November 10, 2023

Securing Success for your Startup

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Securing Success for your Startup

Did you know that around 95% of startups in Australia fail before exit? There are many reasons for this high failure rate and in our practice we have seen them arise at all stages in the startup lifecycle, from concept, through to growth and a potential exit.

Our focus at Digby Law is the growth phase.  As your business starts to grow, you will understandably be thrilled that you have proven your concept and started generating some revenue.  However, this is only one of many hurdles your startup will face throughout its business lifecycle.  New challenges await.

One of the key differences between startups and traditional business models is that startups can grow, scale and move through the business lifecycle very quickly.  The growth phase can be turbulent and this is the phase where your business can be most vulnerable.

The startup business lifecycle

“Laying the right foundations for growth is critical to securing success for your startup.”

The startup business lifecycle can be defined in numerous ways, but the 3 key phases are:

  • Proof of Concept
  • Growth; and
  • Exit

As shown in the graph below, most startups fail in the proof of concept stage.  This can be for a whole host of reasons, including:

  • No market for the product
  • Insufficient capital
  • Not enough marketing
  • Missing key skills/operational support

While setting up appropriate legal, accounting, administrative and operational structures may be far from your mind when you are starting out, it is vital to ensure these structures hold-up when you do start to grow.  You have done the hard work of getting to growth, putting these structures in place will help you secure success for your startup.

The Growth phase

The Growth phase of the startup typically means the business is motoring along – revenues are rising, and you’re now faced with a whole range of new challenges that any growing business faces.  You aren’t just a person with an idea anymore – you have real business issues and costs including:

  • Employing (the right) people
  • Premises for your employees (and future employees) including fit-out, IT, furniture
  • Managing people
  • Dealing with customers and suppliers
  • Tax and accounting issues
  • Legal considerations, e.g. key contracts with clients and customers; IP; confidentiality, privacy
  • Regulations imposed by the ACCC, ASIC and other industry regulators
  • Superannuation
  • Insurances
  • Fair Work Act considerations
  • Marketing
  • Training

These administrative and operational issues often have very little to do with the concept you’ve proven, or what you may have perceived to be your role in the startup.  However, failing to address these issues appropriately could see your startup fail just as you thought it was destined for success.

At this stage your costs have probably increased without the revenue to match it, so you will also need to consider external funding sources to keep the business alive, including investors, lenders and/or business partners.  Raising capital has its own risks, including taking on the wrong partners, giving away too much equity or control, and taking loans on bad terms.

It is an exciting but daunting time.  The business will face an enormous number of new issues and the excitement of beginning the startup may turn into the stress of making it not only survive, but succeed.  Managing your stress is a critical factor in making the right decisions, and what you do next can dramatically affect whether the business succeeds or not.

Managing these new challenges is critical for your business and will determine whether your happiness and profitability in the Startup Business Lifecycle resolve positively or negatively.

Preparing for exit

Ultimately, the way you manage these challenges can also determine your path to exit.  Whether you are looking for an IPO, a sale to an investor, an acquisition or early retirement, you will be better prepared for exit if you have addressed the business’ various requirements and risks appropriately in advance or as they arise, rather than trying to patch-up or gloss over issues before exit.

Investors, acquirers and other stakeholders will expect good corporate governance when they conduct due diligence and appraise your startup.  The nature, timing and value of an exit can hinge on the accuracy, completeness and reliability of information that you provide to these third parties.

Laying the foundations early by setting up appropriate legal, accounting, administrative and operational structures will not only assist with securing the growth of your startup, it is also important when planning for exit.

For help navigating through the growth phase of your startup, contact Digby Law and see how we can help you prepare for success.

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