Founders have hard choices to make to keep our startups in pole position in the future

The cynical optimism of “not wasting a good crisis” isn’t much use to most early-stage companies facing the onslaught of skyrocketing prices. The level of VC investment in UK startups plunged by over 50 per cent in the third quarter of this year, a trend that unfortunately looks likely to accelerate through the last quarter and into 2023.

When economic uncertainty increases, investors’ appetite for high-risk opportunities declines. The current levels of unpredictability are greater and more far reaching than anything we’ve seen before. In a poly-crisis, what’s a startup to do?

For very early-stage businesses cash conservation is key. Start-ups shouldn’t take on new staff now, unless they know they can pay for them. They shouldn’t start buying expensive long-term outsourced solutions either. Instead, they should concentrate on extending the runway as far as possible while keeping overheads low. They should try to accelerate sales – but without sacrificing quality or service levels along the way.

For those companies with more momentum and recurrent revenues, investing in innovation in tough economic times isn’t as crazy as it sounds. Corporates in many different sectors are recognising that strategic innovation is a business imperative – whether to comply with net zero regulations, reduce energy consumption, or optimise networks for high data flows.

Big businesses want to work with smart innovative ones to help figure out solutions faster, and VCs are increasingly looking for these kinds of new entities on the horizon. Despite the slowdown, investment in UK advanced digital tech companies was almost £2.5bn from August 2020 to August 2021. There’s also more support than ever from a wide range of sources – both government and non-government backed. Some of the funding programmes available can be excellent ways to bridge between funding rounds, create new partnerships and attract new investment. You’d be amazed at how frequently chance meetings lead to a significant effect on the journey of a business.

But it’s still tricky to make the right choices. Striking strategic deals with larger businesses to achieve scale can be a huge distraction from day-to-day survival. Playing an even longer game with academic institutions can slow product development. Founders should therefore be cautious about embarking on research and development unless it’s clearly in their line of sight. The temptation of funding itself shouldn’t distract from the real focus. There is a real risk of achieving short-term funding gains, but also losing the direction of the business in the process.

Deals and collaboration can draw long lasting benefits from new investment to long term employment opportunities, and in times of economic turmoil these can seem reassuring. Alternatively, some founders might start thinking about an exit as a means of ensuring their team can have job security through tough times ahead. Certainly, at times like these there are some companies who start to go shopping for talent through inexpensive acquisitions. But a buy-out by a larger company can also shut down the potential of a small business, redirecting that energy towards its new parent’s goals.

And this is where focused leadership comes into play. Now it’s not the time for u-turns – we’ve seen enough already in politics – or un-thought through ideas. Business leaders don’t have all the answers – their role is to acknowledge the situation and provide a calm, purposeful role model for how to get through tough times.

Not many of us have lived and worked through turmoil and uncertainty of the degree we’re currently facing. Whichever their strategy, start-ups must weigh their options carefully and commit to staying focussed on the option they have chosen. You might not care about wasting a good crisis, but you definitely want to find your best path to navigate through this one.