Within the continuously growing digital sector, the right structure and sufficient funding to invest in new products is key to promote growth and avoid potentially problematic delays. But how do businesses achieve this?
The growth statistics of digital tech companies largely exceed those of the UK economy with their turnover growing by 4.5% in 2016 and 2017 compared to only a 1.7% increase in UK GDP and job numbers increasing five times faster within the sector, all of which clearly indicate a high level of investment.
The competition between tech-led businesses is fierce and although they are innovative by nature, roughly 50% of start-ups fail during their first 12 months. Funding issues, production difficulties and a lack of market demand are just a few reasons for businesses not being able to reach their full potential.
Firms which are structured in a way to take full advantage of investment and realise value over time, are more likely to attract key investors. Therefore, business owners should adopt a strong cash-flow management and forecasting approach to improve their chance of success and to allow for the business to thrive over time. Additionally, accurate forecasting can find and help address potential funding gaps.
With several entrepreneurs asking friends or family for financial support and others building up a high level of personal debt, it is fair to say that securing the necessary finance to invest in new products or services is one of the biggest challenges for tech-led businesses.
When secured, it is important to ensure all funding is utilised fully and the necessary steps to eliminate activity associated risks are taken. As finance is essential in order to make a proposition market ready, considering investors’ needs by putting tax-efficient structures in place, could make the difference between the business being a success or a flash in the pan.
Schemes such as the Enterprise Investment Scheme (EIS), which provides upfront income tax relief and allows for shares, which have been held for 3 years, to be disposed of tax free, can attract investors and encourage early-stage investment. Although, before utilising any of these schemes, businesses should be aware of the rules and ensure their compliance.
As many tech-led businesses invest in the creation of new software and systems or the development of new products, R&D tax relief might be a way of reducing their corporation tax liability. The R&D regime is aimed at rewarding innovative businesses during the early stages with potential refunds from HMRC. However, it is recommended to gather the necessary advice to ensure the correct handling and optimal result of a claim.
Ingredients for success
Besides focusing on current operational activities, having a strong growth strategy in place is equally important. Finding the right balance between creating room for growth, staying tax efficient and focusing on cash management can be difficult. Therefore, it may be worth seeking external advice or to appoint an experienced non-executive director.
Having the right people is another essential part to success. To attract and retain those with the appropriate skills-set and proper market knowledge, creating a rewards and incentives package might be needed. Offering an equity share of the business is a good option for less cash rich and growing organisations and might help with retention by directly aligning employee rewards to the success of the business.
A flexible and motivated workforce is vital for the support of a business’ growth plan. In order to address the talent shortages and skills gaps and to attract the best candidates, tech-led businesses should invest in the creation of a brand that will appeal to the millennial job-seeker.
Structuring the business for growth, providing a well-funded business plan, attracting and retaining talented people and having access to the right experience and expertise are some of the ingredients a business owner should possess to make the difference between success and failure within this innovation driven sector.