Is 2023 the disaster year startups anticipated?

Kirstie Pickering presents a midyear analysis of what’s fast becoming a make-or-break year for UK small businesses.

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This year has hit startups hard. Investment is hard to come by, the cost-of-living crisis is striking businesses from every angle, and interest rates have risen to 5%.

Now we’re halfway through the year, it’s time for a health check. Is 2023 shaping up to be the disaster analysts predicted?

Slow spending for Q1 and Q2

Many of the challenges experienced last year – like volatile public markets and inflationary pressures – continue to push the UK economy to the brink of recession. And it’s not just in broader market dynamics where early-stage businesses have cause for concern. Earlier in 2023, we witnessed the collapse of Silicon Valley Bank, which further destabilised the global funding landscape.

“There are big liquidity challenges for startups and restrictions on capital are evident across the fundraising landscape,” says Jasmine Lynn, senior portfolio manager at Seedrs.

“According to VC firm Atomico, the amount of venture capital invested in European startups this year will be 52% lower than in 2021. This is leaving many startups facing a choice between raising capital at a lower valuation, taking on debt, or cutting costs to ‘make do’ until the funding environment improves.”

This is a sentiment shared by Edward Kandel, investor at Founders Factory. He says the fundraising climate is definitely tougher, with greater scrutiny and caution than what he says were ‘the heady days’ of 2021.

“The timelines to get the money in the bank are taking longer, which founders need to prepare for as much as possible,” says Kandel. “Some deals are still being done under fast timelines at pre-seed and seed, but these are mostly in very buzzy spaces with well-planned fundraises and often strong existing investor networks to tap into.”

Looking to raise money? Check out our guides to small business funding and grants.

Hiring trouble adds to SME woes

As cofounder and CEO of early-stage startup Allye, Jonathan Carrier has launched his business in a challenging tech ecosystem. He has found that finding talent has been a key hurdle this year, and one he expects to continue.

“Access to talent has been mixed, with a general lack of capable and skilled people available to fill roles in a rapidly growing company,” says Carrier. “Candidates are also being squeezed due to a cost-of-living crisis, so they are less willing to take on the risk of working for an early-stage startup. And with rising inflation, they are more demanding about salaries, squeezing the limited funding we have available and impacting our runway.

As we enter Q3, Carrier is firmly in the realist camp about the months ahead: “I think the second half of the year will be more of the same. We are headed for a significant recession as central banks struggle to keep inflation under control,” he says.

A cautious six months ahead

Like Carrier, most investors and startups expect much of the same for the remainder of the year, but there is some optimism for brighter times ahead.

Lynn says dry-powder – cash reserves kept on hand to cover future obligations – is at an all-time high across the private equity industry, totalling almost $1.3T for private equity and $580B for VC at the start of the year.

She says such vast sums of available capital mean that the reported doom and gloom statistics don’t accurately tell the whole story for the funding prospects of the startup ecosystem. This is great news for startups whose 18–24-month runway is coming to an end and will soon be looking for fresh funding.

“Some of the most generation-defining startups in history were built in recessionary times, such as Facebook and Square,” says Lynn.

According to Lynn, poor economic cycles benefit resilient entrepreneurs: a key reason why businesses thrive in these circumstances.

Starting a business in a downturn also means there is a naturally reduced rival set, giving owners greater scope to carry out competitor analysis to capture their key audience. Plus, in turbulent times, companies often find a pool of available top tier talent with which to supercharge their business.

“Ultimately, the strongest young companies will survive this downturn by scrapping a growth-at-all-costs mentality to focus on hardcore business fundamentals, especially positive unit economics,” she adds.

Jasmine Lynn’s three top tips to survive the downturn

Who will emerge triumphant from the current slowdown is a question for another day. For now, the focus for most small businesses is on surviving the recessionary environment. For startups struggling with the impact of the current market, Lynn offers three pieces of advice:

1. Future-proof funding plans

“A basic understanding that it is going to be an even tougher journey to raise money at the moment is key. Founders need to make sure they’re starting the process and preparing to fundraise as early as possible and not waiting until they desperately need the funds.

“Something I always advise is that startups should avoid putting all their eggs in one basket when it comes to courting investors. Sometimes funds or investment leads might drop out for reasons unrelated to you. Make sure you’re talking to a range of investors.

2. Know your numbers

“Startups should make sure their finances are up to scratch. Founders should focus on the fundamental financials of the business, knowing what their unit economics look like and having a clear sense of the path to profitability as there is an increasing focus on that now.”

More on this: how to create a cash flow forecast

3. Review your corporate image

“It’s also important – particularly in the early stages where you have less proof points and data – to make sure you’re presenting the team and the founders well.

“Ask yourself, why are these people in particular best positioned to make this business successful? Growing and scaling a business is a long and gruelling process, and investors want to know that the founders and the team are committed to this for the long-term.”

There’s no question that 2023 has been – and will continue to be – a difficult year for startups. But with some resilience, a ‘thinking outside of the box’ mentality, and a realistic approach to strategising for the coming months, there are plenty of opportunities for savvy business owners to take hold of.

Mid shot of Kirstie Pickering freelance journalist.
Kirstie Pickering - business journalist

Kirstie is a freelance journalist writing in the tech, startup and business spaces for publications including Sifted, TNW, UKTN, The Business Magazine and Maddyness UK. She also works closely with agencies such as CEW Communications to develop content for their startup and scaleup clients.

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