As co-working spaces start to increase their capacity, and WFH (working from home) starts to become partially obsolete, startups are starting to focus on their next dimension. The last couple of months has tested the sustainability of businesses within our startup ecosystem. The three things that have benefited those who are still in operation are: financial resources, value proposition, and/or good people. Recently, during Eric Ries’ podcast Out of the Crisis, Sam Altman (former president of the startup accelerator YCombinator and the CEO of Open AI) shared his thoughts from an investor’s perspective and how he thinks we’ll move on from the pandemic.
“This is a moment when great startups will emerge and get stronger,” he says. “They need to reduce volatility, be more bearish on what might happen, and also prioritize their obligations towards their employees, communities and themselves as people.”
Sam also mentions that the current crisis has presented a unique opportunity for companies and organizations to aid with the coordination of funding resources available from angels, venture capitalists, family houses, corporate venture capital and government entities to foster innovation. I couldn’t agree with him more.
For weeks, German startup founders have been waiting to benefit from Germany’s “Startup Support Program.” It appears that immediately after the announcement, the ministries couldn’t reach common ground as to who would pay what, therefore slowing down the process. In the meantime, Berlin’s unicorn startups such as Get Your Guide, N26 and others have been publicly recognized as being amongst those waiting patiently to receive a portion of the €2 billion ($2.2 billion) claimed to be set aside for Germany’s startup ecosystem according to a recent Bloomberg article. Earlier this month, N26 announced that it had extended its Series D round with another $100 million of funding at the same valuation of $3.5 billion, and just yesterday it was announced that N26 laid off 10% of their US workforce. When a startup who has received over $570 million in its Series D (according to various reports), and also has to lay off work forces across the globe, you can only imagine how some of the less fortunate startups are doing. Regardless, the issue at hand is how to organize, gather, distribute and fund a startup ecosystem when diverse funding sources are being used.
Show us the money, the Berlin ecosystem demanded
In April, Germany’s Federal Minister for Economic Affairs and Energy Peter Altmaier announced the Corona support booster for technology businesses and SMEs, but knew this program would not be suitable for small startups. Why? Because as a startup founder, what can €15,000 actually do for you? Not much. However, some money is better than no money and unfortunately, a lot of female founders typically operate their business with limited resources and hopefully were able to benefit from the funds. The Corona grant program was meant for companies who employed less than 10 employees and was executed by Investment Bank Berlin (IBB). The program awarded freelancers and entrepreneurs with a maximum of five employees €5000 and an additional maximum of €9000 from the federal government. Companies up to 10 could receive a €15,000 grant. This process was quite efficient and fairly simple.
Shortly after France announced their €4 billion economic support plan and made it clear that funding for startups was absolutely essential, the German government announced a “Startup Support Program” worth €2 billion ($2.2 billion) to support startups based in Germany. A detailed description of the funding process for startups took quite some time, causing the Deutsche Startup Association to take action and start gathering signatures from various constituents throughout the German startup ecosystem. Those signatures were added to a letter addressed to the Federal Minister of Finance, Olaf Scholz, demanding the funds be released and a detailed description of exactly how they would be dispersed. It’s not exactly clear if the letter forced the Ministry to release the details when they did, but the extra pressure definitely helped. More details of the financial distribution can be found by visiting the Deutsche Startup Association’s website.
Timing is everything
“We welcome the further concretisation of the Federal Government’s €2 billion startup aid package. Differentiating the rescue measures into startups with and startups without VC-investors is the right approach to provide targeted support for startups. We understand that the design of these aid instruments is complex and acknowledge the commitment of the departments involved. However, in addition to a clever design of the programmes, which should help effectively and at the same time prevent possible abuse, speed is also a decisive factor. The best aid instrument fails to have the desired effect if it comes too late. That is why the Federal Government must now speed up and move as quickly as possible from conception mode to implementation mode. If it does not succeed in supporting startups in time for the corona crisis, this will damage Germany’s entire tech ecosystem and economy, “ stated Christian Miele who is currently the acting president of the German Startup Association. I agree with Christian – timing is of essence. Providing access to the lifeline once a startup has been forced to close its doors, has absolutely no benefit!
Yesterday, the German Ministry of Finance posted more details regarding the funding package for startup founders which is structured to benefit both venture backed (Phase 1), and early stage startups (Phase 2) who have no venture capital support. It has taken a while for the ministries to reach common ground as to who would pay what, but the first payouts are to come sometime this month. They say that timing is everything, and a lot of startups have had limited resources prior to the crisis due to a fairly closed looped investment ecosystem and the European investor climate as a whole, therefore this relief package could be just what the startup ecosystem of Germany needed from the beginning in order to create a less risk adverse startup ecosystem. Only time will tell.
Will Germany’s “Startup Support Plan” level the playing field between female-led and male-led startups?
Last year, the Deutsche Startups Association published their “Female Founders Monitor”, in collaboration with Google for Startups. The monitor was based on an analysis of 1,547 startups and highlighted the fact that only 15.1% of startups are led by female founders. I suspect that Covid-19 and WFH has benefitted female founders by providing a safe space for them to work and excel without the unconscious bias they sometimes experience while in the office or in environments that are predominantly male dominated. These times have not only shifted the way we work, but the way we engage with our work and those with whom we work.
