Tech startups need to take risk seriously
Starting any business comes with risk. However, for startups in the technology sector those risks can be significantly different from mainstream organisations due to the frequent rapid growth in what is often a new product or service offering.
In fact there are typically four stages of growth, all of which have their own dynamics, start up, growth, expansion and exit.
No two firms are exactly alike even if they are delivering the same product or service. If two companies create mobile apps but one occupies an office space with another choosing to have its team work remotely, they will be performing largely the same service but creating unique risk profiles for their insurers.
There is also the need for a broader and more holistic approach too, and with it an understanding that the support you receive from your insurers should go beyond a policy that reacts when claims arise.
What makes a tech business different?
We all recognise that when starting a business the need for insurance is all too often not in the forefront of people’s minds, but from the outset a business will require insurance of some form or another.
You may well be undergoing a period of research and development before you look to market your products to clients, and as such will not be generating revenue. It may well be that you have a contract with a client but have yet to begin to fulfil it.
Business owners may rent office space rather than own the building, have staff working from home and at the outset no revenue to protect.
However, you will have invested in the staff, in equipment and even if you do not own or lease the building will still need to take out the required contents insurance alongside employers and public liability if you have staff or clients coming to your premises.
There will be legal issues and taxation concerns as you begin. For instance there are many tax efficiencies that can be gained when investing in research and development.
At startup phase, it is very much about getting the right cover in place early often before a product is commercialised, and in some cases, while an idea is being developed.
For tech firms the ability to grow with pace is often greater than in more traditional business models so it is more important to look for insurance which is flexible and fit for purpose as companies grow through their life cycle.
With tech startups often investing in R&D, there is a need for specific R&D Business Interruption protection. This covers interruption to R&D expenditure and loss of R&D income from funding and grants; this is not available as standard under a commercial combined policy, and therefore remains an important but bespoke part of a technology firm’s insurance protection.
R&D Property insurance covers the full cost to reinstate the property in the event of a loss; this is a key bespoke exposure with no one size fits all approach so will require the advice and expertise of an insurance broker.
Your prototype can all too often be the key to the future of your business. Prototypes may be covered under the Public Liability section of a policy but it is not covered in all. If you depend in the ability to leverage a prototype to drive revenue you may require Product Liability cover depending on the insurance provider.
Efficacy cover (failure to perform) under the Products Liability section of cover is an important part of your risk mitigation strategy so you should look for this to be covered as standard.
Additional business support
Starting a business in today’s climate can only add to your challenges. If nothing else COVID-19 has starkly illustrated every business needs risk certainty, financial efficiency and legal compliance.
It has also proved the value of access to appropriate insurance, tax, legal and specialist consultancy services to support the stable business environment firms need to prosper.
In the past year as the UK has been in varying degrees of lockdown, tech firms have been faced with concerns around how they can grow a business at a time of unprecedented economic pressure.
The inability to drive sales, the difficulty to attract new business, and generate new investment, are the biggest concerns that Markel’s tech company clients have discussed with both their brokers and insurer.
Tech businesses were looking for support around risks that all too often are not provided by insurers, such as taxation and changing regulatory demands.
Data from our legal advice line and online Law Hub facility showed a dramatic shift in both the volume and nature of demand for high-quality, business-related information and advice. The downloads and page views of our Law Hub guide both increased by well over 50% from Q1 to Q2 2020, and the nature of enquiries shifted dramatically as employers looked to clarify crucial questions for their business.
Why tech is an opportunity
The new year has bought with it a new hope that society and business will begin the road to recovery. However, that recovery will see a dramatic change in the way firms are required to operate.
Such has been the impact of the pandemic on every aspect of our lives, just as the terms 'pre-war' and 'post-war' are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras.
The move towards the greater use of technology in many aspects of our lives has been rapidly accelerated. In the past, it has taken a decade or longer for game-changing technologies to evolve from ‘cool new things’ to productivity drivers. The COVID-19 crisis has sped up that transition in areas such as AI and digitisation by several years, and even faster in Asia. A McKinsey survey published in October 2020 found that companies are three times likelier than they were before the crisis to conduct at least 80 percent of their customer interactions digitally.
“The near-term challenge, then, is to move from reacting to the crisis to building and institutionalising what has been done well so far,” it stated. “For consumer industries, and particularly for retail, that could mean improving digital and omnichannel business models. For healthcare, it’s about establishing virtual options as a norm. For insurance, it’s about personalising the customer experience.”
Therefore, those who are keen on turning their dream of creating a tech start up into reality need to be cognisant of the fact that tech businesses are exposed to a number of risks. The need to work with an insurance broker to map out their exposures and the way in which they want those exposures to be mitigated.
For tech firms the year ahead will present opportunities but they will require a dynamic risk solution that can adapt to their specific risk and compliance needs through the whole lifecycle of a technology-enabled businesses.
Growth Requires flexibility
For those who have taken the step to form their tech company it may well be the first time they have needed to address areas such as risk, taxation and the legal demands on UK businesses alongside a new era of export and import against the backdrop of Brexit.
You can take some comfort that the issues for tech companies are not new, but they have been exacerbated by the pandemic and our departure for the European single market.
As a specialist insurer in the technology space we have undertaken a detailed analysis of the sector which has found the majority of tech businesses do not have the appropriate level of cover in place based on their unique requirements.
A representative sample of technology risks we received between July and September 2019 concluded that 69% of businesses did not have the appropriate level of cover or extensions.
The solution for startups is to approach the issues of insurance, taxation and legal assistance as a partnership rather than a purchase.
Your insurance broker should be viewed as a part of your outsourced risk management capability and the same should be said for your insurer.
There needs to be an advisory approach from underwriters and adding legal and tax services to insurance offerings are part and parcel of our belief. We can better service our clients by supporting the prevention of claims, which not only reduce costs but also, more importantly for any start up, reduces the risk of disruption to your business and the ability to fulfil contracts and meet the needs of your clients.
The insurance of technology firms is a specialist task. Working with your brokers to ensure that your risks are underwritten by an insurer with a detailed understanding of your sector and is willing to ensure that your cover can quickly change as your business grows, is a vital first step in your ability to concentrate on what you do best. Safe in the knowledge that the right level of support is there as and when you need it.