weGrow's Gernot Schwendtner on Europe's startup scene in 2021

As we enter 2021 and look ahead to the current year, the ongoing Covid-19 pandemic undoubtedly looms at the forefront of conversations. In a climate where uncertainty is the only certainty, how can startup CEOs and entrepreneurs future-proof their businesses, achieve growth in existing markets and win new ones? A discussion with Gernot Schwendtner, the co-founder of growth consultancy weGrow International. 

How has 2020 impacted the startup ecosystem?

2020 has undoubtedly been a tough year, and the crisis has had a significant impact on the startup ecosystem. Worldwide, venture capital funding fell in 2020, with many sectors struggling as cash flow depleted and many unfortunate but necessary layoffs were made. Since the start of the pandemic, 72 percent of the world’s startups saw their revenue fall, averaging a decline of about 32 percent. Startups in hard-hit sectors continue to be particularly at-risk, as they continue to be in the dark with no pathway to launch during this period.

However, the crisis has also spurred innovation. Encouragingly, startup communities came together in solidarity to support each other and collectively adapted in order to survive. From distant selling to remote working, new ways of efficient work and business operations were realised, leading to accelerated digital transformation. This led to new opportunities and business growth for those that were agile and able to ride the wave, such as GovTech, HRTech, many B2B SaaS solutions and e-commerce sectors. 

Although some sectors, such as tourism and travel, were definitely hit harder with continuous decline in demand, the tech sector remained relatively resilient. It has been a challenging year, to say the least but overall, Europe’s tech sector has still performed extremely well. The Index Ventures report indicates that the value of European tech companies skyrocketed by 46% in 2020 alone – and is now worth four times what it was five years ago. Amsterdam, Berlin and Paris, are definitely on their way to becoming and will continue to be the startup super-hubs of Europe.

What are some key lessons that businesses should bring forward this year?

Although the dust is yet to settle on the full impact of this crisis, there are definitely key lessons that can be brought forward to 2021 in order to continue managing the fallout of this crisis and also to future-proof your business.

Firstly, develop a strategic approach. Use this period to build a strong and dependable team, organise yourselves efficiently and develop ways of optimal ways of working. Businesses need to stand out and be well-founded in order to distinguish themselves from the rest when venture capitalists make a ‘natural portfolio selection’. 

Secondly, reflect and adapt. Use the time to re-evaluate your core business model and markets to determine if they are still valid in the context of a ‘new normal’ – digital sales channels, services provided and more. Pivoting your business is not a sign of failure, but rather, a key strategy in order to ensure survival and future success. We have seen it more than once, where the focus shifted from one presumably key-market to a new one with better market conditions. 

Lastly, capitalise on new opportunities in the market. With more decision-making being done remotely or virtually, people limiting activity out of the home, increased flexibility required by employers, the need for digital workflows in HR and throughout the employee journey, there are a plethora of new opportunities that can be capitalised upon.

Identify these opportunities in order to drive growth through new lucrative markets and market segments – stay on top of trends and news in order to stay on top of the ‘new normal’. 

Should businesses still expand internationally during these times? What factors determine readiness for international expansion?

Yes, yes and yes! Businesses can and should still expand internationally, and there are elements of the current situation that may actually work in their favour. 

When markets are normally operating at full force, it is difficult to get a chance to experiment and carefully plan your market entry. If businesses have spare capacity at the moment, it should be capitalised and used for careful preparation and experimentation ahead of international expansion.

Use the time to work with local experts for market insights, build a local team, network with potential local clients and suppliers, in order to establish a stable and secure foothold in the market you are trying to penetrate. Additional time also allows for more research capabilities in time consuming, but crucial considerations, such as judicial rules, tax laws and more.

Travel restrictions may also make it difficult to travel to and be personally present in the various markets you are operating in or new markets you are considering entering right now, but there are still many ways to establish a strong local presence and maintain brand relevance. From access to an existing local network, social media platforms, word of mouth and more, businesses need to be flexible in their approach to partnerships and building relationships.

Internationalising in Europe for a scale-up has much potential, as Amsterdam, Berlin and Paris, are set to become and continue as the startup super-hubs of Europe. For many scaleups, this process is a hidden minefield; and an unforeseen trap often leaves many casualties. It is crucial to understand native product market fit, local nuances, cultural differences in ways of working, selling and building trust in determining the right market, the right moment and the right way to expand. 

On the other hand, what calls for a market exit and how to do it strategically?

There come times when it is wiser to cut your losses. Overall, a best-practice we often see applied is to define an affordable loss for any expansion business plan. Clear KPIs, goals, milestones and a realistic budget, with buffers, help to keep the overview. However, it is ideal to avoid the classic sunk cost fallacy by continuing to accumulate blood reserves when the patient is already gone. 

If this is the case and the business case is no longer viable for a new market, exit is best. What makes it cumbersome then, is having a non-flexible structure in place, such as established entities, people on payroll and other long-term commitments. For this reason, a staged approach for risk-spreading is a good risk mitigator: Test the market, validate the need, enter step by step, with clear exit points (in case needed). Too much bullishness can backfire and having a de-risked go-to-market plan helps. 

