Mitigating the risks of Brexit for your tech startup

It took Theresa May eighteen months to reach a deal with the EU, but it Parliament less than a month to throw it out by a wide margin, most MPs believing that her imperfect compromise is worse than the status quo. The paralysis is such that the government has largely given up arguing that its deal will be good for the country, instead insisting that it is what democracy demands.

May’s ‘progress’ in negotiations has been a pantomime of democracy. Neverendum. The risk is real. Britain faces years of trade negotiations with the EU, involving more painful trade-offs between prosperity and control. All the while, the country will be falling further behind its potential.

Voters were swept off their feet by the promises of the Leave campaign, only to discover that the future relationship was that promised. Those with long-standing delusions about what Brexit would mean have been forced to swallow a dose of reality. It’s chaotic. May has appointed her third Brexit secretary as her own backbenchers are feverishly plotting to bring her down. Labour’s position is hopelessly unclear.

With negotiating time almost up, Britain has the imperfect deal that it was always going to get. Promises of having cake and eating it have given way to a less appetising offering. Yet among Brexiteers, one hopeful fantasy lives on: the idea that, if all else fails, Britain can prosper outside the EU without signing a deal at all.

If May wonders how this dire outcome has come to be more popular than her deal, she should start by re-reading her own speeches. Her mantra that ‘no deal is better than a bad deal’ was supposed to persuade the EU to give Britain better terms. It didn’t work. But it struck a chord at home.

The draft withdrawal agreement of 585 pages will guide future talks. Will we agree a Norway-style relationship or a deal modelled on Switzerland or Canada? In truth the EU27 will be in control, with Britain having few cards to play, and the process of ratifying a deal with Britain will be tortuous.

What we do know, is that the ongoing uncertainty and rhetoric of Brexit heading into 2019 will create volatility in sentiment, confidence, investment decisions and currencies, that will influence both business and consumer spending and buying power. So how will this impact tech startups?

Whether you’re a Eurosceptic or a Europhile, the UK startup environment has a supportive investor tax regime, a good intellectual property regulations and amazing talent from across Europe, but there are challenges ahead created by Brexit.

Everyone is looking for the headline that everything is fine or everything is catastrophic, and actually it’s somewhere in-between. At a high level, the potential winners will include those startups that are exporters, whilst potential losers are importers and foreign workers in the UK.

While Brexit is a ground-breaking event in the history of Europe, geopolitics, and global economy, modern agile companies have long ago surpassed the constraints of state borders and work permits. However, lets’ look at four key challenges from Brexit for tech startups, and mitigation strategies

Workforce

It’s already tough to hire good developers and engineers. While UK tech startups do create jobs for British citizens, part of the skills shortage has been filled by European immigration. We could potentially lose a large part of the startup workforce if regulations make it tough for EU nationals to stay in the UK.

Around one in five tech workers in the UK are from the EU. It’s likely that the current freedom of movement that allows EU citizens to work in the UK with few limitations will come to an end after Brexit. That’s going to make it harder to attract staff from the EU, and to keep workers who are already here.

Talent is the life blood of start-ups. You cannot build a startup if you cannot attract the best talent. While Brexit could be frustrating we might have a larger talent pool to choose from – a lack of European migrants doesn’t necessarily mean a complete migration halt. Brexit will open doors to non-EU countries, and whilst overseas talent is important, we have to invest more in terms of home-grown talent too.

Finance

The adjustments the financial services industry must undertake arguably pose a bigger challenge than the immediate geo-political uncertainty casting a shadow over the labour market to startups.

Startups looking for additional funding or support may have a harder time when pitching, but there are still plenty of options for growth.  While UK investors are cautious, EU investors are taking advantage to promote their own economic stability. This may mean a drift to Berlin and other cities offering greater entrepreneurial incentives.

As the UK exits Europe, businesses will lose access to funds that come directly from EU membership. The European Investment Bank, for example, has invested over €31.3bn in the UK economy of which 17% funded innovation and SMEs. In the tech and life sciences sector, the European Investment Fund is a key source of finance, supporting 27,700 SMEs.

A weakened pound and higher inflation after the final Brexit terms are agreed could lead to higher costs. A holistic view thus gives a perspective of many uncertainties arising from Brexit regarding finance for startups.

Regulatory environment

Services make up about 80% of the UK’s tech exports, and the EU is its biggest export market, however, the UK Government is more focused on trade in physical goods. Without even a vague plan in place, tech companies can’t be sure about the rules that will govern trade. That means, for example, they could end up being required to comply with two sets of regulations – one to sell in the UK, one to sell in Europe – with different VAT and thus cashflow implications.

