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3 Startup Challenges and Risks to Your Bottom Line in 2022

7 min read

Startups feel increasingly confident about their prospects for 2022 despite the ongoing impact of the pandemic, according to research from Angel Investment Network.

Surveying more than 1,800 startups in the US and the UK, the study found that approximately three-quarters of startups are positive about the coming year, with half of the American respondents going as far as saying they feel “very optimistic”.

Still, even the most bullish of entrepreneurs would accept there are speed bumps on the road ahead. In this article, we’ll take a look at three key challenges facing startups in 2022.

1. Inflation Places Pressure on Prices

Almost all small businesses (97%) are concerned about inflation heading into 2022, according to the latest Quickbooks Small Business Insights survey.

Those fears look to be well placed, with analysis from the London School of Economics warning that annual inflation could remain close to the 5% mark for the next few months.

If that projection proves accurate, a lot of small businesses will inevitably start to feel the pinch.

High inflation is often thought of as a problem for consumers, but it’s just as much of a headache for startups. Without the buying power of larger organizations, they will inevitably end up paying more for key products and materials. To make matters worse, employees may ask for higher pay to counteract the effects of inflation.

More generally, inflation also causes uncertainty. With no way of knowing when the problem will begin or end, there’s simply no way to accurately plan for the future.

The upshot of all of those problems is that startups, faced with inflation and worried about the impact, often end up raising prices. But this is far from a silver bullet. Indeed, higher prices pose their own problems, potentially making it harder to:

  • Acquire new customers
  • Retain existing customers

How to Deal With It

First off, it’s important to note that not all small businesses will be negatively impacted by inflation; some will even benefit. Startups with low operating costs are less affected by rising prices, which might enable them to freeze their own prices while their competitors increase them. This could put them in a position to attract new customers.

However, if your startup has higher expenses, there are still measures you can take to mitigate the impact of inflation.

One key approach is to analyze your credit cycle. Loans should be extended, as inflation reduces the real value of your debt, making repayments easier. At the same time, sellers should shorten their credit cycle to avoid losing money.

Another key factor is what to do with your business savings. Your money becomes less valuable due to inflation, so it’s sensible to look for measures that protect against this, such as inflation-protected bonds. The most successful business owners know that saving money is just as important as making money.

Bear in mind, also, that inflation isn’t solely a domestic issue. It impacts foreign sales too, as fluctuating exchange rates can make your products or services more affordable for buyers overseas. This could actually lead to an increase in demand — although beware of trading in unreliable currencies to guard against sudden changes.

Summary

Sure, inflation can be a big challenge for startups. But it certainly needn’t be a death knell for your small business.

With proper planning, it’s possible to mitigate the worst of the effects. And bear in mind that inflation also brings opportunities, such as making your prices more attractive to international customers.

2. Labor Shortages Make It Hard to Find Talent

Not all of the challenges facing startups in 2022 are of a specific financial nature. Accessing the human capital you need to achieve your growth plans is also becoming increasingly difficult.

Recent research from Quickbooks shows that two in five small businesses were planning to grow their workforce in the next three months, with just 3% predicting their employee numbers would shrink.

Yet this desire to expand is coming at a time when businesses of all sizes are struggling to access the talent they need.

Americans quit their jobs at a record rate over the summer of 2021, with around 4.3 million people leaving their jobs in August.

What’s more, a September 2021 Korn Ferry survey reveals that more than half of professionals believe employee turnover will increase further in the coming year. Separate research into the causes of the so-called “Great Resignation” — also from Korn Ferry — shows that almost one-third of employees would be prepared to quit their job even if they didn’t have another one lined up.

Clearly, this isn’t an issue that’s exclusive to startups; organizations of all sizes are finding it hard to hire (the right) candidates.

Yet there’s little doubt that the talent crunch poses a greater challenge for startups.

