Startup survival: tips for founders as the economic storm clouds gather

Just about every single Tory economic belief was abandoned in Thursday’s Autumn Statement – lower taxes, tight control of public spending, incentives for business to invest and entrepreneurs to work hard – ditched in favour of a fiscal hairshirt to be worn for many years, introduced by the Sunak-Hunt determination to put fiscal rectitude as their sole priority. Much of their actions were of their own making due to the shenanigans of Truss-Kwarteng and Brexit. The Autumn Statement was delivered in immensely difficult economic circumstances.

Growth has been downgraded, borrowing increased. There is no good news to distribute, only pain.  Clearly there nothing proposed to make Britain a land fit for wealth-creators. It’s not much cop at encouraging business to invest either – corporation tax is rising from 19% to 25% which will place Britain at the higher end of the global league table for corporate taxes. The average in the EU is 20%. Even the lower-tax investment zones previously announced have been scrapped.

Tories used to talk of turning the UK into Singapore-on-Thames, a simplistic shorthand for a more dynamic, efficient, market-driven economy. That won’t happen any time soon. Instead of a dynamic UK showing the sclerotic Europeans a clean pair of heels, next year our economy will be the slowest growing major economy in Europe. In fact, it won’t be growing at all: it is forecast to shrink by 1.4%.

Discipline and difficult decisions were Hunt’s watchwords. Instead of being ideological, I’m going to be practical. But Hunt’s did make ideological decisions, it’s just that they were masked by appeals to necessity. He was trying to bind us into his economic narrative and to play by his rules, making it seem as if this is the only option and any divergence was dangerous. But the reality is this: his objective is to reduce Government debt by passing this onto personal debt. The OBR forecast a drop in living standards of 7.1% over the next two years.

What is the impact on startups and entrepreneurs from Hunt’s policies? The key takeaways in the Autumn Statement for startup founders maybe summarised as follows. Spoiler alert, there is little good news:

  • R&D tax relief schemes will see a significant shake-up, with changes to the process, qualifying criteria, and tax relief rates. The R&D tax relief on qualifying expenditure will reduce from 33% to 18.6% for loss making startups, and to 16.3% for profit making startups from April 2023. The enhanced deduction rate will be reduced from 130% to 86%;
  • Previously announced uplifts on SEIS and EIS thresholds will be implemented;
  • Income Tax thresholds for personal allowances, basic and higher tax rates are frozen until 2028, so entrepreneurs and their teams will take home less pay as they earn more over the next six years;
  • The CGT threshold will decrease. This will affect founders when selling their business, and employees if they sell shares gained from EMI option schemes;
  • Dividend tax threshold will halve and then halve again, making it a less tax efficient way to earn; 
  • The VAT threshold is frozen at £85k, meaning more small businesses will need to register for VAT for the first time, impacting cashflow.

The UK’s startup financial plumbing is under pressure. However, adversity and unsettling volatility can surge into longer-term opportunities. Long periods of economic calm and growth create the conditions for violent air pockets, as the economist Hyman Minsky identified: the phenomenon of prolonged stability breeds complacency as a precursor to instability.  So it works both ways.

During turmoil, differentiation gives way to indiscriminate action, as explained by the market for lemons theory put forward by George Akerlof, and by the work of Nobel Laureates Michael Spence and Joseph Stiglitz. It becomes difficult to signal your offering provides more value than others when the context is extremely noisy and volatility is unsettling, so even solid names get treated as ‘lemons’ initially.

Most businesses hesitate to adopt new thinking and innovate during an economic downturn, instead they focus on hunkering down and a ‘back to basics’ existence. Whilst this can secure survival, it rarely offers anything more than a one-off saving, and certainly impedes thinking beyond the immediate time horizon as plans for new ideas and investments are put on the ‘wait and see’ pile. However, the Great Depression of the 1930s saw several successful companies that did not delay investment in their future.

In April 1930, Dupont research scientist Wallace Carothers, discovered neoprene (synthetic rubber). Whilst DuPont’s sales were down 15% that year, they maintained a long-term view on their strategy, boosting R&D spending. A lack of competitor ambition and low raw-material prices helped keep the cost of its research investment manageable. By 1939, every car and plane manufactured in the United States had neoprene components.

In 1929, brothers, Paul and Joseph Galvin, founders of Galvin Manufacturing, needed new revenue after the Wall Street Crash. Teaming up with William Lear, who owned a radio parts company in the same factory building, and audio engineer Elmer Wavering, they installed the first car radio in May 1930. Paul then drove 800 miles to a radio manufacturers’ convention in Atlantic City. Lacking an invitation for the event, he parked his car outside and cranked up the radio, coaxing attendees to look and listen. In 1933, Ford began offering factory-installed radios from the brothers, and Galvin Manufacturing changed its name to Motorola.

The Depression-era economist Joseph Schumpeter emphasised the positive consequences of downturns: the destruction of underperforming companies, the release of capital from dying sectors to new industries, and the movement of skilled workers toward stronger employers. For companies with cash and ideas, history shows that downturns can provide enormous strategic opportunities.

