The pandemic has hit the startup world hard. With even well-established later-stage companies struggling to keep on an even keel during the crisis, government support packages have become particularly critical to sustaining early-stage companies.
And despite the pain being felt universally throughout the startup world, each country’s response has been slightly different. They say you see someone’s true colours when the going gets tough — so what have rescue packages across Europe revealed about the way different countries think about their startup ecosystem?
The UK: slow and unfriendly to the earliest-stage startups
The UK repeatedly tops European VC investment charts and, even after Brexit-related uncertainty, London has maintained its position as the preeminent non-US startup hub. The government has consistently stated its commitment to putting startups at the heart of economic strategy — and backed this up in its 2020 Budget, where it announced ambitious policies to support science and tech R&D. With that in mind, one might have expected the UK to lead the way in supporting startups in the crisis.
The government reacted swiftly, rolling out government-backed loans and unemployment schemes. But the package itself was slow to be announced, took several weeks to start accepting applications and was significantly oversubscribed once it was live (though chancellor Rishi Sunak has indicated it will be extended indefinitely to meet demand). Since then, it has also been slow to process applications and deploy funds. As it stands, only 53 out of 533 applications to the Future Fund have been accepted, for a total value of £55.9m, out of hundreds of millions applied for.
The Future Fund’s structure also excludes angel investors, thus harming the prospects of the pre-VC early-stage startups that are most vulnerable. Many of the great British startup success stories cited by Sunak were beneficiaries of the Enterprise Investment Scheme (EIS) early in their journey, and the Future Fund currently bars potential future successes (particularly R&D-rich companies) from that same vehicle in their time of need.
Overall, while the government has taken some significant steps to help protect innovation during this unprecedented time, there have been certain areas where it has not gone as far as other European countries, such as the flexible furlough scheme of France, or the overarching support of very early-stage companies in Spain. These factors could adversely impact the ecosystem once we emerge from the crisis.
France: direct and personal
In some ways, the French response was similar to the UK’s — but with differences I believe to be important. France was the first major European nation to reveal specific support for its startups, outlining a €4bn liquidity plan in March that has subsequently been updated and refined with new measures and funds, generally managed by public investment bank Bpifrance. France was also one of the earliest adopters of the furlough scheme, which has been particularly welcomed by startups, where often their most costly asset is their staff. Further, it offered partial furlough from the offset, helping companies relieve the pressure of costs, while retaining the skills of the people they will require in the future.
France has taken the most direct and personal approach to communicating with the startup ecosystem.
This is a flexibility that is absent from many of the other European furlough schemes at the moment. The national funding model, provided by Bbifrance, also provides non-dilutive money which gives startups greater clarity in the long run, preventing confusion over future funding rounds.
The plan is marked by many hallmarks of the country’s generous social support system — salary protection, hours reductions, loan guarantees and startups being allowed to request deferral of payment of tax bills and social charges such as rent and utilities.
France has also taken the most direct and personal approach to communicating with the startup ecosystem, with its minister of state holding weekly Facebook Live Q&As with entrepreneurs to address their concerns. These measures have all gone a long way in establishing France as a resilient model for supporting innovation through this crisis.
Germany: survival of the fittest
Faster out of the traps (though it remains unclear exactly how or when the funding will be delivered to startups), Germany’s response reflects its characteristic financial prudence and pragmatism.
One of the central questions for every government was whether to provide “bailout” money to startups that would ordinarily have failed (and likely still will, even with funding to get them through the crisis). Germany has answered “no” and placed startups’ access to relief explicitly in the hands of their investors, who must apply on the startup’s behalf.
Germany’s response reflects its characteristic financial prudence and pragmatism.
This pragmatism extends beyond immediate Darwinism to recognise that the funding landscape could change markedly over the long term, prompting Germany to launch a €2bn fund to provide long-term support.
Spain: focus on jobs and entrepreneurship
In addition to the impressively robust support announced for the entirety of the Spanish business community — including a €20bn liquidity guarantee scheme that could eventually extend to as much as €100bn — Spain’s response to the problems faced specifically by startups is comprehensive, and impressively, is being led by the ecosystem itself.
Spain’s response is being led by the ecosystem itself.
The Spanish equivalent of the French and UK furlough scheme has been the ERTE. This has allowed employers to suspend contracts, while employees could still claim 70% of their wage for the first six months. The government has also taken steps to help support the self-employed, which includes suspending social security payments.
While the government announced that startups would be able to defer tax bills of up to €30,000 for six months, this scheme was closed at the beginning of June. Much of the wider support is coming directly from investors.
Venture firm Target Global announced it would hive off €500,000 to provide a “super seed” fund that will back laid-off tech sector employees who want to turn promising ideas into businesses during the downturn. In addition to that amount, a group of local founders, including the entrepreneurs behind AlienVault, TravelPerk, Jobandtalent, Badi and Adyen, are chipping in a further €500,000. Separately, an alliance of social impact investors has been formed by La Bolsa Social to invest or provide services and a separate group of investors from across Spain, Portugal and Italy have joined together for online pitching sessions to help support the ecosystem.
Israel: Surviving the virus doesn’t help until the rest of the world has survived too
Israel is perhaps the most interesting case of government support intersecting with national economic and cultural identity.
Tech is the highest-contributing sector to economic growth, and the global success of its startups is a big defining factor for Israel on the world stage given their revenues are dependent on demand from the rest of the world. Therefore, with many customers in Europe and America taking steps to extend their runway, it could become challenging for many Israeli startups to survive.
The government expects a 25% reduction in private capital investment as a result of the pandemic, with major knock-on effects for the economy as a whole. This has posed a new problem for Israel; it has weathered the coronavirus storm almost unscathed from a global health perspective so, as the economy returns to normal, it is merely waiting for the rest of the world to catch up.
To counter this, the government has committed to fast-tracking grants for high-potential startups in financial need, through co-investment with VCs and other investors. Nevertheless, this decision has not been met with universal acclaim. The tech sector is seen as emblematic of wealth inequality in the country as a whole, and there are questions about whether public money should instead be spent in ways that will be more widely felt. The government’s perspective is that investing a relatively small amount now could eventually benefit all citizens.
How governments respond to the crisis now will shape their economies for the next decade or more. The prominence of tech companies in the global effort to mitigate the impact of the pandemic has shown us how important startups can be to the post-Covid economy. The countries that best enable their startup and entrepreneur ecosystems to weather the storm and exit on the other side equipped to grow will be best positioned to capitalise. Those that get their response wrong risk being left behind.
Amid a slew of varying rescue responses internationally, I believe the country closest to getting it right so far is France. The combination of the generous government package and the ease with which startups can access it has helped ensure that many startups endure the worst of the crisis and remain intact.
The marked commitment and willingness to protect the ecosystem of startups in France is a noteworthy example about protecting innovation at all costs.
Given the long history of era-defining tech companies — from Microsoft to Stripe — being founded in the depths of major economic downturns, ensuring that support during the Covid-19 crisis enables innovators to start up in spite of difficult economic conditions shows long-term thinking that could yield rich dividends. The marked commitment and willingness to protect the ecosystem of startups and entrepreneurs seen in France is a noteworthy example about protecting innovation at all costs. And while approaches and legislation about preserving innovation have varied considerably around the globe, it is clear that politicians across Germany, Israel, France, the UK and Spain agree on one thing: companies being founded today will be our future tomorrow and it is our collective duty to ensure they thrive.