Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
With only 23% of UK startups progressing past the first 5 years, it is vital that investors (and founders) look out for potential warning signs, early in the startup’s lifespan.
Many causes of failure can be predicted and planned for ahead of time. In the UK, 38% of failed startups run aground due to running out of cash. 35% discover a lack of market need and 20% are outcompeted. 19% had a flawed business model and 18% were caught up in legal or regulatory issues/changes.
How can startups plan for these sorts of problems – especially those which are unexpected? Below, we offer ideas to help founders and investors with their contingency planning to help give their startup(s) the best chances of success.
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Even a large corporation relies heavily on its CEO for strategic direction and leadership. However, for a startup, the presence of a competent and visionary founder is crucial. Without this, the business faces a high risk of failure.
A founder could experience a range of issues. Perhaps he/she becomes seriously ill or injured, unable to work. A premature death could derail the business. Or, a mental health problem or family crisis could confound things.
Investors can do little to prevent such scenarios. However, steps can be taken to mitigate their potential harm. For instance, are there other founders who can pick up the extra work if one person is incapacitated?
Are there other team members who can be trained up quickly to move higher up into a leadership role, should the need arise? Having a clear definition of each person’s role (including founders) can help the team to quickly identify sudden “gaps” and re-fill them quickly.
Legal and regulation
Having a robust legal plan from the beginning will greatly help a startup to avoid legal/regulatory issues later. For instance, a tech startup needs robust terms of service (ToS) to delineate legal rights and responsibilities between customers and the startup.
These documents and plans should be crafted properly – not done quickly or “on the cheap”. Having a foundation of insurance also helps if things do go wrong, such as public liability insurance. At a minimum, a UK startup needs employers’ liability insurance (EL).
Of course, rules can change over time. Artificial intelligence (AI), for instance, is currently evolving as governments struggle to devise a robust regulatory framework to protect users whilst allowing the technology to innovate.
Investors should check that founders are keeping their ears to the ground on such matters, continuing to receive professional advice when needed.
Little can be done to control the larger economic environment in which startups find themselves. However, it helps to have plans ready for various “boom” and “bust” scenarios.
In a boom economy, unemployment is typically low. Average prices (inflation) also tend to be low – encouraging central banks to lower interest rates.
This concoction can make it harder to recruit new talent (since more people are happy in their jobs), but it can also help startup sales due to more disposable income in the wider economy. Profits may also be easier to attain since input costs may be lower from suppliers.
In a bust economy (or slow-down), inflation and interest rates may start to rise. Unemployment may go up and the standard of living might decline. This could make it easier for startups to find talent, since more people are looking for work. However, it can create a more challenging environment to generate sales and profits.
Startups can prepare for such scenarios by laying down various contingency plans. For instance, what is the plan if input costs rise (e.g. due to rising inflation)? How might the business finances be impacted by a rise in interest rates?
Sometimes, startups can founder not due to misfortune, but due to maleficence. For instance, in the 12 months leading to March 2022, the UK government found that 39% of UK businesses had experienced some type of security breach (e.g. a cyber attack).
A crucial first step to protect a startup is ensuring robust, up-to-date software against malware, such as antivirus software on all business devices. Also, staff should be trained properly on how to keep work devices safe.
For instance, refrain from connecting to public WiFi – or, only doing so when using a secure virtual private network (VPN). Also, avoid clicking on suspicious links in emails, which could lead to phishing attacks or other hacking tactics.
Startups should be especially careful if using the bring-your-own-device (BYOD) model for IT hardware (e.g. staff use their own phones or laptops to work). Whilst this may help to keep costs low for startups, it can make security breaches more likely.
Passwords should be strong, changed periodically and stored safely. Data backups should be performed regularly. Indeed, a data security policy should be in place from Day One, where all startup members can readily refer to it.
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