Although a good number of young companies and innovative startups are providing solutions to the challenges which COVID-19 has brought, the truth is that these ventures and the organizations that support them are being hit hard by the pandemic.
A recent study by the Inter-American Development Bank (IDB) and PRODEM explores this impact, as well as the responses from entrepreneurs and ecosystems, based on a survey of 2,232 ventures in Latin America and the Caribbean (LAC) and 429 support institutions, such as incubators, accelerators, company builders, co-working spaces and public agencies supporting innovation. In this blog post, we present the main insights from the survey, along some reflections on recommended actions.
How are entrepreneurs and young companies coping?
Let's start with an example. Joinnus Market is a Peruvian startup founded in 2012 which offers a platform built to disseminate and sale massive events in the region. In recent months, after having reached 1.5 million users in Colombia, Peru and Ecuador, its income plummet to zero. Faced with this catastrophe, the resilient spirit of the entrepreneurs, Carolina and Domingo, led them to re-invent themselves and launch new platforms such as JoinnUs Live, Joinnus Market and Joinnus Donations, which seek to meet the growing needs of people and organizations in the current context. For example, the first is a platform that enables access to events, classes, workshops and content through live broadcasts; the second is a self-managed online store for small producers; and the third seeks to help fundraise and carry out campaigns for charities. Some of these activities are already starting to generate income, but the entrepreneurs know that they are re-starting and it will not be easy.
This story portrays the impact that ventures are suffering and sheds light on their potential resilience in face of adversity. However, it is difficult to think that the majority will find answers without adequate support. And the impact is enormous. The study reveals that eight out of 10 enterprises are being strongly affected by this crisis. In particular, half of those who had not yet started their business interrupted such process, while 53% of those who were already selling, saw sales stop. Perhaps most worrying of all, only half can resist up to two months before having to close their companies.
The impact is greater on companies with a shorter trajectory. Two thirds of companies younger than a year stopped selling, compared to just under half of those that are at least three years old. On the other hand, ventures in the technology sector and young companies which had managed to grow in recent years, are suffering a little less. 29% of technology companies saw sales halt, compared to more than 80% in other service sectors. At the same time, only a third of the most dynamic companies saw a sales interrupted, compared to 53% of the overall average.
The pandemic has also taken a toll on the general mood of entrepreneurs and their teams. Two out of three startups have seen the spirit of their entrepreneurial teams drop significantly, something that occurs even more widely among their employees (71%).
Most entrepreneurs report that they only count on the support from their internal team (56%) and, to a lesser extent, their closest social network such as family and friends (39%). Ecosystem organizations do not appear to be playing a leading role at this stage. 44% of the surveyed entrepreneurs rated the reaction and support of these organizations as slow and insufficient, or even non-existent (29%). Nonetheless, the recognition of support from the ecosystem is somewhat higher among entrepreneurs in the most dynamic and older companies, as well as in the ecosystems of Uruguay, Costa Rica and Chile.
How are ecosystem organizations reacting to the COVID-19 pandemic?
There has been a considerable impact on organizations that support the region's entrepreneurship and innovation ecosystems. Two out of three organizations have stopped or decreased their work with entrepreneurs. The main problems they report are the lack of appropriateness of their services for the needs of entrepreneurs during the emergency (68%) and the uncertainty about their future operations (64%), as well as the significant drops in their sources of funding (62%). Moreover, only one in four organizations is optimistic about the possibility of a prompt recovery of their activity.
But not all countries show the same behavior. The ecosystems of Uruguay, and to a lesser extent that of Chile, are the least affected. This is possibly due to a greater capacity for resilience and flexibility to adapt quickly to the new scenario, derived from greater institutional capabilities and articulation achieved prior to the crisis. On the contrary, the ecosystems that register the greatest impact from the crisis are those of Bolivia, Ecuador, Panama, Guatemala, El Salvador and Venezuela.
The main response from these organizations has been the implementation of online activities such as courses, webinars and assistance channels (66%). However, other more personalized actions for entrepreneurs are much less frequent, such as online support (18%), mentoring (5%), or the management of public support mechanism to assist companies (3%).
In this context, various institutions have promoted actions aimed at promoting the involvement of entrepreneurs in generating solutions to the problems derived from the crisis. The most frequent have been hackathons and challenges, such as the COVID-19 Challenge of the Alliance for Entrepreneurship and Innovation in Ecuador, the HackCovid-19 which took place in Argentina, Uruguay and Costa Rica, the regional "Every Day Counts" hackathon, and the Chilean HackThePandemic and “COVID, Collaboration and Life” initiatives, to name just a few examples.
The governments of the region also launched challenges and calls for innovation to channel entrepreneurial capacities towards new demands, often for the development of a local supply of critical inputs. In this link you will find a non-exhaustive list of these calls from agencies and ministries of science, technology and innovation. New initiatives have also emerged as platforms for linking problems and solutions, such as the one organized by Innpulsa in Colombia, or training and assistance for the 'recycling' of entrepreneurs such as PLAi in Mexico.
How can we drive recovery?
Entrepreneurs, young companies and the institutions that support them are among the groups particularly affected by the pandemic and must be taken into account in the proposed relief measures as public policies. Protecting new companies with growth potential, preserving their human and organizational capital, as well as their innovative capacity, will speed up the economic and social reconstruction necessary to overcome the crisis. We must act quickly so that dynamic and innovative entrepreneurs and support ecosystems can be part of the solution.
The public policy agenda must consider measures that promote access to financing via seed capital, both to respond to the emergency and to support entrepreneurs in rethinking their business models in response to conditions of the 'new normal'. But it should also aim at generating demand to sustain entrepreneurial activity, which includes promoting public procurement from young companies, especially from those linked to innovation, as well as actions to channel and enhance the value proposition from entrepreneurs towards the social and productive challenges of post-pandemic scenario. Lastly, this agenda must contemplate the organizations of the innovation ecosystem, supporting them to face and overcome this crisis, accompanying in the current situation the adaptation of their services to the new needs of entrepreneurs.
We can avoid even more negative impacts on this generation of entrepreneurs and on an ecosystem built with hard work over the past years. Let's build an agenda towards that.
Download the study report
The document includes five sections. First, it presents the composition of the survey. In the next section, it identifies and analyzes the main impacts of COVID-19 on young enterprises and enterprises, their reactions, as well as the support mechanisms they have to face the current situation. Then, it offers an analysis of the responses obtained from the survey of ecosystem organizations. In addition, the demands for support from entrepreneurs and organizations are discussed. Finally, it presents conclusions and specific recommendations.
Watch the Latin American 'Mega Hangout'
In late April, the Global Entrepreneurship Network collaborated with the IDB and Prodem to host a virtual meeting with entrepreneurs, ecosystem organizations and government agencies to discuss about the initiatives they are promoting and their solutions to the emergency. Held in Spanish, the recording of this meeting is available to watch below.
The original version of this article was posted on May 14 on the Inter-American Development Bank’s “Puntos sobre la i” blog: Startups y empresas jóvenes ante el COVID-19: impactos y respuestas desde el ecosistema.