis?
To understand their likely behavior today, we can look back at how they responded to the previous financial crisis. Between 2009 and 2012, the number of angel investors surged, especially in Europe. Wealthy individuals were looking for alternatives as stock markets collapsed, real estate was burdened with toxic assets, and government bonds—once considered safe—became risky.
Investing in early-stage startups became appealing for several reasons:
Valuations were low due to pessimistic forecasts and minimal financial planning.
Strong teams were willing to work hard, knowing this was likely their only opportunity.
Unlike in good times, investors spent carefully and sought high-impact opportunities.
Angel investors could play an active role in shaping a startup’s future, unlike with bonds or public stocks.
While these are reasons to remain optimistic about angel investment, it’s also likely their activity will decline in the short term. Most angel investors are entrepreneurs themselves and need to focus on their own businesses during a crisis.
What’s Happening in European Venture Capital?
Since mid-March, when COVID-19 became a major concern in Europe, venture capital investors have responded in varied ways. Some continue to fund startups, believing the crisis is not caused by startup failures. Others have pulled back entirely. Still, some are taking advantage of market instability by pushing down startup valuations.
Leading VCs have turned their attention to existing portfolio companies, many of which are now raising additional funds to sustain their growth. In this environment, it is crucial for VCs to revise financial plans and support the startups they’ve backed, as the future remains uncertain and these companies are vital for economic recovery.
While VC funding is critical for early-stage startups, in times of crisis many of these sources become unavailable. That’s why government support becomes essential—but traditional public aid programs often exclude startups, due to their lack of stable revenue and strong balance sheets.
This exclusion can worsen the economic crisis by destroying jobs and delaying the innovations that could drive recovery. Startups are like the children of a household—they need timely support and nurturing.
Two Practical Steps Governments Can Take to Support Startups:
Startups must be eligible for public financial assistance. It is clear that loss-making businesses should be able to access emergency credit lines made available by governments worldwide.
Funding must be delivered quickly. Relying on traditional financial institutions—many of which don’t understand the startup ecosystem—could result in dangerous delays.
Instead, governments should distribute financial support through venture capital firms, accelerators, and angel investors—entities with deep understanding of startups and the agility to act fast. Banks are not equipped for this role, and time is of the essence.
The best tool for governments may be convertible debt, which allows them to participate in upside potential if the startup succeeds and raises new capital. In the VC world, one good investment can return the entire value of a fund. Similarly, it is reasonable for governments to expect a strong return while helping build the innovations that may transform life during and after the pandemic.
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