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Will Tech start-ups find investment for post pandemic growth surge?

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Many Entrepreneurs in the tech sector are on edge after the Chancellors recent decision to announce a review of the Capital Gains Tax (CGT) regime, as many of these rely heavily on venture capital and angels to fund their growth plan. If such investment becomes harder to access in the future, will they be able to scale when the time is right?

A tougher tax regime could limit tech start-ups growth potential

With several rumours spreading that tax changes could be introduced in the Autumn Budget, tech entrepreneurs are nervous that a tougher tax regime for investors could limit their growth potential. Those that might have been considering selling a stake in their business prior to the pandemic, may be tempted to rush through a deal in the hope of securing the finance they need, but is the timing right?

Is there a pause on investments in the tech sector?

Despite most venture capital firms being cash-rich and ready to invest they seem to have paused their investment activities during the pandemic, to focus on their existing investments and are waiting for trading conditions to get back to normal, or at least show signs of stability. Businesses with deals on the table are also finding that the term are not as favourable as they were before the pandemic and the impetus to complete on both sides of the negotiations has weakened.

While not all businesses have fared the same during the coronavirus crisis, the tech sector as a whole has proved more resilient than many others. This is mainly due to the rapid rise in the adoption of digital technologies linked to areas such as e-commerce activity, contactless payments, remote working and communications. A report published recently by Tech Nation and Dealroom confirms that tech start-ups in the UK raised £4.1 billion from January to May, with most deals put together and completed before the outbreak.

Having secured the finance they need to scale, clearly some tech businesses are in a strong position to capitalise on opportunities that might arise as markets begin to recover. For new start-ups and seed businesses however, investor interest and access to finance is likely to be more limited in the months ahead.

Is it the right time to get an investor on board?

Some early-stage businesses may put a pause on their business plans, waiting for less challenging market conditions so they can then get better terms agreed with an investor. However, to capitalise on a post-pandemic growth surge, tech start-ups must ensure they are investment ready and prepared to act when the time comes.

8 steps for Tech start-ups growth strategy post Covid-19:

The following steps should be considered as part of a strategy to ensure they are ready to press ahead with their business plans when the time is right:

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How well do you know your market?

Venture capital firms and other private investors are looking for entrepreneurs who have an in-depth knowledge and understanding of the market they are operating in, with the ability to demonstrate demand. Increasingly they expect the business to be trading before investing to support their growth plans. Clear evidence of market research, knowledge of market size, as well as customer and market understanding is needed.

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What does the post-pandemic future look like?

A number of markets have changed drastically during the pandemic and some may not return to what once was. Tech entrepreneurs should re-evaluate and refresh business plans to account for the changes.   The business may have grown rapidly during the pandemic, but will demand dip in recovery? Where is the business now? Are new opportunities emerging? How can the business strengthen its proposition to take advantage of those opportunities? Investors will need to see that this thinking has been done and the business plan has been updated.

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Have a development roadmap

Investors are looking for tech businesses with a strong development story to tell. Putting in place a development roadmap that documents the course of their research and development activity, and learnings along the way, will help to attract investor interest.

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Keep accounts and forecasts in good order

This may be obvious, but preparation is key and tech entrepreneurs must ensure their management account are maintained and in good order since day one. Investors will want to view these documents to ensure demand and track record of trading activities are good. They will also expect to see evidence of clear cash flow forecasting , which takes account of any market changes arising during the pandemic.

Masterclass – Forecasting and Financing your way to a brighter future!

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What do prospective buyers want?

To optimise their appeal, business owners should consider what venture capital firms or other investors might be looking for. Have they already invested in similar technology? Are they aiming to diversify their portfolio or invest in a niche sector / technology? A traditional trade buyer may be  looking to leverage cross-selling opportunities or add  geography. Understanding what potential investors / buyers are looking for will help the entrepreneur to present their business in the right way.

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Know your IP rights

Tech businesses are often highly innovative and their business model is based on bringing something novel and inventive to market. Investors expect business owners to have patent rights in place, granting them a 20-year period of commercial exclusivity. Other IP rights, such as registered designs and trademarks should also be considered. With patent protection in place, businesses can also benefit from Patent Box tax relief on any profits generated by their patented technologies.

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Make the most of reliefs and allowances

Businesses investing in the development of new products or making refinements to existing products should consider whether they are eligible for R&D tax relief or capital allowance claims. Making the most of these opportunities is a further indication of a well-managed business that is investment ready.

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Consider other sources of finance

At a time of uncertainty, tech entrepreneurs need to do everything they can to reassure investors that their business plan is robust and well considered. Securing a bank loan to boost their cash position and making timely repayments, will reassure investors that might be viewing the business more closely in the months ahead.

Tech start-ups know they can’t afford to sit back and wait for markets to recover. Equally, they know that spending resources now to ensure they are ready to attract investment, and capitalise on the upturn, will be key to their success.

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Stephen Hemmings - FCA

Partner

Stephen Hemmings is a Menzies Tax Partner in our London office specialising in business tax planning. He also heads up the Technology sector team