If you ask any successful entrepreneur what it takes to succeed in the start-up environment, they'd likely put resilience, proactivity and adaptability at the top of the list. Many early-stage companies are well-accustomed to operating with a minimal workforce, on a tight budget and in a flexible manner. You might therefore think the same group of UK-based founders and CEOs who attracted a record £5.5 billion of investment in the first half of 2019, would be well-equipped to deal with the COVID-19 pandemic as well as the related social and economic fallout.
Nonetheless, despite the £1 billion support package pledged by the government in April 2020 (including a new £250 million Future Fund to be administered by the British Business Bank), as the country begins to emerge from lock down, early-stage companies are likely to be cash-strapped and faced with increased competition when it comes to attracting investors, with many also having to reconsider their short and long term growth strategy. Below are some key considerations for UK start-ups on how to withstand the inevitable increase in investor scrutiny, cash-flow scarcity and emerge from the crisis stronger than their competitors.
Revival of the cautious investment approach
On the Future Fund's first day, the British Business Bank received applications from 533 tech start-ups, seeking a total of £515 million of funding. This implied that either the Future Fund was offering generous terms to applicants (which we discuss in our articles on the topic) or the UK's start-up ecosystem was in need of help. However, according to a report published by the Government's Digital Economy Council, early-stage UK-based tech companies received an impressive £4.1 billion from investors in the first five months of 2020. Investor appetite is evidently high, with the stats suggesting that Britain continues to be one of Europe's most attractive destinations for tech investors. Even higher, however, are the demands being placed on founders and CEOs having to operate on even more of a 'hand to mouth' basis than ever before.
It seems inevitable that many early-stage companies will be in need of vital capital injections in the coming months. Some will turn to their existing investors (especially given the Future Fund requirement for matched private sector funding and an investor-led application process). Meanwhile, those looking to attract new investors may encounter a more traditional, cautious approach, with investors paying keen attention to:
The importance of effective and sustainable cost management
Start-ups will need to be looking to take every measure possible to ensure effective and sustainable cost-management. Such measures might include:
Over the coming months, investor scrutiny and the demands placed on start-ups will continue to increase. But, instead of feeling overly pessimistic about the future, founders and CEOs should look at the now thriving businesses founded in the post-financial crisis era including the likes of Whatsapp, Instagram, Uber and Pinterest, to name but a few. Crises of this scale highlight fundamental weaknesses in existing systems and gaps in the market. For example, look at the unprecedented growth of Zoom in recent months.
The ability to innovate and create solutions is key to any start-up's success, crisis or no crisis. Yes, demand may be down and cash may be more strapped than ever, but many of the challenges faced in the post-COVID-19 era can be tempered if start-ups continue to rely on some of the measures that will no doubt have proven vital to their early growth. Turning to old tactics, rather than implementing drastic measures, is a practical way to ensure sustainable, long-term growth and investor interest.