2020 has been a challenging year. For businesses all around the world, the impacts of COVID-19 have been felt deeply. Founders have been faced with difficult decisions and in many cases have relied on government support to survive.
The results of the second annual Summer Survey by The Digital Finance Forum (DFF) reflects this. Launched in late August, its findings demonstrate the challenges that UK SMEs and startups in fintech are facing, as well as some of the hurdles that are still to come.
For example, while more than 80% of founders surveyed have a positive outlook for the future of their business, nine out of ten believe that access to funding will be difficult, if not impossible, in the next 12 months.
In this article we will explore the most powerful findings from the DFF Summer Survey, and provide some equity-based solutions to challenges that UK startups and SMEs are facing in the present, cash-strapped environment.
The impacts of COVID-19 on UK SMEs and startups
Founded in 2019, the DFF is a relatively new business forum that comprises founders from fintech startups and SMEs. Last year it launched their annual Summer Survey, which collects the attitudes and opinions of more than 100 founders.
The respondents of the survey were largely from small fintech businesses with less than 50 employees (50%) with 25% of businesses turning over more than £10m.
The subject of its latest survey was the impact of COVID-19, and the results are very interesting. Despite the challenges of 2020, founders that took part in the survey share an optimism for the next 12 months.
Interestingly, despite their optimism, half of founders surveyed have accepted some form of help from the UK government, whether it is in the form of furlough, business bounce-back loans, or other financial aid and tax relief.
Let’s take a look at the challenges, as well as the opportunities, that the DFF survey responses highlighted.
UK fintech founders: challenges and opportunities
The DFF’s research highlights that UK fintech founders are facing lots of similar challenges. They also found that many of these founders identified similar opportunities arising from the COVID-19 pandemic. These challenges and opportunities are as follows:
1. Access to government support
37% of respondents applied for a government loan but were ineligible for them.
2. A lack of funding
This was the single most-cited issue among founders, who said that access to institutional lines of funding has been severely affected.
3. Limited/no access to EIS/SEIS schemes
The government’s EIS and SEIS schemes prohibit investment in financial services companies, which many founders believe is unfair.
4. A lack of support for alternative lenders
Unlike traditional banks and lenders, UK fintech businesses lacked the support to help provide liquidity to customers during the crisis.
5. Engaging with customers whilst staff are furloughed
30% of respondents had made use of the government’s furlough scheme, which created difficulties in responding to customers.
1. Accelerated digital adoption
More than a third of founders surveyed believe that recent events will drive adoption, with many organisations switching to remote working.
2. Opportunity for fintech to help drive economic recovery
One in five respondents stated that they see opportunity in helping businesses rebuild their finances following the pandemic - especially for UK SMEs who were identified as a gap in the market left open by risk-averse banks.
3. New talent entering the labour market
More than 40% of respondents said that they have plans to grow in the next year as a result of growth in the availability of talent.
Arguably the most critical challenge here is the limited access to funding. This has both operational and economic impacts for scaling businesses. It restricts the ways in which businesses can reward their teams, which has a direct impact on their ability to attract, retain, and align talent.
How to incentivise and align teams when cash is scarce
The opportunities that exist in the post-COVID environment are significant. With increased adoption of digital technology and the potential momentum of an economic recovery, as well as a wider selection of talent in the market, UK SMEs and startups clearly do have reasons to be optimistic about the future.
However, the challenges that this research highlights are also significant, and some are interlinked. For example, are you able to fully capitalise on new talent in the market if funding isn’t an option? If not, can your existing team support growing demand for your products and services?
When the opportunity to raise funding diminishes, companies are faced with difficult decisions, and one of the biggest vacuums created when funding pools dry up is the ability to attract and retain talent - especially in the absence of competitive salaries and bonuses.
There are different remedies to this, but perhaps the most convincing solution lies in something you already own: your equity. By offering your team a share in the potential upside of your business, you can still drive the growth of your business even when the rivers of institutional funding have dried up.
And the best part? You don’t have to squander your runway to do this.
A survey that we conducted earlier this year found that there are five key benefits to rewarding your people with equity, including:
- Team alignment
- Employee retention
- Improved company culture
- Attracting talent, and
- Increased productivity.
These are vital to startups and SMEs at any time, but perhaps even more so in an environment where funding is scarce and teams are distributed. The costs of hiring, employee churn, and poor company culture are significant after all.
What is the best way to share equity with your team?
There are many ways to share equity with your team, and the scheme you choose largely depends on your reasons for giving your people a slice of the action.
For example, if your goal is to incentivise your team then a scheme that includes an element of conditionality, such as an EMI scheme, would be a good choice. This allows you to motivate your team while alleviating the risks of them not delivering on their promises but adding an element of conditionality to their shares.
With an EMI scheme, if members of your team fail to reach certain milestones, whether length of service or performance related, then some or all of their options can be converted into deferred shares. This stops people from walking away with equity when they haven’t delivered.
Another great way of rewarding people with equity in a conditional way is by using our proprietary Agile Partnerships framework. It is perfect for incentivising co-founders, employees, advisors, contractors and investors with flexible, dynamic equity.
Conquering the challenges and opportunities of COVID-19
The DFF’s study highlights that founders’ optimism isn’t unfounded: There are plenty of opportunities to arise from the COVID-19 pandemic that UK SMEs and startups can take advantage of.
That said, many of these opportunities rely on an ability to grow internal capacity to meet increased demand, and capitalise on a richer pool of talent †in the labour market. This is a conflict, as the research also highlights that accessing funding in the coming months will be tough.
In order to overcome this, founders should look to their equity as a potential solution. By rewarding their teams with equity and using it to attract new hires, businesses can overcome the funding drought and realise the opportunities of the post-COVID world.