COVID-19 has necessitated injection of more resources into the entrepreneurship ecosystem
Ms Jaana Puukka (left), an international expert in higher education and innovation based in Nice in France, was one of many international presenters at the recent 4th annual Entrepreneurship Development in Higher Education (EDHE) Lekgotla, with strong ties to South Africa.
Her pre-recorded talk, titled The Impact of the Pandemic on Startup Ecosystems Globally, formed part of the session on Global Entrepreneurship in the Context of the Pandemic on Tuesday September 15.
The risk of mass extinction of startups across the world
Puukka said the global startup economy generates about $3 trillion in value. Startups are key drivers of economic growth, job creation and radical innovations. They account for 20% of employments, but are responsible for creating nearly 50% of new jobs in the economic and development area.
Now the COVID-19 crisis is challenging their survival and limiting their growth, and they are at risk of mass extinction, she said. Total venture capital funding has dropped in all continents, down by 20% in the first three months of 2020. In China, investment in new firms declined by 50% in the first quarter of 2020 compared to the previous year.
Four out of 10 startups are in red zone, which means they have three months or less of capital runway, that is, before they run out of money. In Africa, this affects 56% of startups. Worldwide, 72% of startups saw their income fall by an average of 32% but 12% recorded significant growth.
The travel and tourism sector was hit the largest, losing 70% of its income. On the other side of the spectrum, exclusively digital sectors such as blockchain, crypto-currencies and social media were the most resilient in the face of the crisis."
Some digital companies such as Amazon, Zoom and the online business chat Slack even needed more labour. Here Puukka mentioned OneCart, Bottles, Quench, Sixty60 and UCook in South Africa – digital companies or divisions of existing companies which had either been initiated, boosted or refocused their online services during lockdown to focus on home deliveries.
Overall, the impact on jobs has been severe, with up to 60% of startups slashing jobs -- on average of 33% of their employees, or reducing salaries. Globally the numbers of employees laid off grew five times between March and May 2020. Job losses were not only in expected positions such as sales and marketing, but also in research and development, for example, software engineers.
The good news about the impact of the pandemic on startups
Digital tech-based startups are driving the recovery. They are very big job multipliers: for every high-tech job they create, five other jobs are created.
The pandemic is strengthening people's reliance on digital technology products and services, particularly with regard to digital commerce, digital payments, distance working, health and medicine, and digital education. Social distancing and lockdown has changed people's behaviour. Those who are laggards and would not normally adopt new technologies are becoming converts of digital commerce and services.
This has created a shift in two aspects: consumers are more confident to use technology, and businesses in sectors such as retail, digital learning, fitness and financial services went online in a matter of days.
Although some sectors and industries will die, a crisis such as COVID-19 can be a huge opportunity for startups. "It's like a once in a lifetime opportunity", said Puukka.
With the need to make safety a priority, there has been a huge increase in online deliveries because they offer no-contact services. Similarly, digital payments are on the rise because actual cash is now seen as dirty. The average increase in cashless business, and a move to card payments, since the pandemic is about 28%. In the UK it is 60%. In South Africa the increase is 24% "but that is a huge change," said Puukka.
Working from home has taken off in a big way. Tata Consulting Services (TCS), the biggest IT services company in India, will see two-thirds of its 450 000 global workforce working remotely by 2025. Distance working saves money for companies in terms of paying rent for offices. It is also an opportunity to have global teams, and a better work-life balance but research has revealed mixed reports about its impact on productivity.
Puukka said she felt it could be "a very short step for a remote worker being pushed to become a solo entrepreneur'', which they might not want. There are also issues about increasing isolation and home working could increase social problems.
One sector that is advancing rapidly is health and medicine. The race is on to find a vaccine for the coronavirus and mobile devices are being used for virtual consultations, monitoring and tracking of COVID-19. The demand for ventilators saw a startup using snorkeling masks to provide oxygen, which Puukka found to be very clever.
Regulators have been fast-tracking innovations to try solve the crisis. It was previously unheard of that the United States Food and Drug Administration (FDA) would accept applications for manufacturing facilities in 10 days. The FDA has also fast-tracked approvals for drug trials and therapies.
Digital learning has been a massive opportunity for startups. At the end of last year, before the pandemic, the digital education market was estimated to be worth $350billion by 2025. Now the market has skyrocketed. The pandemic has seen nearly 1.4 billion digital learners globally because schools and universities in many countries have transferred their mode of learning to online.
The pandemic has also affected the adult learning market. There has been a huge need and opportunity for upskilling. The recent boom for the type of short courses Udemy and Coursera offer will increase accreditation for smaller, specific competencies. So micro credentials, such as the digital badges one gets on completing online courses, are growing. To some extent, they might change the business model of traditional universities. The European Union is already developing an approach to microlearning, that is, individuals being able to choose their own learning pathway independently, and put together a degree.
How to fix the problems for startups globally
The pandemic has created a huge impact on ecosystems. With more startups, the ecosystem of talent, universities and startup support organisations produces more value. If an ecosystem grows three times larger, it creates five times more economic value. But if 40% of startups close down – those that are in the red zone - the risk is that there will be about 50% of reduction in economic value.
The top startups ecosystem of Silicon Valley, New York and Beijing will thrive, because they have talent, experience and capital. But in less advanced ecosystems, it is crucial for government to support startups, said Puukka, because their ecosystems lack capital to draw upon in times of crisis.
She suggested three focus areas to fix policies that would address the crisis:
- tackle short term challenges with funding, raising awareness of available support, online training, and introducing research and innovation;
- reduce barriers and incentivise;
- boost entrepreneurial potential, which is where higher education institutions can play a very important role.
"There is a need for good quality entrepreneurship training, university-business collaboration, network developments, and investments in the startup ecosystem," she said.
Until she founded InnovationEngage in 2013, which advises and supports organisations such as the European Commission, universities and the World Bank, Puukka spent nearly eight years at the Organisation for Economic Cooperation and Development (OECD). In that capacity she led reviews of higher education in regional and city development across the world, including in the Free State in South Africa.
The EDHE Lekgotla is one of Universities South Africa's flagship projects funded largely by the Department of Higher Education and Training's University Capacity Development Programme.
EDHE Lekgotla 2020 attracted 1221 attendees from South Africa, other African countries such as Ghana, Nigeria EDHE and Tanzania, as well as Europe and the US.
The author, Gillian Anstey, is an independent writer commissioned by Universities South Africa.