Worse comes to worse, do not burn all bridges but retreat strategically. Perhaps, at a later stage, it is beneficial to rekindle markets and relationships again. Proactively inform anyone involved, from employees and partners to clients and consumers – controlling the narrative and offering alternatives are two key guiding principles. Also, having put aside some budget in the go-to-market stage for this scenario will provide room to move faster. 

Why and how can businesses build and maintain meaningful international relationships remotely?

The pandemic may affect different sectors in different ways, but it can still be a uniting factor. Make time for those relationships and take the chance to connect with clients, partners and investors over shared struggles. Reach out to clients and partners not just for solidarity, but also as an opportunity to share experiences and knowledge in order to mutually reflect on room for improvement in facing new challenges. 

We are all in the same boat here! In times of need and/or crisis, support is what people will remember the most afterwards and it will pay off in the long run. 

The crisis offers businesses the ability to stand out in their communications – be it internal or external. Connecting and facilitating work relationships can be simple and cost and time efficient, so use it to strengthen your team and make a concerted effort in staying in touch and sharing information. Although there is growing video-call fatigue in many organisations, businesses can try to be creative with their means of communication – reaching smaller and more dedicated audiences in more meaningful formats.

Recently, at weGrow International, we organised an exchange between investors and scaling founders throughout Europe, around the topic of internationalisation. Although the session was selective in terms of the participants, it resulted in a safe, intimate and engaged session with like-minded participants from all over Europe. 

How can businesses set themselves up for post-pandemic success?

As countries around the world battle ongoing restrictions and many begin another lockdown, a flexible strategy remains of pivotal importance. Flexibility needs to be embraced and celebrated in various ways, in terms of adapting to new clients’ needs and also of employees, through remote working as the new normal for example. While there is opportunity in every challenge, they are only available to those agile enough to adjust their operations and priorities to be well-positioned to capitalise on them. 

Shift from short-term to mid-term and long-term thinking – start 2021 by setting clear expectations and goals. This will help your organisation and team be more efficient, proactive and achieve outstanding results. Communication is a big part of that: work collaboratively on projects, develop clear and constructive feedback loops and encourage consistent two-way communication. With all the uncertainty that we are facing, and external stresses, it is even more important to create a good company culture that employees are proud and happy to be a part of. 

Lastly, it goes without saying – digitalise! Businesses that resist or don’t actively adapt to ongoing digital transformation will not survive. Digital transformation and adoption has integrated into our day to day lives to a point of no return, and the ‘new normal’ that we are witnessing now is likely to stay. This digital transformation will only accelerate, so stay ahead of the curve – be open to and embrace change.

What are your predictions for the next year in terms of up and coming sectors, disruptors to look out for, vulnerable industries?

Some industries are doing very well now, and are predicted to continue to do so. Looking at the ‘State of European Tech 2020 Report’, the pandemic has created evident headwinds and tailwinds for tech investments but this varies across industries. The three leading industries in terms of capital invested are FinTech, Enterprise Software, Health and EdTech.

European fintech companies raised more capital in 2020 than any other industry vertical, driven by a number of huge growth rounds raised by Europe's largest fintech giants. Although propelled by unfortunate circumstances, health tech companies, which had already been attracting significant capital, have also raised record amounts in 2020 and European SaaS continue to enjoy record levels of capital invested, with over 200% increase in cumulative total investment since 2016. 

The recent European Scaleup Monitor dives deeper into the key growth areas within the healthcare sector – with the top invested verticals being Oncology, Life Sciences and Insurtech.

The Covid-19 crisis has also been a major catalyst in the adoption of digital technology in education at every level, from early years to adult learning and career development, with global EdTech investment on track to grow by 15% in 2020, a predicted €6.4 billion.

Within these sectors, we may also expect accelerated vertical integrations or more robust solutions with closer proximity to the end-consumer, as supply chains continue to be disrupted. For example, buying or forging new partnerships with their suppliers if necessary, and we expect an increasing number to do so. 

On the other end of the spectrum, capital invested in event tech, travel and jobs recruitment companies saw the steepest decline overall, with more than a 50% decrease in capital invested year-on-year from 2019 to 2020. For job recruitment companies, and in the same vein, HR Tech companies, 2021 looks to be a brighter year – if the proposition is right, a steep and steady growth trajectory is to be expected.

Another interesting sector to watch will be purpose-driven tech startups. European tech companies targeting climate action, circularity and sustainability have attracted great sums of investment, and there are many forces at play here – governmental organisations, entrepreneurs, investors and consumers, that will continue to be reflected in the pace and scale of investment in the industry. 

While scaling-up may often be a challenge for purpose-driven and impact startups, its social relevance has never been more relevant than in 2020. 

However, on a more optimistic note, startup communities have been and will continue to flourish all across Europe. Far from being a homogenous region, the relative scale of capital invested differs vastly between markets in Europe – the denser the relative number of start-ups activity within a country, the greater the level of per capita investment. Europe's most mature hubs such as London, Berlin, Paris and Amsterdam, continue to maintain their stronghold, but as they continue to power ahead, other more nascent hubs are also taking steps forward. 

Any last words?

Keep on growing! 2021 looks to be a year full of changes, so stay adaptive and flexible while identifying and seizing growth opportunities. Europe will see a new era of startup growth – a last chance perhaps to catch up with China or USA-based startups, who will excel even further. In order to keep up, innovation and speed in market expansion is and will be crucial.