The Dutch economy in the Covid-19 era. Why we need startups and scaleups now more than ever

The disruptive changes brought about by the outbreak of the Covid-19 pandemic and the measures to contain it have confronted the business landscape with enormous challenges. The impossibility of maintaining an interconnected globalized supply chain and the abrupt drop in worldwide demand have had long-lasting impacts on the whole entrepreneurial ecosystem. It is no surprise that startups and scaleups were especially hit by this. Unlike larger, more established enterprises, young and high-growth companies have less financial resources to sustain themselves when sales suddenly drop. Based on Techleap.nl’s COVID-19 survey, in March 2020, 42% of startups expected a negative financial impact on their business within the first 3 months[2]. 

A common coping mechanism has been reducing costs, often by staff cuts: 74% of startups across the world had to let go of their employees as a result of the crisis, as reported by StartupGenome. Despite a rising concern of unemployment during the pandemic, employment in Dutch startups and scaleups remained stable, but their hiring pace has slowed down. This is evident when analyzing the applicant data of the Corona Bridging Loan — also called Corona Oververbruggingslening (COL). The COL was launched on the 29th of April by Techleap.nl and the Dutch Ministry of Economic Affairs and Climate Policy and the Dutch regional development agencies (ROMs) to support all non-bank funded companies: startups, scaleups, and innovative SMEs. Since the start of the COL until 1st of July 2020, 406 scaleups and 1049 startups have applied for bridging loans. A live overview of applicants can be found here. 

A clear distinction between startups and scaleups can be seen in the number of FTE employed. Based on the figure above, it can be seen that startups have on average a lower FTE growth rate in the last two years compared to scaleups. 

When zooming in on the sectors, we notice differences in FTE growth. Startups within biotech, agritech, and life sciences have the least employment growth on average. While startups in high tech systems and soft tech have the highest employment growth. 

Looking closely into scaleups, while some industries have been disrupted by a sudden drop in demand, others grew even faster. Fintech, CleanTech and Energy sectors have the highest employment growth. This confirms the trends that were already emerging in the previous years — think for instance of online banking services such as Bunq and Adyen, already among the fastest-growing companies in The Netherlands (Top250 scaleups). 

Scaleups in biobased, chemistry & materials, and Medtech sectors have the lowest average FTE growth in the last two years. These sectors are directly or indirectly related to the consequences of economic slowdown and reorganization happening during the Coronavirus pandemic. Scaleups in logistic & maintenance, high-tech systems, agritech & food, and soft tech are experiencing similar average FTE growth patterns in the last two years. Companies within the life sciences and Medtech sectors are showing similar average FTE growth patterns. These two sectors are actively providing relevant technologies and innovations to combat and potentially find a solution for the Coronavirus. While companies within soft tech, hightech systems are currently in high demand due to changes in mobility and remote way of working. 

Based on the total FTE of startups and scaleups disclosed in the first quarter of 2020, shares of total FTE in softtech are the highest for both startups and scaleups. However, when looking at the second highest share of total FTE, cleantech and energy sector place second for scaleups with 20% share of total FTE, while life science sector place second for startups with 12% of share of total FTE.

What can we do today to survive this crisis tomorrow? Research from Erasmus Centre for Entrepreneurship (2020) on previous economic recessions shows how the key for a successful recovery lies in long-term investments in innovation. In other words, companies should now focus on improving and adapting their business models in order to become more competitive in the future. In this way, a crisis can also be seen as an opportunity that forces businesses to pursue innovation. The agility and leanness of their teams and the entrepreneurial mentality of “If life gives you lemons, then make lemonade” allow for startups and scaleups to be particularly suited to do so, as highlighted by Prof. Dr. Justin Jansen, Academic Director of Erasmus Centre for Entrepreneurship [4]. 

Scaleups are companies that grow so fast that they yearly increase their revenues and/or headcount by 20% or more (OECD, 2007). As it appears from the ScaleUp Dashboard 2019, Dutch scaleups have a significant influence on the prosperity and vitality of the Dutch economy. Thanks to their ability to implement new technologies and develop new scalable business models, scaleups have an important impact on regional ecosystems. Indeed, Dutch scaleups created nearly 220.000 full-time jobs between 2015-2018. That’s approximately 30% of the total job creation in the Netherlands during that time [5]. 

The role of startups should, however, not be underestimated. Since scaleups often begin as startups, the two are inextricably interrelated. That is why they generally overlap in their innovative personality. Startups, like scaleups, stimulate innovation and job creation. On top of that, startups are receptive to the needs of the market and are capable of adapting fast to external factors. A good example of this is provided by the innovative startups in the MedTech sector that since the beginning of the Covid-19 pandemic have worked hard on improving hospital capabilities, decreasing infection rate and providing assessment tools for medical staff, as shown in Techleap’s Dutch Tech Heroes Fighting COVID-19 list. 

At the same time, startups experience a critical drawback in terms of their low survival rate, when compared to scaleups. It is a tragic fact that only a handful of startups survive after their first 5 years of founding [6]. As such, many startups only bring about a temporary value for the economy in terms of job creation. It is therefore important for startups to grow into scaleups. To have a long-lasting impact on the economy, it is crucial for startups to have the necessary support to survive and have the opportunity to prove their business models and ultimately scale up. 

To survive the current recession, keeping innovation high on the agenda is key to moving forward. Startups, scaleups, and other entrepreneurially-minded agents are best suited to do so. Rapid growth in technological advancements, adoption, and usage also brings about new challenges and opportunities. Providing adequate market access and support towards entrepreneurs is thus crucial during this transition period. The good news is that the Dutch Startup Ecosystem has recently climbed up its ranking at number 3 in Europe and 12 worldwide [7]. The ecosystem ranks highly on connectedness and scores very well on performance, funding, market, and talent matrices. The advantage of having logistical and social connectedness should be leveraged further to gain momentum in improving funding, performance, market, and talent. It is now crucial to stay connected and learn from each other. The role Techleap.nl will play in improving these mentioned areas can be seen in its 2020 Action Plan. 

One major area where the Dutch Startups Ecosystem can improve is the knowledge metric. This is defined as the impact of publications or research and the volume or complexity of patents in the Life Sciences Ecosystem. In order to address this, close ties and collaboration to universities and knowledge institutions with knowledge-intensive startups should be further established. Erasmus Center for Entrepreneurship develops people in their entrepreneurial competencies with the academic knowledge and network of Erasmus University Rotterdam. Together with Techleap.nl, they strive to stimulate better collaboration between knowledge institutions, entrepreneurs, government, and ecosystem leaders. 


Source:
[1] Centraal Planbureau, August 2020 
[2] Techleap.nl - The Dutch Tech Ecosystem and COVID-19 report
[3] Techleap.nl - Corona Overbruggingslening data
[4] What can we learn from startups and scaleups to survive the Corona crisis? (Erasmus Centre for Entrepreneurship, 2020)
[5] Erasmus Centre for Entrepreneurship – ScaleUp Dashboard 2019
[6] https://stryber.com/truth-about-startup-failure/ 
[7] Startup Genome - The Global Startup Ecosystem Report (GSER 2020)