A picture of Tessa Clarke, CEO of Olio

Opinion

May 22, 2024

The founder ‘scar tissue’ from the last two years will run deep

Founders don’t forget — and investors have a long way to go to rebuild their trust

Tessa Clarke

4 min read

Last month the UK government’s recently formed Small Business Council held a working group meeting with minister Hollinrake, the minister of state for the Department of Business and Trade.

We were discussing how more of the UK’s 5.6m SMEs (defined as businesses with a turnover of less than £10m and/or employing fewer than 50 people) could be encouraged to access debt finance in order to accelerate their growth. The issue is particularly pressing given debt financing can be a powerful accelerant of growth. Yet, data from the British Business Bank’s annual report shows that net bank lending to SMEs fell 8.7% last year, and was 14% lower in real terms than in 2014.  

It only took about 10 minutes before things took an emotional turn. 

Multiple council members shared their views on the appalling behaviour of the banking sector during the financial crisis of 2007-08. They recounted how swift the banks were to take family homes, seize company assets and close businesses down. It felt like predation they said, not partnership. And so, is it any surprise that so many of the UK’s SMEs — who employ 27m people and generate £4.5tn in turnover — are reluctant to take on debt financing? While marketing campaigns and policy improvements may well be able to take the SME horse to water, they most certainly can’t make it drink. Trust was shattered, and it needs to be rebuilt. 

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Reflecting on the conversation afterwards, it struck me that while the economic cost of the ‘open wound’ inflicted by the financial crisis was calculable, the emotional cost of the ‘scar tissue’ it left behind for individuals, families, communities and businesses is not. And that emotional ‘scar tissue’ is hampering the growth prospects of the UK economy today, almost two decades later.

This made me wonder: what scar tissue have we laid down in the UK — and European — entrepreneurial ecosystem as a result of the whiplash that startup founders have had to deal with over the past two years? We’ve ricocheted from close-to-zero interest rates and a growth-at-all-costs mentality to a world where capital is scarce and profitability is king — and many of us are still reeling.

Never again

As luck would have it, I didn’t have to wait long to get some answers. In subsequent conversations with three successfully exited startup founders the message they shared with me was stark. 

The first, who had raised over £100m for her business, told me the most important advice she would give me was to “never raise again”, so bruised was she by the behaviour of her investors during the recent downturn. 

The next was a founder whose startup had just been acquired by another startup. His top priority when thinking about what next was not figuring out what sector he wanted to be in, or what problem he wanted to solve — it was deciding whether he had the stomach for another venture-backed business or not. 

The third founder, who exited his global business — which at its peak had 300 employees, but was now down to 150 — recounted how he had to take a full year off to recover from burnout. And that he had vowed he would never be a cofounder CEO again: the personal price to pay was just too high. 

This sentiment is backed up in a Sifted survey last year, where 51% of founders said relations with their investors had worsened since the downturn, with complaints of being ‘gaslit’, ‘micro-managed’ and put under ‘extreme pressure’. A survey this year found that 49% of founders are considering quitting their startups in the next 12 months, saying they’re “overworked”, “exhausted” and “broken”. 

As the green shoots of recovery are starting to emerge in venture financing, it would behove the ecosystem to acknowledge that the ‘scar tissue’ laid down is real. Policymakers and investors cannot just start charging ahead as if the past two years never happened.

Policymakers need to pay as much attention to the ‘personal’ as the ‘policy’. The government needs to acknowledge that the walk-back on R&D funding has been catastrophic for some businesses. And for investors, there’s a long road ahead to rebuild trust — which needs to be all about actions, not words. Too many founders seem to be feeling “once bitten, twice shy”, which is deeply concerning for the growth prospects of the UK economy. 

Tessa Clarke

Tessa Clarke is cofounder and CEO of OLIO