Another area of concern is data protection. Data of all sorts flows to, from and through the UK as a part of daily life, everything from IoT devices to cloud computing, and all of this data is currently governed by EU law. After Brexit, a new deal on data protection is needed otherwise those data flows could be disrupted or even stopped, with predictably chaotic consequences.

Market access

The UK has traditionally traded extensively with Europe, and access to European markets is crucial, it’s a two-way trade. Although many startups are still moving forward with their plans for Europe, loss of Single Market access could be damaging, so startups need to be looking at other parts of the world, which might be more financially viable.

Across the tech industry the picture is mixed. Those tech companies that mostly deal with US customers or suppliers are largely unaffected by Brexit, and if a mooted UK-US trade deal happens these companies may even see significant benefits. However, uncertainty on both demand and supply side is currently impacting many startups.

What can tech startups do?

The key to surviving the Brexit haze is flexibility and contingency planning as new rules are created. In the current uncertainty it can be difficult to plan, but that’s exactly what you need to do. It’s the act of planning, rather than the plan itself, which is the key. Robust, well-thought out business plans, showing that you’ve calculated upside and downside scenarios, will be crucial.

Whilst it can seem that every time you hear the news or open a newspaper, there’s more reason not to act, the fact is that if you have an innovative idea, the experience to see it through and the ability to make a robust business case for it, the UK remains one of the world’s most favourable environments for start-ups.

So what should a startup tech company be doing right now, with only a little information to guide them? It appears the advice, in classic British style, is a modified version of keep ‘calm and carry on’.

On one hand, startups are probably the most equipped to navigate whatever is yet to come, being adaptable, innovative, and nimble in their mindset. Every day brings with it a new challenge that small business owners never thought they would have to deal with.

On the other hand, entrepreneurs often have the least amount of experience and resources. Then there’s the emotional side of it. I have heard many entrepreneurs talking about the uncertainty of Brexit and saying they don’t need an additional gamble at the moment.

So here are some thoughts on how to navigate the future, pending our exit in March.

1. Understand your runway, and create a clear plan

The place to start is your current plan – and don’t create one of those fake plans aimed at investors, that won’t help you, craft a plan for YOU with realistic assumptions and meaningful goals.

Make a decision based on cash runway and velocity. Make decisions based on a new plan, not based on the plan you had before. This is probably the toughest thing you’d need to do as a founder, but there are times where you need to do it. Do it sooner rather than later, do it with respect, and ensure there is a balance of optimism and realism – hope is not a strategy.

2. Financial targets – be scrappy

First is the cash in the bank, and the second is the cash you expect to get from your customers. How certain are you in your revenue forecasts? Look at the number of customers, pricing, volumes you know are confirmed, and you sales funnel, pipeline and lead conversion times.

In general, switch into a scrappy mode, embrace that mentality. Review your costs – what can you cut? There is always extra stuff. Just get into the mode of cutting things that aren’t critical – activities that don’t add value to customers.

3. Review your hiring

Review your hiring plan. This is easy to control in times of uncertainty and whilst it means that you will grow slower, and the current team will have to do more work, it keeps fixed costs and demand on management time on hold.

Whilst I’m an advocate of continuous recruitment in terms of always being active in the market rather than seeking to hire for a specific role at a specific time, taking a three-month recruitment sabbatical at times of heightened uncertainty takes the pressure off making what are high-risk decisions.

4. Get customers faster and for longer

This may sound odd, because why wouldn’t you close customers faster anyway? The point is, think about friction points, anything that slows down your sales? Think about offering a price incentive for an annual payment versus monthly payments, and offer different price structures for longer contracts.

“‘Uncertainty’ and ‘opportunity’ are the two words I most closely associate with Brexit. However, on the back of uncertainty rides opportunity, which is where genuine entrepreneurs thrive. Now is not the time to hunker down on innovation, build rapport and relationships with new and existing customers alike with renewed zest.

Next steps…

At Disney, the shared understanding is that ‘nothing hurts the mouse’ – risk assessment and management is a key leadership focus, and so it should be for startups.

Precisely quantifying Brexit vulnerability is impossible, but that doesn’t mean you can’t reduce uncertainty. The goal is to develop ways of understanding key drivers and possibilities so that surprises aren’t so surprising. You have to hedge your bets, don’t put all your eggs in one basket and reduce decision making on the fly – take steps to minimise potential damage long before a crisis unfolds.

