The global economy is facing one of its largest challenges, caused by the outbreak of the COVID-19 pandemic in the middle of March 2020. The governments introduce measures to minimize the health effects of the pandemic and to protect their citizens. This caused a significant fallback in business activity, which harms mostly the small and medium-sized companies. Among the SMEs, the operation of the startup companies might be threatened the most by the delay in investments (venture capital, business angels) and in consumption.
In the past years, startup companies contributed significantly to job creation, economic growth and innovation. Therefore it would be particularly important to introduce new measures to help the startups, because the current measures do not provide an adequate solution to the risks that affect this sector.
In the last decade, crowdfunding played a key role in startup financing. This might be one of the most important tools for startup companies to secure their business continuity during the crisis. In this post we present what kind of measures the crowdfunding platforms took in order to support the fundraising of companies, which face significant risks due to the pandemic.The global economy is facing one of its largest challenges, caused by the outbreak of the COVID-19 pandemic in the middle of March 2020.
Similarly to our recent blogpost on this topic, we are presenting the new measures.
The governments introduce measures to minimize the health effects of the pandemic and to protect their citizens. This caused a significant fallback in business activity, which harms mostly the small and medium-sized companies. Among the SMEs, the operation of the startup companies might be threatened the most by the delay in investments (venture capital, business angels) and in consumption.
In the past years, startup companies contributed significantly to job creation, economic growth and innovation. Therefore it would be particularly important to introduce new measures to help the startups, because the current measures do not provide an adequate solution to the risks that affect this sector. It is good news however that at the same time of publishing our article, a new measure for Hungarian startups has been published on the websites of MFB and EIT, the details of which are to be published later.
In the last decade, crowdfunding played a key role in startup financing. This might be one of the most important tools for startup companies to secure their business continuity during the crisis. In this post we present what kind of measures the crowdfunding platforms took in order to support the fundraising of companies, which face significant risks due to the pandemic.
The response of platforms to the crisis
11 crowdfunding platforms reacted quickly to the crisis: they introducedmeasures regarding their operation, with particular regard to supporting the users of the crowdfunding platforms: the companies (campaign initiators) and the investors. The examined platforms recognized the need for taking measures and responded quickly to the crisis.
Source: the publications of the platforms (own elaboration)
The platforms recognized the importance of quick reactions, therefore all of them communicate regularly and actively with the campaign initiators and investors through multiple channels and forums. In order to contribute to the communication between campaign initiators and investors, Tokeportal.hu launched a series of Quarantine Pitch events. Besides organizing these events, Tokeportal.hu provides the online platform for these events.
All the examined platforms stated that they continue to operate business as usual. The majority of them did not report a fallback in investment activity or in the number of new campaigns. Still, most platforms simplified its processes in order to incentivize campaign initiators and investors to use the platform as usual.
The British platform Seedrs and the German platform Startnext provides a fast track for campaign review, while the Austrian platform Conda supports campaign initiators by reducing the administrative burden and fees.
Several platforms ease the financing of startups by reducing or providing exemptions from the success fee or the transaction fees of the campaign. The Austrian platform Conda charges only the fees of third parties and its employees, but provides exemption from its commission. The American platform Wefunder charges no fees for startups that save lives, while the German platform Startnext abolishes transaction fees for all campaigns. Tokeportal.hu introduced favourable fees: it has reduced the success fee of campaigns.
Providing the opportunity to launch non-regulated campaigns makes startup financing much easier, since the preparation of these campaigns is a lot quicker and the processes are simpler than in the case of regulated campaigns. A couple of platforms recognized this and made available donation-based and reward-based campaigns. On Conda the campaign initiators issue subordinated loans, and now having regard to the crisis, the interest may be paid in other forms than cash: by providing services. Startnext abolished the obligation of providing the backers with perks, thus allowing the launch of donation-based campaigns. The Swedish platform FundedByMe launched its donation-based campaigns a few days ago, just like the Hungarian platform, Tokeportal.hu
The platforms adjust their activity to government measures: some platforms (e.g. the British platforms Seedrs and Crowdcube) offer professional help to companies, which are eligible to participate in government-backed grant schemes.
The initiative of Startnext is unique among the platforms: it has launched a relief fund, with the opportunity to apply either with already launched campaigns or new projects. The fund complements the donations of the crowd in the case of selected campaigns, in the total value of at most EUR 500,000
The solution of the Austrian model
The Austrian government published its measures on 20th April, with the aim to relieve the harm caused to startups by the COVID-19 pandemic. It has established the Covid-Startups Relief Fund and the Venture Capital Relief Fund, the details of which are to be published later.
Coronavirus negatively affects the Austrian small and medium-sized companies: there is significant delay in or even cease of production and development, but the shortage in supply and the uncertainty that affects all sectors pose a great challenge as well as cause liquidity problems for small and medium-sized companies.
The Covid-Startups Relief Fund complements the funding of startups by providing the same amount as the startup has raised since the outbreak of the crisis. The startups have to refund this amount at a later point in time, after they become successful. The fund of EUR 50 million thus provides further liquidity to the sector in the value of EUR 100 million. The complementary funds can be raised through a platform.
The Venture Capital Relief Fund mobilizes further funding by providing capital guarantee for 50% the amount that Venture Capital funds invest through a call option in Austrian startups, in the total value of EUR 25 million. The average volume of investments is expected to range between EUR 200,000 and 1 million, these will serve the adaptation to the crisis.
Save our startups!
Almost all the examined platforms highlight the importance of innovative solutions and raise the attention to the need to support the startups.
Startup companies usually have limited reserves, therefore the reduction in their revenues poses such a challenge to them that they have never seen before. Some companies can survive the crisis through their own efforts but it is a common interest of our society to increase the number of companies that pull through the pandemic and its economic effects.
Jeff Lynn, the CEO of Seedrs, one of the most successful British platform that has had more than 1,000 successful campaigns with more than GBP 850 million of investments, informs its users via regular newsletters. In his last newsletter he has published a campaign called Save Our Startups. The aim of the campaign is to persuade the government of the United Kingdom to take specific measures in order to save the unique British startup ecosystem during the COVID-19 crisis. Jeff Lynn summarized the necessary measures in the following three points:
- Providing an equity-based liquidity package suitable to save startups at risk. The currently available schemes are available only to certain kinds of startups, while many companies with great potential for growth cannot access them. Thousands of such companies might go bankrupt without support from the government.
- The government of the United Kingdom supports the fundraising of startup companies with the EIS (Enterprise Investment Scheme) and the SEIS (Seed Enterprise Investment Scheme) schemes. The disbursement of tax credits and other grants should be accelerated, since the liquidity of the private sector has shrunk. Business angels and investment institutions cannot provide enough funds for startup companies, therefore it is incredibly important to disburse state funds quickly.
- There is a need to extend those schemes, which provide incentives (tax relief, tax credits) to investment, just like EIS and SEIS. Equity and debt financing of startups has decreased, therefore it is particularly important to introduce further incentives to investment.
Harmonized measures of the private and public sectors are needed to preserve the successes that startup companies have achieved in the past years. These results are in danger now but it seems that the private sector was much quicker to react than most governments. Let’s hope that after curbing the pandemic, startups continue to grow just like before.