With inflation rising and the economy slumping, word on the street is that Europe is cruising into an economic downturn that could last for a few years. We’ve already seen some big companies make big job cuts – whilst other companies are struggling to find the right talent.
So, what exactly does this mean for Europe’s startup ecosystem?
Together with insights from Jesus Tapia, we take a look.
Jesus Tapia is Head of ISDI Accelerator, part of ISDI, one of Spain’s top business and technology schools, specializing in the internet economy and digital businesses.
The global startup ecosystem seems to be at a critical stage right now. Recent data from Cruchbase’s monthly recap revealed that the second-quarter funding fell from $162 billion to $120 billion. Europe isn’t immune, where startup funding is reported to have dropped by 38%, resulting in the startup job market being down 40% from the beginning of this year. In the first half of 2022, late-stage Venture Capital deals were down 8% according to data from Dealroom.
It’s not all doom and gloom though. We should remember that last year was a standout year for funding, and, so far funding this year is still out-powering expectations and what we saw before 2021.
The current decline in funding is impacting startups at all stages, with late-stage startups taking a big hit- those that took big investments made lots of hiring decisions and seemed to scale super fast. Now, they are making tough calls around staff numbers and restructuring.
While early-stage investors understand it could be years until they see a return on their investment, later-stage startups tend to be experiencing more pressure to move toward an exit. In an economic slowdown, the wallets of investors tend to tighten quicker than VCs or angels who invest in earlier-stage companies. The selection becomes tougher for late-stage startups.
What we are seeing now is that VCs are being a little less risky, and saving their investments for the best-performing companies. So, while some late-stage companies that aren’t performing well may take a big hit in terms of raising new funding, other better-performing companies could see a boost in support from investors during the economic slump.
For example, Gorillas looks to be raising more funding at a reduced valuation right now. Some may argue it’s a safety net or a survival package – but it could be just what the startup needs to maintain itself.
Funding cut, hiring frozen
In addition to a funding slowdown, Europe also faces a hiring deceleration. According to a report by NGP, even many large B2C startups (e.g. Gorillas) are having to make job cuts right now. As funding has dropped, many startups, especially those that grew massively over the past couple of years, have had to let people go.
Firms that made it big in the heyday of the pandemic like Getir, Klarna and Gazoo have all shrank their workforce by 10-15% in the last year.
Further, NGP reported that 50% of B2C startups made job cuts while only 35% of B2B startups made cuts. Open job postings for startups in Europe have dropped 43% since February, according to a report from NGP Capital that analysed 3,612 startups.
A second trend, we may see is that some of the top performing B2B startups will take advantage of the talent surge into the market and hire for roles they might not have had the ability to fill just a few months back.
Fresh talent has re-hit the job market due to the lay-offs. So, top performers profit from the lay-offs by other startups and can hire talent previously unavailable to them. This could be an opportunity for startups who were previously struggling to find profiles with the right skills and expertise, who now find talent on the job market to tackle growth. So, the job crisis provides opportunities for smaller companies as well as problems for the previously fast-growing ones.
What European startup founders need to consider to survive during a recession.
Looking forward, being proactive is always the best course of action. Jesus Tapia gave his top tips to get through the next 12-24 months.
1) Make shifts, not job cuts, wherever possible
Startups should identify revenue-producing departments of the company shifting resources temporarily from other areas that produce less revenue. They can do this by doubling down on personnel in some areas to help grow those departments, that are successful. It is a good moment to review your processes. Team work really makes the dream work, so maintaining a strong team is critical.
2) Startups less impacted should take advantage. They can be aggressive in this situation
Not all startups will face the same level of hardship, and an opportunity exists for those less impacted to capture market share, and/or raise funding from the limited amount of venture capital still available. Startups performing well should not be afraid to get in contact with their existing investors with hard data that makes the point that investing in extending the runway is worthwhile to them.
3) Adapt product and pricing to keep users engaged
Don’t stay stagnant. Make a move. Constantly evaluate consumer behaviour related to your product and how it changes amid a recession. Adapt the product to the customers’ needs to continue to provide value. Also, don’t be afraid to offer more value for less cost on a limited-time basis to keep your principal clients engaged during a recession. More than ever put the users and clients at the centre of your actions.
Tough times might be ahead for startups – that is something we could never deny. On the other hand, we have had unicorns seeing the light of life during earlier downturns: Airbnb, Whatsapp, Slack, Uber all were founded after the 2008 recession, taking advantage of consumers’ need to bootstrap their finances.
Like the Sharing Economy has its origins in the earlier recession, the current downturn will offer a ground for tech talent to found the unicorns of the future. It takes courage, a proactive spirit and some creativity.
Editor’s note: This article was created with additional participation and input from writer Alexandra Amsberg and Head of ISDI Accelerator, Jesus Tapia.