If you’ve been reading our blog for a while, you’ll have noticed that most of our posts are comparatively optimistic. We talk a lot about how important it is to understand your company’s finances to build a successful startup. But let’s be honest, not all startups are successful. The failure rate of UK startups lies around 60%, in line with global figures.
So, it’s time to talk about what to do when a startup fails. Admitting that failure is possible allows you to prepare for it and ensures that your options remain open for the future. In this blog, we’ll take a look at why startup founders and their teams find it so hard to admit failure and what you can do to be ready for when things don’t go your way.
Why Difficulties are Difficult to Admit
When you’re working on turning a startup idea into a profitable company, it’s only natural to be focused on building your company and your future. You’re looking for investors, selecting team members, and renting premises. If you’re following our advice, you will also be keeping an eye on your startup’s financial situation.
In short, you’re doing everything right. Still, your startup can fail. That fact is so hard to admit because as humans, we are programmed to strive for success. The thing to remember is that our failures – or early attempts – are not all bad as long as we learn from them. The inventor of the lightbulb, Thomas Edison, is said to have had 1,000 failed attempts before making that one life-changing discovery.
With hindsight, many entrepreneurs and inventors will say that their failures contributed as much to their success as their wins. At the time of the failure, however, it’s not so easy to see the way ahead. Within corporate environments, companies trying to encourage innovation and experimentation are looking to create a company culture where it’s safe to fail. These companies encourage employees to take appropriate risks.
As a startup founder, you’re likely to be less risk-averse than many of your employed peers. Fear of risk is unlikely to guide your decision-making. However, just like employees that have been encouraged to experiment and innovate, you need to create an environment where it’s relatively safe to fail. What does that mean in a startup context? Ideally, you’re able to recognize difficulties early and manage to avoid serious consequences. Having said that, it’s not always possible to save every startup. That’s when you need a plan for a controlled wind-down or closing of the company.
Preparing for Failure
It sounds counterintuitive to prepare for failure when all you’re trying to do is build your startup. However, preparing to fail without leaving a train wreck behind starts almost as soon as setting up your company.
Here are three main points that will allow you to fail without crippling consequences. Following these steps let you pick up the pieces from your current venture and start again:
- Understand your financial situation
- Learn about the process of closing down a UK company
- Prepare a wind-down plan
1. Understand your Financial Situation
I’ve written about the importance of understanding your startup’s financial situation before – check out this blog from June 2022 and this one from February 2023 for more in-depth information. That’s why I will keep this part short.
Knowing your financial situation can help you see trouble coming before it gets too close. The better you understand the status of your finances, including upcoming expenses, the more likely you are to spot a potential shortfall early and find a solution for it. Make a habit of reviewing your finances regularly to avoid being caught unawares.
2. The Process of Closing Down a UK Company
Most UK startups are incorporated as limited companies. But even if you are a sole trader, it’s a good idea to find out about the steps you would need to take if the worst happened, and you could not save your business. The goal is to minimize any additional damage caused by an unplanned wind-down.
Luckily, there is a lot of useful information available online. When it comes to closing a limited company, the process you need to follow depends on whether your company can still pay its bills or not.
Solvent Businesses
A business that can pay its bills is considered to be solvent. If that’s the case with your business, you have a lot more options. You can mothball the company, pay off all creditors, close down operations and retain the intellectual property in the company. By doing that, you retain the option to start back up again later if market conditions improve or you find fresh investment. Alternatively, you can also ask Companies House to strike off the company.
This is often the most straightforward option and allows you to start another business without restrictions. A members’ voluntary liquidation is another option for solvent businesses, but it’s more complicated and expensive than a strike-off application.
Insolvent Businesses
If your startup can no longer meet its financial obligations as they fall due, the situation is somewhat more complicated. At this point the bills you owe to creditors come before your own needs as a director or a shareholder, and you have a legal obligation as a director to cease trading. If you continue to run up more debt which you know the company cannot pay – known as wrongful trading – you can be held personally liable to pay them.
Depending on the individual circumstances of your insolvency, you may need to put the business into administration, arrange a creditors’ voluntary liquidation, or apply to get the business struck off the Companies Register. Your creditors can also apply to the courts to recover their debts or to enforce any security they have over the business’s assets, and in these cases, you can lose control of the company very quickly.
If your startup is in this situation, it’s worth seeking professional advice from a specialist lawyer or an insolvency practitioner at as early a stage as possible. I would advise against trying to navigate the process by yourself to avoid inadvertently damaging your credit history, or your ability to run a company in the future, since in extreme cases you can be barred from acting as a director.
3. Preparing a Wind Down Plan
If you’re operating in the financial or financial services industries, you may be required to prepare a wind-down plan. Designed to allow firms “to exit the market without disturbing it,” wind-down plans should ideally be part of a company’s risk management process. These plans need to be actionable and developed in a manner that would allow a third party to execute them.
Good wind-down plans cover financial, operational, and legal concerns. They also include compliance, HR, and IT concerns that are relevant to your company. Wind-down plans have become mandatory for businesses that are regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). However, even if your business is not regulated by either of those, it’s worth integrating this kind of worst-case scenario into your business planning and risk management.
Bringing it All Together
No one wants to see their business fail, and it’s only human to concentrate on the positive and avoid even considering failure. But just as we wrote about the fact that failing to plan is planning to fail, failing to plan for potential business failure can leave you facing dire consequences.
There is no shame in finding out that your initial business idea doesn’t work and you need to try something new, as long as you manage to change the course of the startup or wind down the company in a controlled manner. Understanding your financials, knowing the process involved in closing a business, and considering a wind-down plan can all help you minimize your exposure to the potential long-term consequences of a failing startup.
As a founder, you’re bound to be looking to the future. Failure-planning like this is simply another part of looking to the future. The goal is to leave you in a position to start again with the next iteration of your idea. Remember, Edison needed 1,000 attempts to invent the lightbulb, so who are we to argue with a few attempts to bring a life-changing startup into the world?