A third of VC-backed startups are "at risk of collapse"

Almost a third of European startups are at "risk of collapse" and in a "vulnerable" position as the economic fallout of the coronavirus pandemic looms, according to research.

Analysis from Dealroom.co also suggests that a fifth of early-stage businesses are well placed to profit from the outbreak.

The findings come from EuropeanStartups.co, a new initiative supported by the European Council, which is aided by Dealroom and Sifted. It has analysed 18,000 VC-backed startups in Europe and placed each business into one of four categories.

The first category is for the firms that will profit from the pandemic, such as health tech, logistics and video conferencing companies, which account for a fifth (2,600) of those included in the research. The second tier is the firms that will be OK, namely those involved in streaming services, gaming and fintech.

The third and fourth categories are those that are "vulnerable", and includes proptech and fashion tech, while the companies that will be most affected by the crisis includes travel tech and mobility firms. According to Dealroom, one third (6,000) of European tech companies fall into these bottom tiers.

"In just three weeks Europe has effectively shut down much of the infrastructure that it has taken for granted for decades," said Pēteris Zilgalvis, co-chair of the European Commission FinTech Task Force. "This change is both destroying traditional business models and creating new opportunities, often for emerging tech companies."

"Fortunately the European tech ecosystem faces this crisis from a position of strength, having raised record levels of capital in 2019 and demonstrated strong levels of growth. The coming months will be a huge challenge to the startup sector, but it is more than capable of rising to it."

Over the last five years, Europe's tech sector has seen €223 billion worth of VC-backed exits since 2013. The result of this funding is a profitable and sustainable ecosystem that has greater availability of capital.

A number of governments have unveiled large support packages for early-stage businesses, such as the UK's Future Fund. While it is worth noting that in normal circumstances a high percentage of startups actual fail its likely that many will not find the government-backed loans as a financially viable option.

"We would recommend that businesses looking for cash to see them through these unprecedented times look first at the various other schemes the government has introduced before exploring the Future Fund," said Jack Clipsham, partner and head of corporate finance at Kreston Reeves.

"If other options are not open to businesses, then the Future Fund might prove expensive but a viable option, particularly if loans are repaid in full before any trigger points."