A ticking Covid-19 time bomb for Irish start-ups

As Covid-19 rumbles on, Irish start-ups are caught between a rock and a hard place as revenues stall and they struggle to retain talent.

Irish start-ups have an average cashflow runway of between three and six months before they run out of cash due to the Covid-19 crisis, a survey by Scale Ireland has found.

The survey indicated that Government subsidies for struggling firms impacted by Covid-19 do not go far enough to reflect the situation faced by start-ups caught up in the war for talent but equally striving to win investment.

“Rather than benefiting from the subsidy, start ups will tend to leave people go, good people, people hard found, to minimise cash burn”

The survey of 206 start-ups by Scale Ireland found that 23pc of Irish start-ups are concerned about raising money. A similar survey in collaboration with Techleap.nl found that 27pc of start-ups in the Netherlands have the same fears.

18.3pc of the start-ups have responded to Covid-19 by cutting salaries across management and 14.3pc cut salaries across the team.

7.2pc have made staff redundant while 8.1pc have shortened labour hours. 14.8pc have stopped development of products while 30.5pc have postponed payments to suppliers and have stopped marketing.

Asked when they expect to see the financial impact of Covid-19 to become critical for their business in terms of running out of cashflow, more than two-thirds (36.2pc) reckon they have between three and six months while just under one-third (31.1pc) have between one and three months to keep their heads above water.

Since the Covid crisis began 16.3pc of Irish start-ups have seen revenue decline by more than 75pc, followed by 15.6pc who saw revenue plummet by between 50c and 75pc.

The majority (44.9pc) said they were moderately satisfied with help for start-ups offered by the Irish Government to date while 43.3pc said they were not.

The majority of entrepreneneurs (51.4pc) want the Irish Government to provide them with access to the Covid-19 Wage Subsidy Scheme, 49.7pc want access to Government-backed bridge funding while 40.2pc want tax exemptions/postponements to PAYE and PRSI.

What Government can do

Scale Ireland, a lobby group founded by leading entrepreneurs and investors from all over Ireland last year, has called for four key policies to be implemented by the Irish Government:

Covid-19 Bridging Financing Fund: Supplying emergency financing to viable start-ups through a dedicated Government-backed investment fund

Clarify Eligibility for Supports: Ensure the COVID-19 Wage Subsidy Scheme and other business supports apply to pre-revenue startups or startups that are otherwise dependent on investment capital

Tax holiday / deferment: Deferment or suspension of employer related taxes would have the greatest impact to support cash flow; followed by acceleration of VAT repayments and deferral of VAT payments

R&D Tax Credit repayment: Priority should be allocated to SMEs, this would help the most R&D active companies to survive the crisis.

What Irish start-ups are saying

Start-ups in Ireland appear to be caught between a rock and a hard place. Many, which are tech companies, have to fight in the talent war for executives who are highly-paid but cannot afford to reduce their salaries.

According to one start-up founder: “A simple change to the R&D tax credit will help us protect a lot of jobs.”

Another start-up founder said: We’re not eligible for main Government subsidy as we have cash in the bank despite the fact our revenue is down 30pc or more.

“Tech companies typically have higher salaries but there is no support for people earning more than €70,000. This causes a major issue as we don’t want to let anyone go – especially not critical team members, but many such people are earning €80,000 to €100,000 and we cannot get any support for keeping them on.”

Another pointed out: “France has taken decisive action to support their start-ups with convertible loans to act as ‘bridge’ finance. Having spoken to key Irish start-up agencies, there are no specific supports to help start-ups survive the Covid-19 crisis. All that appears to be on offer are existing grants mainly designed to fund new projects or additional external consulting spend. Investor reaction is mixed, many are more cautious and investment processes, even where investors are fully engaged, will be slower due to many factors, including adjusting to remote processes where travel is not possible for pitch meetings. Many investors have pulled back from new investments as they focus on their existing companies, this was the case with the lead investor on our current late seed round.”

Some companies could yet get investment if they could be underwritten by the State. “We have a viable start-up addressing a global problem that is not affected by the pandemic,” said one founder.

“We have private investors who will invest but only when they see how the world is after things have returned to some semblance of normality. They might be persuaded to invest if the Government (perhaps through Enterprise Ireland) were to underwrite their investment. This would allow us to press on with development which, in turn would necessitate us hiring people thereby generating much needed employment.”

The outlook for start-ups is indeed bleak until there is an upturn of some kind: “The current Employee Subsidy is blunt, in the sense that your typical loss making start-up may have the cash to pay in any one week, and therefore cannot claim the subsidy, but will need to make money to give it sufficient ‘runway’ before further investment is obtained. Therefore, rather than benefiting from the subsidy, start ups will tend to leave people go, good people, people hard found, to minimise cash burn.”

Pictured: Conor Gouldsberry and Liz McCarthy from Scale Ireland and Brian Caulfield, chair, Scale Ireland. Image: Neil Donegan

Written by John Kennedy (john.kennedy3@boi.com)

Published: 15 April, 2020