Many of the details of the policy and regulatory issues remain very unclear, but recent endorsements from tech giants Apple, Google and Facebook demonstrated that the UK is still an attractive location for tech business.

So, be steadfast in your resolve. Don’t take a wait-and-see approach, relying on being nimble to respond to however Brexit turns out, waiting for Brexit isn’t an option. Look at the four potential levers highlighted above – runway, finances, hiring and customers – and start making your plans today.

Be a Wizard of Odds

During the English Civil War, Cromwell’s own troops often fell out amongst themselves, and they were never more troublesome than on 15 December 1647, at the first rendezvous of the New Model Army. On that day at Corkbush Fields, Ware, two regiments led by Robert Liburne and Thomas Harrison, mutinied.

Many of the soldiers were unhappy with the idea of a compromise with the king, agitating for the creation of a republic, and no deal. Some had formalised these thoughts into a political agenda, and called themselves ‘Levellers’ – their aim ‘to raise parity and community throughout the kingdom’.

The Levellers manifesto, ‘The Agreement of the People’, was published, and many of the soldiers wore copies in their hats, much to the annoyance of Cromwell. He in turn had his own army manifesto, ‘The Heads of the Proposals’.

Negotiations opened with the mutineers of ‘England’s freedom’, and Thomas Fairfax, commander-in-chief of the New Model Army persuaded Harrison’s regiment to accept the ‘Heads’. Liburne’s men were not so easily swayed, and it took direct intervention from Cromwell, riding amongst them brandishing his sword, ordering them to take the Levellers manifesto from their hats, before they complied.

Now, like any leader at the end of a mutiny, Cromwell was in a difficult situation. Whilst there are always casualties of war, it is generally considered poor form to shoot your own troops. There was no point in punishing an entire regiment that was now back on his side and offering to fight for the cause.

Equally, letting the leaders of the Levellers go free could create problems in the future. Cromwell’s answer was to arrest and try the ringleaders in a hastily convened court martial and then let fate play a role. There were three identified instigators, and each was summarily convicted and sentenced to death.

Cromwell needed to make only one example, so he made the three men play a deadly game. Each in turn threw dice to see who would live and who would die. The lowest score fell to Private Richard Arnold. He was shot on the spot.

What an outcome from the roll of the dice! Whilst the situation wasn’t one in which he had much time to consider the probability of certain scores, it would have been useful for Private Arnold to know the odds of success or otherwise as he stepped up to throw the dice in the ultimate game of chance.

We don’t know Private Arnold’s score, but seven (17%) is the most common combined result when you roll two dice, and 2 and 12 (3%) are the least probable, and you will likely roll a pair of doubles one out of every six rolls. I suspect Private Arnold rolled the dice and hoped for the best.

Unfortunately some business owners just roll the dice and hope for the best too, not evaluating risk or assessing uncertainty, they simply ignore the odds. Decisions are either made at random, or left to chance. Often they get the same outcome as Private Arnold.

However, successful entrepreneurs are masters at managing risk and uncertainty. On most days, before they finish that first morning brew, they have already considered several scenarios they anticipate will confront them that day. The risk involved in these scenarios has been quantified and assessed. Contingent solutions have been formulated and plan A and plan B are ready to implement as required.

Uncertainty, which is different to risk, is the possibility that an event will happen in the future. Whilst risk can be evaluated with an assortment of financial decision making tools and sensitivity analysis, uncertainty presents a more challenging problem.

Most business owners do consider uncertainty. Unfortunately it is usually in the middle of the night when they can’t sleep and they lay awake wondering. Mitigating uncertainty requires forward thinking and actions to be taken in order to be prepared for a future possible event. All entrepreneurs take risk, but it is the successful ones that manage uncertainty. They recall the sleepless night and do something about it.

Back to the dice. Let’s play a game. It costs you £1 to play. We then roll a dice once. If it comes up 6, I pay you £10 otherwise you lose. Do you want to play? Most likely you will agree to play. You have a one in six chance of winning £10 for a £1 bet.

Now let’s make it £1m to play. Once again we roll the dice just once. If it comes up 6, I pay you £10m. Do you want to play? The probabilities are exactly the same and so it should be an easy decision. But most people would decline. Would you risk £1m for a one in six chance of winning £10m?

Now imagine you are the CEO of a business with turnover £50m and £2m profit. You have £2m cash in the bank. Katie, your Marketing Director comes to you with a proposition to enter an exciting new market with an innovative product. It will cost £1m to develop and launch the product. There are many imponderables but if it is successful she estimates it will add £50m in turnover and £10m in profit over the next three years.

