As inflation reaches a record high of 10.1%, half of UK startups are still struggling to scale beyond the seed and pre-seed stages. These figures, according to a damning report from Tech Nation, revealed that startups were struggling with low growth and funding. This has been further reiterated by KPMG’s Venture Pulse report finding that UK businesses attracted £7.2bn in VC investment during April to July 2022 – down on the £8.5bn raised in the opening quarter of the year. On a global stage, VC funding levels saw a decline in Q2 of this year, falling from £138bn to £100bn. Whilst experts have described this period as an ‘uncertain time’ for startups across Britain, the country is still outperforming China and France in terms of startup investment – and is still second only to the US. In light of this, Nayan Gala – growth strategist and founder of global startup investment banking platform, JPIN – explains why startups struggle to scale, and how firms can use the current climate to their advantage and ensure growth and success.
Unprecedented levels of funding for startups in 2021 has evidently put even more pressure on the retreat in VC funding. Therefore, it has become fundamental for startups to consult small business financial advisors such as Accountants East London to know what alternative options there are. A series of interest rate rises by central banks means that VC investing has become increasingly expensive at a time when returns may also diminish. That being said, Gala argues that startups could remain a focus for investors given a global desire to accelerate technology. In addition to this, he explains that some sectors – such as fintech, greentech and AI – will remain competitive and significantly buoyant despite the current landscape. With this in mind, Gala shares some of the most common barriers for early-stage businesses amidst the current startup market, and explains how these can be combated.
Avoid common marketing mistakes, and don’t begin scaling too early:
“Underestimating the significance of marketing can often lead to the collapse of startups. Whilst having a great product or service is fantastic, you need to let people know about it and why it’s so great. Visibility is crucial to reaching your target audience. One of the primary reasons why firms fail is because founders pour all their money into the product, and not into increasingly the visibility of the idea.
“Although there is no guarantee that any form of marketing could work, it’s vital that you test the waters with different streams of marketing. Make sure that you’re not placing all your bets onto the one route. It’s normal to make mistakes, but it’s also important to learn from them and go slow with putting money into it. That way, as you gain traction, you’ll be able to transition into bigger things.”
“It is vital that bootstrapped businesses, and VC-backed businesses prioritise sustainability, to ensure that you keep the revenue coming in even when funding runs out. Make sure that when you’ve reached the distribution stage, you’re not pouring money into it – see if you can gain customers from a cost-effective marketing channel with minimal spend initially. That way you’re not investing the majority of your money into an unproven channel, only to find that your acquisition costs are unsustainable.
“If the channel works, continue to slowly increase your spending until it taps out. It’s key to note this should be done in stages – many startups see early traction through a single channel, assume this is the best method of acquiring customers and begin funnelling money and time into it. However, it can often be too early and as a result, the cost to acquire and payback period changes as spending increases, and isn’t able to be recovered.”
Understand the demand for your product or service and don’t over-complicate things:
“Lack of market research can often be one of the main drivers of business downfall. It’s crucial for startups to understand the value of the product/service they’re bringing to the market and whether the demand is there. Talk to your target audience, or look for other businesses that work in the same space – ensure that you’re conducting sufficient research on all fronts.”
“It’s also important to note that you shouldn’t overcomplicate things – sometimes, the simpler the concept is, the more attractive it’ll be for users and customers.”
Ensure you have a solid financial infrastructure in place:
“Brexit has had a huge impact on encouraging companies to expand overseas, meaning that this will be a top priority for not only businesses, but also investors. When a firm expands internationally, it makes managing payments a much more complex issue.
“You can fall foul of sudden currency changes, regulatory requirements and a host of other issues. The banking industry differs significantly from country to country and firms need to have a good understanding of what each landscape looks like first of all. Also, the financial systems that are operated in certain territories don’t allow for firms to connect via an API for example, which can help streamline payment processes – so it’s important to understand what you’re up against from a tech perspective too.
“Companies must first ensure they have the relevant expertise – either in house or from external advisors – that can help them with this vital aspect of international expansion. For example, you’ll need to consider enlisting the help of a different payment services provider that specialises and is popular in the particular market of interest.
“Businesses must also be aware of the regulatory and tax implications of expanding overseas as this can prove to be very costly if not understood correctly. If the firm is trading across international boundaries, then it is also vital to have a clear and real-time overview of profit and loss that accounts for cross-currency transactions and changes in forex rates. Ideally, all of these aspects will be automated using the appropriate financial technology otherwise it will become incredibly time consuming and errors can occur.”
Use this time to learn and build resilience:
“Startups and early-stage businesses should not panic amidst the current landscape – there are investors that are still looking to invest in firms to expand their portfolios. The main difference is that they are narrowing down their choices and being more vigilant with their capital.
“From my experience, the nation’s best up-and-coming firms will still receive investment in the current environment – that being said, it also provides an opportunity for the startups who are worst-affected to demonstrate resilience and learn important lessons that could serve them well in the future. As a young tech firm coming up in this environment, if they manage to weather the storm, so to speak, that’s potentially going to be attractive for investors in the future. I think it will also teach them to be much more savvy with their capital, and to plan ahead for any unexpected bumps in the road like this one.”
