Startups are the lifeblood of a dynamic, entrepreneurial economy. Unfortunately, however, the COVID-19 pandemic is threatening the survival of thousands of startups, both in the UK and around the world. In April, research by policy advisory firm Startup Genome found that 41% of startups globally had three months or less of cash runway left.
In a recent videoconference, members of CIMA and the Association of International Certified Professional Accountants who work for — and with — startups shared their perspectives on COVID-19 and its implications. The main themes to emerge included:
Access to funding
Raising funds can be a significant challenge for startups, especially those that are not currently generating revenue. Many startups initially rely on funding from friends and family. As they grow, they typically apply for capital from other sources, which requires them to construct a business case and meet specified criteria in relation to their financial results and how any potential funding is likely to be used.
Startups’ ability to raise funds can depend on the sector in which they operate. In the UK healthcare sector, government funding is currently available for startups that are developing COVID-19 solutions. In other sectors, government funding for startups is available, though there are specific and various application rules. Also, revenue-generating startups may have experienced a fall in income due to the decline in consumer spending.
Startups that are struggling financially sometimes have no clear source of funding to tap. Fundraising through venture capitalists can be a long process, and many startups do not have sufficiently strong financial results to secure a bank loan. At present, there appears to be a funding gap for startup businesses in the knowledge economy. Some limited reforms to the UK’s tax regime could boost the pools of investment capital that might be attracted to tech and other knowledge-based businesses.
Research and development relief
The UK government’s SME R&D tax relief scheme can be an important source of funding for startups since it allows them to deduct an extra 130% of their qualifying costs from their yearly profit, in addition to the normal 100% deduction. Nevertheless, it can take a long time for startups to receive the cash. Also, there can be an impact on their ability to claim if they make use of the government’s three loan schemes for companies facing financial hardship as a result of COVID-19. These loan schemes are the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS), and the Bounce Back Loan Scheme.
The three schemes have been designated as “notified state aid”, which means that if companies use money from these loans to fund development work, it is the rules of the less generous Research and Development expenditure credit (RDEC) scheme that would apply rather than the rules of the SME R&D tax relief scheme. The RDEC relief is calculated at 13% of a company’s qualifying R&D expenditure.
Scenario planning has been valuable for enabling startups to navigate the pandemic. The founder of a fintech startup revealed that he undertook financial and operational stress tests to understand the possible impact of the pandemic on his business over the short, medium, and long term so that he could plan accordingly. This scenario planning enabled him to allocate resources to value-add activities and reappraise the business strategy. He could then develop a strategy for communicating with the organisation’s different stakeholders, including investors.
The pandemic has acted as a spur for innovation for many startups. It has prompted them to rethink their business models and develop closer relationships with their customers with the goal of serving them better and delivering a more compelling experience. The founder of a wellbeing startup explained that, in response to the pandemic, he had switched his business model from being retailer-focused to serving consumers directly.
Some businesses are starting up for the first time during the pandemic, often because the founder has been made redundant. CIMA has a number of talented members who previously worked in industry and have now switched to working in practice. They have needed help with winning customers, establishing themselves in a niche, and getting used to working in isolation. Support is available through CIMA’s Members in Practice network.
For startups, life can be challenging at the best of times. Now it is harder than ever. Some have not survived the pandemic, and more will fail over the coming months. It is unclear how long these difficult business conditions will persist and when consumer confidence will recover. There is also the risk of a second wave of the virus, which would be a further economic setback.
In this difficult period, financial literacy will be crucial for startups — it will enable them to control their spending and manage their resources effectively. The skills of professional management accountants can help them in this respect. Startups should also take advantage of their networks, as well as social media platforms, to raise their visibility while making use of government grants and loan schemes to gain financial breathing space. While there are many challenges, there are also opportunities for businesses that are agile and nimble, and able to respond quickly to events as they occur.
— Ian Selby, Ph.D., is vice-president–Global Research and Development, Management Accounting, at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.