How small businesses can stave off the job loss epidemic

This article originally appeared in issue 30 of IT Pro 20/20, available here. To sign up to receive each new issue in your inbox, Click here

At first glance, it might seem like the UK startup ecosystem is booming. The UK created a record number of unicorns in 2021, with more than two unicorns – a business worth at least $1bn (about £758m) – being created each month on average. Similarly, investment in the UK’s tech sector hit record highs last year, bringing in more than France, Germany and Israel combined.

Due to growing 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 that capital- venture capitalists (VCs) have become increasingly cautious as startups begin to bear the consequences.

“The current economic downturn, which has caused some of the world’s largest companies like Tesla, Netflix and Uber to announce hiring freezes and layoffs, will inevitably affect all businesses, large and small,” says Ekaterina Almasque, General Partner at European Series. at VC, OpenOcean. “With the high cost of doing business and fears of a global recession, startups will find venture capital funding much harder to come by than in previous years.”

Job losses on the horizon

Freetrade, the London-based trading platform, recently announced it was laying off 15% of its staff, saying the “difficult decision” was necessary as “global stock markets have fallen and funding for companies like ours has slow motion”. London HQ’d Curve, a digital wallet aggregator, laid off between 60% and 70% of people, says CEO Shachar Bialick Thames the company had made the decision “with the aim of putting us in the best possible position for growth in the second half”.

Similarly, London-based casual recruitment platform Stint has confirmed that 20% of its 140 employees are at risk of being made redundant, Zapp, a UK fast-delivery grocery startup, recently said it was considering redundancy. up to 10% of its staff, and Cazoo – once one of the UK’s best-funded new tech companies – said it plans to cut its workforce by around 15% and slow the pace of hiring new staff as part of a major cost-savings drive, the majority of job losses ahead are taking place across all of 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 undermined consumer confidence,” says Alex Chesterman , founder and CEO of Cazoo. “This perfect storm put cash conservation at the forefront of the corporate mindset, ahead of growth.”

This is not a problem limited to the UK, with more than 28,000 US tech workers who have been made redundant so far in 2022. It is clear that other startups and small and medium-sized enterprises (SMEs) have to learn from the massive layoffs taking place in the UK startup sector to ensure they don’t become the next victim.

Funds are drying up

One of the biggest and most obvious factors behind the massive layoffs seen in 2022 is the current economic crisis; rising energy costs, COVID-19, Brexit and supply chain disruptions have contributed to a continued deterioration in economic conditions. SMEs have been disproportionately affected, with companies in “critical financial distress” increasing by 19% so far this year.

“The reason small businesses are likely to suffer in 2022 is because their main source of funds is provided by venture capital firms,” ​​said Samuel Leach, founder and managing director of Samuel and Co Trading. IT professional. “Their reliance on cash from ‘collection’ may prove problematic during the year. And as inflation rises, we may see a potential recession on the horizon, which makes less likely for investors, banks and financial institutions to part with their capital, regardless of the company’s potential.

“The number of transactions is expected to be 6,904, down 22% from the previous quarter, and the continued decline in venture capital funding and the lack of liquidity are expected to further weigh on small businesses.”

Andy Oury, Partner at Oury Clark Chartered Accountants, adds: “The bubble has burst on endless cheap money. A perfect storm of shocks saw venture capital money dry up somewhat. Of course, uncertainty affects all businesses, but it is small businesses that are paying the price. »

Damian Hanson, co-founder and director of CircleLoop, believes the shift to hybrid working has also played a role as SMBs and startups struggle to adapt to widespread demand for flexibility. “Unfortunately, while it sounds simple in theory, implementing this hybrid work to benefit employees as well as company revenue is something that has gone awry for a number of companies this year,” said he declared. IT professional.

“Many startups and SMEs have taken up the challenge by committing to a hybrid working model with the aim of evolving with the times. If only it were that simple. Too many SMBs have learned the hard way that it takes more than just commitment to make hybrid working a success.

How to avoid becoming the next victim

Startups and SMEs must act now to ensure they are not the next victim, says Henrik Grim, MD Europe for Capchase. He says IT Professional there is a rapidly growing alternative finance scene that could help companies avoid downsizing, which is, in many cases, counterproductive.

“If you need capital to weather an economic storm, there are options available,” he says. The startup scene is not entirely dependent on venture capital to fuel growth. In 2008, the collapse in funding meant that new startups were stymied, failures exacerbated and growth severely curtailed. Now, however, there are dozens of companies offering numerous ways for viable startups to continue raising capital. Traditional finance is also very different, with bank loans being a real option for many startups.

Grim adds that the tech downturn is likely to be very uneven, affecting some types of startups more than others: very difficult times. However, pure technology companies – such as software as a service (SaaS), cybersecurity and many fintech startups – will be much less exposed.”

For startups looking to pursue more traditional funding methods, Almasque notes that they need to go beyond buzzwords: “They need to demonstrate that they solve real problems; improve the efficiency of IT infrastructure, solve data analytics problems, or otherwise improve people’s lives in a tangible way. »

Leach adds that while it’s clear that all small businesses have no reason to panic right now, developing a contingency plan is key to enabling them to allocate company budgets more efficiently. . “The four main areas that companies should watch and focus on are enterprise debt, decision making, digital transformation and workforce management,” he said. IT Professional. “Avoiding the massive layoffs we’ve seen recently is due to poor planning and poor 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. “A lot of SMEs and entrepreneurs have a lot to gain from the big brands, especially from the ‘small store’ movements,” he says. “People understand the impact having a small business backing can have and sometimes even go so far as to try to shop outside of the tech giants, which is why offering 1:1 experiences helps build customer loyalty.

“However, to win these customers and keep them coming back as repeat customers, developing radical transparency is essential. Radical transparency starts with keeping customers informed, informing them of delays about circumstances beyond your control to proactively updating them rather than customers suing the company for updates.

It’s not just customers who need to be happy, as Hanson – who warns that a failure to implement hybrid working could also negatively impact UK startups – says a proactive approach to flexibility is also essential. “Each employee’s home set-up should be carefully considered and supported,” Satadip continues. “Without a desk of colleagues to immediately call for help or ad hoc technical support, it’s even more critical that the tools and platforms your business operates on work together seamlessly to eliminate potential friction points. for your staff.”