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Looking Back: COVID-19's Effect on Startups So Far in 2020

For much of 2020, the global startup landscape has been held captive by the coronavirus (COVID-19) pandemic. In the earliest days of the outbreak, most people predicted that startups would be the first to feel the sting of what was shaping up to be a major economic disruption. Now, as August winds down, the dust has settled somewhat to reveal a more complex outlook for startups than what was expected.

To start with, although startup activity was impacted severely by the pandemic-related economic slowdown, there wasn't a wholesale die-off of startups. Instead, startups in certain sectors thrived through the crisis, while others took more severe damage. To elaborate, here's an overview of what impacts the coronavirus pandemic has had on startups, from the expected to the surprising.

A Funding Dip, Then a Rally

The first major effect that the pandemic has had on startups was that venture capital funding sources dried up in Q1 of 2020. According to data provided by CB Insights, global VC activity dropped by 16% versus Q1 of 2019. It was a decline that was twice as bad as the worst quarter during the 2008 financial crisis (Q4 2008). But the drop-in deal activity was more than offset by the total dollar value of the deals that did take place – leading to an 11% increase in total deal value in Q1 2020. In other words, although the pandemic may have stopped some VC deals in their tracks, it didn't put a damper on the quantity of funding that remained available.

But by Q2, there were already signs of a recovery. Globally, VC deals saw a growth rate of 2%, with total funding on track for a stunning 27% jump. The only caveat to the good news was in the US, where the ongoing spread of the coronavirus continues to wreak havoc, resulting in continuing declines in both VC activity and total deal value.

Tech Startups Booming

As the pandemic accelerated, it was expected that startups, in general, would be in for more trouble than most other well-established businesses. But that didn't turn out to be the case for all startups. Tech startups, in particular, proved especially resilient. It was an outcome that was unexpected yet easy to understand. The reason for it was that the sudden lockdowns imposed on much of the world accelerated demand for digital products and services, which helped to isolate tech startups from the worst economic effects.

In fact, analysts believe that the pandemic has turned out to be a net positive for the tech industry. Not only did it create legions of new customers and demand across a wide spectrum of products and services, but it also accelerated a few trends that had existed before the pandemic. For example, companies like Zoom saw huge growth due to newly-remote workers searching for ways to remain productive from home. Critically, the lockdowns sped up what was an ongoing shift to flexible work. And now, many businesses are considering making the changes permanent.

Non-Digital Startups Struggling

For obvious reasons, startups across a variety of industries tied to in-person activities and events have suffered mightily during the pandemic. And just as some of the changes brought on by the pandemic are now expected to benefit tech startups in the long term, they're also likely to have a negative long-term effect on startups in other sectors. Startups in the IT infrastructure space, for example, are likely to see a permanent drop in demand for their products as businesses abandon on-site infrastructure in favor of cloud-based solutions.

The same logic applies to mobility startups who saw a sudden drop in demand for their services as the pandemic took hold. And now that it looks increasingly likely that a return to the pre-pandemic status quo isn't in the cards, it appears that their long-term viability is now in doubt. In other words, the great shift in the way people work is having a clear ripple effect on startups in industries geared toward supporting large commuter populations and the offices they once depended on.

A Whole New World

The key takeaway here is that the startup landscape has started to emerge from the pandemic looking quite different from how it began in 2020. There's been a big surge in activity in some areas and a steep decline in others. But the underlying financial picture didn't get as dire as many predicted – with investors still willing to back new startups if they're worthy of the support. So, in the end, it appears that the pandemic will be a transformative event for global startups, but not a cataclysmic one. And as far as the global economic outlook is concerned, that's a welcome bit of good news indeed.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes

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