How smaller businesses can stave off the job loss epidemic
SMBs need to move beyond buzzwords and start to plan for the future
On the face of it, it might seem like the UK’s startup ecosystem is booming. The UK created a record number of unicorns in 2021, with more than two unicorns – a firm worth at least $1 billion (roughly £758 million) – created every month on average. Similarly, investment in the UK’s tech sector reached record highs last year, raising more than France, Germany and Israel combined.
As a result of rising economic uncertainty, however, a different, and much less rosy picture is emerging in 2022. This uncertainty, combined with other factors such as Brexit and the post-COVID-19 reset, means venture capitalists (VCs) have become increasingly cautious, with startups beginning to bear the consequences.
“The current economic slowdown, which has caused some of the largest companies in the world like Tesla, Netflix and Uber to announce hiring freezes and layoffs, will inevitably touch all businesses, large and small,” says Ekaterina Almasque, general partner at European Series at VC, OpenOcean. “With the cost of doing business high and fears of a global recession, startups will find VC funding much harder to come by than previous years.”
Job losses on the horizon
Freetrade, the London-based trading platform, recently announced it’s making 15% of its staff redundant, stating the “difficult decision” was necessary as “global stock markets have been falling and funding for businesses like ours has slowed”. London HQ’d Curve, a digital wallet aggregator, has made between 60% to 70% of people redundant, with CEO Shachar Bialick telling Sifted the company had made the decision “with the aim of putting us in the best possible position for growth in the second half of the year.”
Similarly, London-based casual recruitment platform Stint confirmed that 20% of its 140 employees are at risk of redundancy, Zapp, a UK-based fast grocery delivery startup, recently said that it’s considering laying off up to 10% of staff, and Cazoo – once one of the highest funded new tech businesses in the UK – has said it plans to slash its workforce by about 15% and slow the pace of hiring new staff under a major cost savings drive, with the majority of the job losses set to take place across its UK operations.
“The combination of rising inflation and interest rates with supply chain issues caused by the pandemic and war has driven up the cost of living and hit consumer confidence,” says Alex Chesterman, Cazoo’s founder and chief executive. “This perfect storm has placed cash conservation top of mind for the company, ahead of growth.”
This isn’t an issue limited to the UK, with more than 28,000 workers in the US tech sector having been laid off so far in 2022. It’s clear that other startups and small and medium-sized businesses (SMBs) need to learn lessons from the mass layoffs taking place across the UK startup sector to ensure they don’t become the next casualty.
Funds are drying up
One of the biggest, and most obvious factors of the sweeping mass layoffs witnessed in 2022 is the current economic crisis; rising energy costs, COVID-19, Brexit and supply chain disruptions have contributed to a continuing deterioration of economic conditions. SMBs have been disproportionately affected, with businesses in 'critical financial distress' having risen by 19% so far this year.
“The reason small businesses are likely to suffer in 2022 is due to their primary source of funds being provided by VC ventures,” Samuel Leach, founder and chief executive of Samuel and Co Trading, tells IT Pro. “Their dependence on cash from ‘raising"’ may prove problematic as the year continues. And as inflation rises, we can see a potential recession on the horizon, making it less likely for investors, banks, and financial institutions to part with their capital, no matter the business's potential.
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“The number of deals is projected at 6,904, a 22% drop from the previous quarter, and the continuing decrease in VC funding and lack of liquidity is guaranteed to take a further toll on small businesses.”
Andy Oury, partner at Oury Clark Chartered Accountants, adds: “The bubble has burst on cheap endless money. A perfect storm of shocks has seen VC money somewhat dry up. Of course, the uncertainty is impacting all businesses, but it's small businesses that face the brunt of it.”
Damian Hanson, co-founder & director at CircleLoop, believes that the shift to hybrid working has also played a part as SMBs and startups struggle to adapt to the widespread demand for flexibility. “Unfortunately, though it seems simple in theory, implementing this hybrid working to the benefit of employees as well as business revenue is something that has gone wrong for a number of businesses this year,” he tells IT Pro.
“Numerous startups and SMBs have risen to the challenge, committing to a hybrid working model in an effort to move with the times. If only it were that simple. Too many SMBs have learnt the hard way that more than just commitment is needed to make hybrid working a success.”
How to avoid becoming the next casualty
Startups and SMBs need to act now to ensure they’re not the next victim, says Henrik Grim, MD of Europe for Capchase. He tells IT Pro there’s a rapidly growing alternative financing scene that could help companies avoid reducing its headcount, which is, in many cases, counterproductive.
“If you require capital to weather an economic storm, there are options available,” he says. The startup scene is not entirely reliant on VC capital to fuel growth. In 2008 the collapse in funding meant that new startups were hobbled, failures were exacerbated, and growth severely curtailed. Now, however, there are scores of companies offering numerous ways for viable startups to continue to get capital. Traditional finance is also very different, with loans from banks a genuine option for many startups.
Grim adds the tech downturn is likely to be very uneven, affecting some types of startups more than others: “Tech-enabled businesses – which have lower margins and capital efficiency – such as logistics, proptech and physical goods retailers are going to find it a very tough time. However, pure tech businesses – such as software as a service (SaaS), cyber security and many fintech startups – are going to be much less exposed”.
For those startups looking to continue on the route of more traditional funding methods, Almasque notes they need to move beyond buzzwords: “They need to demonstrate that they’re solving real problems; addressing IT infrastructure efficiency, tackling data analysis problems or in some other way improving people’s lives in a tangible way.”
Leach adds that while it’s clear there’s no reason for all small businesses to panic just yet, it’s vital to build a contingency plan to allow them to allocate company budgets more effectively. “The four main areas business should be monitoring and focusing on are company debt, decision making, digital transformation, and workforce management,” he tells IT Pro. “Avoiding the mass layoffs that we have seen recently is due to poor planning and change management.”
According to Dutta Satadip, chief customer officer at ActiveCampaign, startups can also weather the current economic storm if they focus on providing a superior customer experience to their competitors. “Many SMBs and entrepreneurs have a lot to win against larger brands, especially in the face of ‘shop small’ movements,” he says. “People understand the impact that supporting an SMB can have and sometimes will even make a point of trying to shop outside of the tech giants, which is why providing 1:1 experiences help with customer retention.
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“However, to win these customers and have them return back as repeat customers, developing radical transparency is a must. Radical transparency begins with keeping customers informed, from informing them about delays on circumstances out of your control to proactively updating them rather than the customers chasing the company for updates.”
It’s not just customers that need to be kept happy, as Hanson – who warns that a failure to implement hybrid working could also be having a detrimental impact on UK startups – says a proactive approach to flexibility is also key. “The at-home set-up for each employee must be considered and supported carefully,” Satadip continues. “Without an office of colleagues to ask immediately for help or ad hoc tech support, it's even more essential the tools and platforms your business operates on work seamlessly together to remove potential points of friction for your staff.”
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