Founders’ formula: keys to UK start-up success

January 2023  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

January 2023 Issue

The economic and political chaos that has engulfed the UK in recent years, and particularly so in recent months, is such that any entrepreneur thinking of starting a business on these shores faces an almighty challenge to succeed.

And yet, despite the many hindrances imposed by these turbulent times, budding business owners refuse to be discouraged and continue to take the plunge at a significant rate, with more than 770,000 start-ups launched in the UK in 2021 – a figure broadly mirrored throughout 2022.

“Entrepreneurship has become fashionable over the past 10 years with the rise of social media influencers donning business building as the way to greater fulfilment and financial freedom,” says Elliot Wise, founder of Limitless Mentoring. “Many new businesses fail in their infancy due to delusional optimism, with owners often starting up more like artists than operators.

“Businesses, especially successful ones, are complex entities which require the owners to be highly skilled and efficient problem solvers,” he continues. “Before one can master business, they must learn how to juggle hundreds of elements simultaneously. Running into it blind with nothing more than an idea will likely see the business owner crushed by their competition.”

Burgeoning sectors

Clearly, start-ups in the UK have been a healthy space in recent years, but which sectors are new UK businesses currently making a beeline toward? Research by SeedLegals indicates six sectors, listed below, as currently securing the lion’s share of entrepreneurs’ attention.

First, services on demand. This sector allows customers to adopt services in an instant, such as food delivery, healthcare and travel, and has been identified as the UK’s fastest-growing sector, with a 75 percent growth in investment rounds from 32 to 56 in 2021. Services on demand start-up Foodstuff is one of many to have taken the sector by storm with its independent and emission-free food delivery service.

Second, EdTech. Understood as IT tools for educational practice, EdTech acquired 70 funding rounds in 2021. EdTech is a sector that has been heavily impacted by the coronavirus (COVID-19) pandemic; educational officials adopted EdTech to produce accessible and digitally focused learning methods to keep up with the stay at home order.

Third, PropTech. A sector assisting real estate needs, PropTech saw 60 funding rounds adopted in 2021, after a heavy decrease in 2020. Including digital dashboards, residential and commercial lending, and smart-home technology, PropTech streamlines the real estate process, creating a faster and easier way of assisting sales operations. One PropTech start-up, Propflo, works to streamline this process and bring transparency to property and upfront information to customers.

Fourth, alternative finance. Emerging outside of the traditional finance system, alternative finance is another rising sector which has seen significant growth in funding rounds this year. Now, 210 of the UK’s active high-growth companies operate in alternative finance, providing financial channels and instruments such as regulated banks and capital markets.

Fifth, InsurTech. A combination of insurance and technology, InsurTech operates to create an efficient form of the current insurance industry model. Securing 52 funding rounds in 2021, InsurTech has been on the rise for a number of years and managed to land fundraising totals of over £700m in 2022. One example in this space is Hubb Insurance, which launched in 2019 and has since landed its 750th customer and reached £10m of gross written premium, becoming the world’s first metaverse-ready insurance broker.

Lastly, gamification. Gamification is where gaming mechanisms are adapted into non-gaming environments, such as across websites and learning management systems. Another sector that has been on the rise for a number of years, 32 funding rounds for gamification were secured in 2021, a huge jump from the less than five that were confirmed in 2011.

“The most successful businesses are not those that perform the most complex tasks, but rather the ones who do the required basic tasks consistently over a prolonged period of time even in the face of no direct results,” contends Mr Wise. “The marketplace will reward those who set longer time horizons and prioritise hammering the basics such as marketing, outreach, hiring, content production and building simple internal systems.”

Reality

Despite the growth of a number of start-up sectors in the UK, the unfortunate reality is that many of these ventures will swiftly fall by the wayside.

“Of the 616,060 companies formed in the UK in 2015, only 226,520 of those are still alive in 2022,” says Henry Whorwood, head of research and consultancy at Beauhurst. “Some will have been bought by other companies, but the majority have died.”

According to 2022 analysis by Beauhurst – ‘UK Start-ups That Failed in 2021’ – among the litany of start-up failures are 668 high-growth UK companies, including online grocery delivery service Farmdrop, luxury clothing brand Ralph & Russo, FinTech company Greensill, software as a service (SaaS) company JS, energy supplier Bulb and gas and electricity supplier Igloo Energy.