According to the “Female Founders Monitor”, only 7.3% of startups run by female founders employ more than ten people, and only 7.8% female led teams vs 16.8% of male-led teams receive venture funding and therefore have to use other sources of funding, such as family and friends, more frequently. The monitor also found that almost half of female founders (49.6%) base their business models on social problems. I would certainly say that the Covid-19 has presented very serious problems which need to be solved for society. Ladies, and multi-national founders who have embarked upon Berlin, I feel that now is your time to shine. It also seems that the second pillar of the aid package is “all about you.” Due to the venture capital and equity vehicles being put into place, founders not backed by venture don’t have to compete with those who already are. The startup investment vehicle will enable KfW development to offer venture capitalists the opportunity to continue to participate in their funding rounds, and save money in the process due to the fact that the state will cover 70 percent of the funding, freeing up 70% of the funding they would have used towards their favorites to diversify their portfolios. Hip-hip-hooray.
EU versus Silicon Valley, closing of funding gaps
According to a recent report from European Startups, a joint initiative between Sifted and Dealroom, the “key reason why Silicon Valley was able to bounce back in the aftermath of the dotcom crash, the global financial crisis and other downturns is because the region has always retained a critical mass of resilient entrepreneurs and investors.” As of this year, 11 Berlin startups surpassed the $1 billion valuation milestone and 82% of the startup unicorns (190) across the EU are venture capital backed according to the report. The report argues that the funding gap is closing between Silicon Valley venture backed companies and European venture backed companies. “European startups raised €39 billion, compared with €116 billion in North America and €66 billion in Asia. In other words, North American VC investment is 3x higher than in Europe, compared to 5x higher in 2015.” I agree with this statement, but I also know that it is a lot harder for EU founders to get started with their ventures due to the amount of seed funding they receive, equity taken upon investment, and various startup accelerator models seen throughout Europe.
Several platforms fostering support amongst Berlin startups have popped up over the past few weeks. This is fabulous.
Let’s just say investors get more for their bang in Europe. Hence, why US investors had started to cross the border pre-Covid-19 and contribute to 19% of the funding rounds seen amongst European startups during 2019. It is quite difficult to compare apples to oranges, therefore I don’t get why different regions across the globe constantly try to compare startup ecosystems when they are simply different. All research can be manipulated to support favorable conditions. To be quite blunt, part of the reason Silicon Valley also recovered post dotcom crash was its strong collaborative spirit which is finally now being seen across Europe. Seeing how the European ecosystems within countries are joining to share resources during this pandemic is refreshing, and reminds me of the collaborative effort seen amongst the US startup ecosystem from the beginning. Several platforms fostering support amongst Berlin startups have popped up over the past few weeks. This is fabulous.
Location shouldn’t matter, all startups should start out equally!
Europe, together, has a strong startup foundation, inclusive of diversified funding mechanisms. Therefore, I do not disagree that support mechanisms should be put in place immediately to continue to strengthen and propel startup development. An article yesterday published in Handelsblatt highlighted the thoughts of Christian Miele and Jeannette zu Fürstenberg of the Deutsche Startup Association as it relates to the crisis and the impacts on the startup ecosystem. Let’s hit the repeat button, “resources must be distributed soon.” The sense of urgency is valid, not just for German startups, but for startups throughout Europe.
Investment vehicles and resources for startups across the 27 states of the EU are very fragmented and should be more uniform across countries for the various startup ecosystems in order for Europe to foster their incredible innovation and talent. The crisis has highlighted this fact even more. Brussels based, lobby group, Allied for Startups hopes to see more uniformity across the states to better coordinate startup relief packages. “Fundamentally we think a start-up shouldn’t be at a disadvantage because it is in Spain and not in France, ”Blomeyer stated during a CNBC interview. I absolutely agree. The one thing Covid-19 has taught us is that working together, solutions can be found for both society and environment. Berlin, as well as other areas throughout Europe, have a very strong startup ecosystem, momentum can’t be lost. Fragmentation must level out between countries, culture, gender, financial resources, and enablers in order for the European startup ecosystem to not fizzle out.
During recent months, the sentiment being echoed across the globe amongst various professional circles is that Covid-19 is the new Chief Digital Officer of business ecosystems, and as a result has been extended an honorary Board position. Now more than ever, innovative solutions which add value are being tested solutions that were being considered have rapidly been tried and adopted without so much red tape. Out of this pandemic tragedy has also come a lot of positivity. However, much like Silicon Valley, and startup ecosystems across the globe, funders fund the funded, leaving little resource allocation for female founded or culturally diverse founders. Supporting underrepresented founders was a major topic before the crisis, and ecosystem champions for diversity in tech are starting to think the initiatives that were starting to gain traction to support diverse founders will now take a back seat. There is clearly a need for a more streamlined and balanced angel investor / venture capital / government funding processes. Transparency of these processes has the potential to level the playing field between European countries, and startups within their ecosystems, in order to cultivate a more unified startup ecosystem across the globe.
That’s all folks! Until next week….. Are you the founder of a startup adding value to society? Want to reach an established (since 2002) culturally diverse + creative + technical English speaking community? Ping me. I want to talk about you next week!