Startup stagnation: An investor perspective for founders
Our focus is on helping high potential founders and startups become investor ready and make a positive impact on the world.
Every company we work with has exciting growth opportunities ahead and founders with passion and energy. But things don’t always work out as hoped, as Beauhurst’s recent report on Startup Fail, Scale & Exit Rates in the UK reveals. Compared to the UK average of around 60% of startups failing, among Beauhurst’s group of high growth UK companies tracked, the failure rate was almost 21% (including scaled but failed companies). So better than average, right?
Not necessarily – a whopping 54% of startups did not progress beyond the seed round stage in their first five years, having each raised on average £596k worth of equity finance. That’s a huge amount of money if you consider the broader UK startup ecosystem, and money not generating growth or returns on investment.
Obviously, investors in early stage startups know there are significant risks and long timeframes involved. While 23% of startups in Beauhurst’s sample had scaled in the five year period covered, just 2% had exited. Hopefully some of the 23% that scaled will follow suit in time.
Let’s go back to the companies stagnating and it’s worth founders understanding more about the investor’s perspective on this. The generous SEIS/EIS schemes in the UK – to be improved next year – are designed to help de-risk early-stage investments and drive growth and innovation through private investment.
With these investments, investors have several potential outcomes. The best is obviously an exit with potential for 100x returns in an IPO to 20-30x in a trade sale. The second best is that the startup fails within a reasonable period of time – let’s say 3 to 5 years. The founder(s) have given it their best efforts, perhaps market sentiment has changed, a big competitor has entered, expected new legislation has not materialised and/or perhaps product-market fit was never achieved. Whatever the reason, the founders and investors decide it’s time to call it a day and the investor can remove the investment from their balance sheet, claim the tax deductions under SEIS/EIS for a failed investment and stop worrying about the business – because investors do want their portfolio businesses to succeed!
The worst outcome is stagnation, where a startup is on “life support,” has few, if any, customers/ revenues and/or becomes a small lifestyle business for the founder. This is when an investor has both financial and mental capital trapped. Mental capital because the investor may spend time trying to help tackle the startup’s challenges and doing the admin required around the investment. Financial capital because the tax breaks for a failed business are unavailable so money cannot be invested elsewhere. It’s a situation that can cause acrimony between founders and investors and stress on both sides.
So what are the take aways for both founders and investors if they are to avoid stagnation?
Communicate regularly (at least once a month) on both the good and the bad – founders should actively ask investors for help when needed as your earliest investors are generally the biggest cheerleaders for the business and bring experience/skills that can help navigate hurdles
Set clear goals, milestones and metrics for growth: If these are being achieved, fantastic! If not, then look at the options with clear eyes and consult with the investors you have the closest relationships with – a pivot may work, perhaps a business model shift, perhaps it’s time to call it a day. Every business has options, but try to separate the emotions from the reality in the market. No-one likes to fail, but many outstanding entrepreneurs have failed and learned lessons that drove their eventual success.
Move on: Life is too short to stagnate and let businesses that don’t have the growth potential to linger. It is demoralising for everyone involved and freeing up trapped cash could kickstart new opportunities on both sides.
To learn more about how Activate Ventures can help you get investor ready, have a look at Our Programme