Talking to many founders, they are stalling making decision by the dysfunctional reality of today, but we cannot afford paralysis. Waiting and seeing, moving deck chairs around on the Titanic, is the worst thing we can do. We need decisive action, even when we don’t have sufficient information to guide our actions, letting go of the need to feel that we need to make the right decision. Rather than correctness, ask yourself: with what I know right now, what is the next best action I can take? The most important thing now is to keep moving.

It’s like being confused, overwhelmed and under informed at the same time about the future economic conditions. For some, this maybe the trigger that pushes them into an overdue pivot, or a much-needed refresh of digital marketing. For others, it will drag them under. But there is always light at the end of the tunnel, so here are my thoughts as to how to prepare yourself to move forward.

Allow yourself the uncomfortable luxury of changing your mind Cultivate a capacity for reflection, and then as required, changing your mind. In reality, you could be working on hunches or insights, without investing the time and thought that cultivating true conviction which customers need.

We then go around asserting these donned opinions and clinging to them as anchors to shape our own version of reality. We can simply be wrong or kidding ourselves. It’s enormously disorienting to simply say, I don’t know, but ultimately, it’s infinitely more rewarding to understand than to be right, even if that means changing your mind about your product or above all, yourself.

Pace yourself: build pockets of stillness Read poetry. Go walking. Ride your bike. There is a creative purpose here – the best ideas sometimes come to us when we stop actively trying to coax the muse into manifesting and let the fragments of experience float around our unconsciousness to click into new combinations.

Most importantly sleep, as besides being a great creative aphrodisiac, also impacts our every waking moment, our social rhythm, and our moods. Be as disciplined about your sleep as you are about your work. We tend to wear our ability to get by on little sleep as some sort of entrepreneurial badge of honour that validates our work ethic. But it really is a profound failure of self-respect and of priorities. What could possibly be more important than your health and your sanity, from which all else springs?

Start, even if you are unsure See the signals amidst the noise. Whilst the questions do not go away unfortunately, how you respond to them is what matters. You start with the same doubts as every founder, but the secret to getting ahead is getting started. Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.

What we call the beginning is often the end of our previous cycle, and to make an end is to make a start. Only those who will risk going too far can possibly find out how far one can go. Life might be a race against time or a dilemma, but it is enriched when we rise above our instincts to understand what we are doing and why. A wise decision requires reflection, and reflection requires a pause, but then to go for it with a vengeance.

How we spend our days is how we spend our lives The Anne Dillard quote reminds me to ensure we retain the capacity for enjoying what we do, that gives startup life some highlights amidst the graft. Getting stuff shipped is important, but presence is more intricate and rewarding. Ours is a startup culture that measures our worth by our earnings, our ability to perform this or that, but this loses sight of having our own definition and perspective of purpose and success.

The tide will turn, but anything worthwhile takes a long time. It’s hard to better capture something so fundamental yet so impatiently overlooked in our culture of immediacy. The myth of the overnight success is just that. The allotment doesn’t go from seed planting to blooming crops in one spritely burst and yet, as a culture, we’re disinterested in the process of the weeding, nurturing, and growing. But that’s where all the real magic unfolds in the making of one’s startup journey.

Be curious: enjoy what magnifies your spirit Understand and tolerate the difference between where you are and where you want to be. At the core of curiosity is understanding that you see the world through a lens of your own experience and ambition. Curiosity drives entrepreneurial spirit, the belief that you can innovate on the status quo, testing different hypotheses and continuously iterating. You want to simply move forward, but I always tie this trait back to recognising the value of feedback and learning.

Push on: don’t be afraid to be an idealist On your startup journey, the richest inspiring days are like sunny days sailing in calm, blue waters but there are also days that pull us to the darkest and most disquieting places, to the self-doubts where our vulnerabilities live, the dark, stormy seas. Idealism is the alchemy by which you should fight the self-doubts.

The sea, the green sea, the scrotum tightening seas, the words of James Joyce in Ulysses captures the reality. Stormy seas, just like economic turmoil, can’t be survived easily, but you need to set sail with purpose and not be tied at anchor, nor drift. Whatever the imagery, prepare yourself for the coming economic challenges to your venture reflected in the Autumn Statement by being thoughtful, balancing thinking and doing, but don’t be left drifting at the mercy of the storm.

Startups exist by finding new answers to new questions. In the volatile and fast-changing context of the economic maelstrom ahead, what we think we know today may not be true tomorrow. Equally, you can never completely eliminate your blind spots, but you can reduce them to spare yourself from the humiliation of hindsight.

It is not all bad, but it is not all good: it is not all ugly, but it is not all beautiful; it is life, life, life – the only thing that matters, a quote from Thomas Wolfe which I think we can borrow to describe startups. Leading a startup is like surfing the biggest waves. This next trip will be a little more choppy and more demanding with its twists and turns. The trick is to stay on the board and enjoy the ride. Tough times never last, but tough people do.

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