“The key challenge is surviving the journey to profitability,” continues Mr Whorwood. “The right type of finance can help a start-up to stay on the journey for longer, but eventually product and market fit will be needed to an extent that allows the business to survive.”

Start-up slip ups

As might be expected, start-up companies tend to routinely make the same mistakes – mistakes that lead to many going bust, often within three years, according to Fundsquire.

As to which mistakes, according to CB Insights: (i) 42 percent of start-up businesses fail because there is no market need for their services or products; (ii) 29 percent failed because they ran out of cash; (iii) 23 percent failed because they did not have the right team running the business; (iv) 19 percent were outcompeted; (v) 18 percent failed because of pricing and cost issues; (vi) 17 percent failed because of a poor product offering; (vii) 17 percent failed because they lacked a business model; (viii) 14 percent failed because of poor marketing; and (ix) 14 percent failed because they ignored their customers.

“Start-up businesses usually suffer from a lack of consumer data,” adds Mr Wise. “It is extremely common to see a start-up pile mind boggling sums of investment into a product or service which has had zero real world validation, only to see it rejected by the market and the business fall into liquidation.”

Proactive steps

Clearly, there are a whole host of reasons why start-ups can fail in any industry. However, Startups.co.uk puts forward a list of actions, outlined below, that fledgling companies can take to avoid unnecessary errors and set out a realistic time frame and a clear goal to work toward.

First, evaluate. Evaluation is a vital step in starting a business. Lacking experience or confidence should not have to be a barrier, and identifying the areas where support is needed is the best way to overcome obstacles in the future.

Second, conduct market research. No business should be started without first understanding the market – which is what makes market research an essential ingredient in a successful start-up. Research provides the perfect opportunity for new founders to understand their audience base.

Third, assess finances. Unsurprisingly, funding is often one of the biggest barriers to setting up a new business, with running out of cash cited as the main reason for a start-up’s failure. Finance is also a bigger issue for female entrepreneurs, a discrepancy referred to as the ‘gender funding gap’.

Fourth, create a business plan. A comprehensive business plan acts as the blueprint for a business going forward. If a start-up has evaluated itself, done market research and worked out its financial situation, then it will be in a strong place to tailor its business plan accordingly.

Fifth, brand the business. A strong brand is integral to the success of any business. A new company needs to brainstorm, thinking about the brands it knows and what makes them stand out. Often, it will choose certain products based entirely on the brand that creates them.

Sixth, build a network. Successful new businesses often rely upon partnerships made along the way. These partnerships could be developmentally or financially beneficial to the start-up, which can be the key to finding like-minded businesses and referrals that accelerate growth.

Seventh, choose vendors. Choosing a vendor brings considerations. What did market research indicate and what is the business’s unique selling point (USP)? These questions, and others, will dictate which vendors and the products they provide.

Finally, build a team. Hiring is a critically important step to get right. A start-up needs to invest in the right people to bring skills that the business needs and which fit with its culture.

“Demand risk versus execution risk is an extremely important variable for entrepreneurs to weigh up when starting a new venture,” adds Mr Wise. “In existing, more saturated markets, there is plentiful demand. The risk to the business owner comes down to their personal skills and ability to execute within the market to outsell their competition. This, in my opinion, would be favourable to newer business owners who can leverage a USP or some form of added value to generate business.

“New markets such as tech or innovative product ideas fall into much higher demand risk,” he continues. “The business must create demand and build a marketplace that did not previously exist. A big part of that consists of educating potential consumers on the problems this new ‘thing’ intends to solve. ‘If you build it, they will come’ does not exist in real life; it requires a highly skilled team to scale new ideas.”

Continued growth?

Despite the economic weight of recent events such as the pandemic, the UK start-up market is booming – a modern business environment that still appears conducive to launching new companies, despite the ever-present spectre of failure.

“I would like to think that with much lower barriers to entry via digital platforms, UK start-ups will continue to grow,” suggests Mr Wise. “The most modern social media platforms, most importantly TikTok, have given the smallest businesses a platform to reach millions.

“We live in an attention economy now, and with so many ways of arbitraging underpriced attention, there has never been a more conducive environment to engineer a start-up,” he concludes. “With that, there has been an emergence of enhanced resources – courses, mentors and free videos – that are enabling businesses to become better and really start to boost the success ratio.”

© Financier Worldwide

BY

Fraser Tennant