Three investors on taking action to avoid failure

Scaling a new business is one of the hardest pursuits you can take on in your professional life. No business is immune to failure, and it’s estimated that 20% of businesses fail in their first year with 50% failing in their first five. 

But even founders of the 50% who have gone on to enjoy success and make a mark in the world past the five-year itch have had the panic. The gut-wrenching feeling that they might not be left with a business at all in the future. It’s part of being a founder.  

 So how should you behave when the proverbial muck has hit the fan or is about to? Take a breath and read on… 

‘Investors rely on honesty from founders’ – Sim Singh-Landa, Investment Director 

Hiding bad news can at times be an instinctive reaction. But for founders and their investors, this is never the best route to take. Establishing an open and trusting relationship from the off is fundamental to ensuring this instinct is not triggered. Once it is, it breaks trust and can be the difference between success and failure. 

Every good investor expects there to be some bumps in the road, but they also rely on honesty from founders. That way, they can help a business navigate any challenges or hurdles its facing. 

If an investor doesn’t know the full extent of what’s going on, how can they help to overcome any challenges in the best possible way? They can’t plan for a further funding round, help with cash flow or support in a crisis. I can guarantee your situation won’t be unique or uncommon; open and frequent communication is the best tool in your kit.  

‘Go back to basics: product, market, fit’ – Louise Chapman, Investment Director 

Scaling a business is never a linear task. At this stage, it’s about being agile and exploring ways to grow – be that investing in new verticals, tweaking your proposition or launching new products.  

That said, there may be times when a business moves too quickly or spreads itself too thinly across the market. If this happens, it’s important to revisit your original product, market and fit. I’ve previously told founders to go back to basics and remember what they set out to do in the first place.  

If you’ve ventured away from your initial plans or overcomplicated your pitch to customers, remind yourself of the core function of your business. What problem are you trying to solve and how? 

‘Indecision is often worse’ – Peter Carway, Investment Director  

Indecision is often worse than the consequences of making a decision that turns out to be wrong (with hindsight). The most common example of this is founders getting stuck in the cycle of burning cash without achieving the growth metrics they need to secure the next round of investment.  

Do I keep burning cash because I believe big sales numbers are just a few months away? Or do I cut heads now, save cash, regroup, and present a more reserved plan to investors? Both plans have their risks and rewards, but when the decision is made, it needs to be committed to. Companies who stay on the fence often end up running out of cash and facing down rounds with onerous VC terms like large prior returns.  

That doesn’t make the decisions any easier, but a well-thought-out decision – with input from the people around you, positive rationale and strong execution – can go a long way with investors.