You cannot forecast what the competition will do, but taking a cautious approach you estimate of the chances of success are 1 in 6. Should you go ahead? Let’s assume that you have no better uses for your cash and there is no cheaper way of testing the market. What would you do?

Most CEOs would make the decision based on how they felt about the product idea, how much they felt comfortable with the Marketing Director’s judgement, how much they trusted the numbers. Let’s say you go ahead and after one year the product has failed. Some unforeseen difficulties with the technology meant that you could not make it a success. You learn what lessons you can and move on.

Now Katie comes to you with a different idea. Strangely the figures are exactly the same as before – £1m investment gives a 1 in 6 chance of a £10m return in profits. You examine all the assumptions and they check out. Would you agree to the request? The probabilities are exactly the same so you should make the same decision, but most CEOs would hesitate. You decide to go ahead and unfortunately the product flops.

What happens when Katie comes to you a third time? In theory you should expect failure 5 times out of 6 and keep faith with her. However, it becomes very difficult to keep placing bets after a string of losses. Most likely you would say Sorry, but your track record on these projects is poor. We cannot keep risking that kind of money again.

Of course, Katie leaves to set up her own business with her new idea, and makes her first million!

What are the lessons here? Innovation is a risky business and often involves many failures. Even with the best market intelligence and research it is impossible to forecast how things will turn out. Should you roll the dice, risk your scarce resources and face the pain of failure?

It is important to recognise that you cannot avoid risk. Doing nothing is risky; you will get left behind. Courageous leaders keep taking calculated risks even after a string of setbacks. Eventually you will roll a six.

What are the odds that your new idea will succeed? If it does, what will the return to you be? One of the problems that we have in business is that we can’t know the answer to questions like this in advance. This means that if you want to innovate successfully, you not only have to deal with uncertainty, you must seek it out. We can’t use not knowing as an excuse to not act – because we never know.

Of course, there are companies that beat the odds. What distinguishes these ‘wizards of odds’ from the pack with business strategy bets that beat the odds time and time again? Here are ten effective habits for rolling the dice and winning every time.

Future Focused: they spend more time than their competitors developing new insights and strategically positioning themselves for that next big opportunity. They make future bets based on market and customer insight, not discovery by chance.

Fresh Thinking: their company story, their value proposition, products, services and even the way they do business with you is different and memorable. They bet on their own future and invest in it with conviction.

Invasive Strategies: their strategies and actions are ‘growth focused’, they bet they will win more business from existing and new customers and set the future trends to counter any complacency from current success.

Customer-Connected: they have high performing sales people who have best practice processes to find, win, keep and grow customers. They don’t leave sales success to chance, they have discipline, focus and clarity.

Co-Creative: they have deliberately identified and engaged with key external individuals and organisations to collaborate and help them make the winning difference. They remove the uncertainty from not having the right skills.

Financial Backbone: they will not allow their growth aspirations to be constrained by inadequate investment, their financial risk analysis of growth opportunities seeks to ensure that they are funded appropriately.

Boringly Ingenious Offerings: they create and launch irresistible new customer offerings on time and within budget to make the competition irrelevant. They manage the risk of new product development.

Own It: they protect, defend, brand and maximise their most precious ideas through rigorous IPR processes and procedures. They remove the risk of copycat replicas disrupting their innovation strategy.

Aligned Minds: they recognise high growth can’t be achieved solely through the contribution of individuals, so they create virtuoso teams. They remove the risk of being exposed to superstars by creating super teams.

Culture Shock: The personality of the business is characterised by a set of core values and an ethos that pro-actively creates the organisation dna and cultural norms. This mitigates the risk of recruitment and secures high retention.

There are risks and costs to every action, but they are far less than the long-term risks of inaction. As Peter Drucker said, People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.

Although luck is involved and factors into the outcome, strategy rather than chance plays a more important role in the long-term of managing the odds from the roll of the dice. So play for the long-term, don’t try to beat the odds, even if you’re on a losing streak. Following the odds will pay out in the long-run regardless of short-term losses. Odds will always even themselves out, but that process may be longer than you anticipate.

In a changing world full of uncertainty, the only strategy that is guaranteed to fail is not taking risk. So take calculated risks, be a wizard of odds. That is quite different from being rash and just rolling the dice and leaving everything left to chance. Take control of your own future, before someone else does.