Established businesses — particularly larger enterprises — are in a better position to cope with a candidate-driven market by increasing wages and offering more attractive perks in order to attract the best talent. Often, startups simply don’t have that luxury: it might be your first hire, so you likely can’t afford to break the bank.

How to Deal With It

If you can’t match the high wages being offered by larger organizations, you’ll need to get smart in order to attract the talent you need.

One smart tactic is to prioritize upskilling existing staff rather than looking for external hires to fill skills shortages. For example, if you need to expand your company’s digital marketing skills, consider training one of your current marketing employees in SMS marketing, keyword research, or give them an SEO certification course.

Not only does this approach mitigate having to fish for the best talent in an increasingly competitive pond, but it also creates more opportunities for your current employees, thereby making it less likely they’ll leave.

You can also try automating certain tasks. For example, consider investing in social media planning tools or sales automation tools instead of hiring an employee to handle these tasks. Or, outsource it instead of hiring in-house–this can easily be done with copywriting, for example, by partnering with a content marketing agency.

At the same time, it makes sense to be less prescriptive over what the “ideal candidate” looks like. Whereas once, you might have insisted on specific qualifications and X years of experience, focus instead on the skills a candidate brings to the table.

Similarly, be more lenient word resume gaps and consider non-traditional sources, such as people in different (but complementary) industries, or recently retired workers. Plus, be lenient in your recruiting strategies. For example, try less traditional approaches like digital recruitment to increase the chances of finding high-quality candidates.

Summary

Flexibility is key to coping with a labor crisis. Candidates have the upper hand, so you simply can’t afford to demand a huge list of requirements.

Rather, focus on the most important skills — those that you need to achieve your growth plans — and, where possible, look within your existing workforce to close any gaps.

3. Supply Chain Issues Stifle Business Ambitions

It’s no secret that supply chain issues have been a major concern in recent months. Indeed, an October US Census Small Business Pulse Survey revealed that 45% of businesses were facing domestic supplier delays, up from 26.7% during the first week of 2021.

In some sectors, the problem is becoming ever-more serious.

For instance, research from take payments warned that the unfortunate combination of supply chain disruption, shipping delays, and rules and regulations related to the pandemic could threaten the survival of a huge number of small retail businesses.

Two-thirds of retail respondents said they fear supply chain problems and staffing shortages will get worse before they get better, while two in five said there is a “strong chance” their business wouldn’t survive 2022 if both those issues persist.

Supply chain challenges become even more concerning given that research from Quickbooks reveals the number one priority for small businesses this year is to increase online sales.

Clearly, it’s going to be hard to scale your startup and make money online while also grappling with the effects of an unpredictable supply chain.

How to Deal With It

Sadly, you can’t just click your fingers and solve the supply chain crisis, but there are certain steps you can take to lessen the impact.

First off, take stock of your current inventory and factor in exactly what you’ll need to get through the next quarter, taking into account any seasonal changes in demand. If you’re going to have to pay higher-than-usual prices to access key materials, you need absolute certainty that the money is being spent wisely.

Next, identify areas in which you are 100% reliant on a single supplier and seek out potential backups. Vetting a new supplier takes time, so don’t leave it until your current provider lets you down to find an alternative.

It’s also important you get your communication strategy right. Sure, customers don’t want to wait for a month to get hold of a product that they could previously access in a week. But if they fully understand the situation before they buy, you’ll be better placed to build and maintain strong buyer relationships.

Summary

As ever, planning is key. The more options you have to access the products you require, and the more clear your communication with customers is, the better placed you’ll be to deal with supply chain issues.

Wrapping it up

There’s no doubt that 2022 will be a challenging time for startups. Those that put in the work upfront to lessen the impact of those challenges will be best placed to come through the year unscathed and gain ground on their rivals.

Whether that means scouring directories to find new suppliers, mapping skills shortages within your workforce and developing programs to upskill existing staff, or being smart with your finances to deal with inflation, the earlier you act, the better.

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