The Chancellor’s recent decision to announce a review of the Capital Gains Tax (CGT) regime has alarmed many entrepreneurs in the tech sector. Why? Because they often rely on venture capital to fund their growth plans. If such investment becomes harder to access in the future, can they scale when the time is right?
Tech entrepreneurs are concerned that a tougher tax regime for investors could limit their growth potential. Those that might have been considering selling a stake in their business before the pandemic, should they be tempted to rush through a deal in the hope of securing the finance they need? But is the timing right?
Is now the right time to seek funding for Tech start-ups?
Despite being cash-rich and ready to invest, many private equity firms paused investment activity during the pandemic and are waiting for trading conditions to get back to normal, or at least show signs of stability. For business owners, this means that in the short-term, only those that are in distress, or need to sell for other reasons, are getting deals away. Other businesses with deals on the table are finding that the terms are not as favourable as they were before the pandemic. The impetus to complete on both sides of the negotiations has weakened significantly.
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 brokered 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.
Rather than reaching out to investors now, these early-stage businesses may decide to pause their business plans. They can then hold out for better terms in less challenging market conditions. However, to capitalise on a post-pandemic growth surge, they need to ensure they are investment-ready. Meaning they are prepared to act swiftly when the time comes.
8 Steps for Tech start-ups to consider
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:
How well do you know your market?
Private equity firms and other private investors are looking for entrepreneurs who really understand the market they are operating in and can demonstrate demand. Increasingly they expect the business to be trading before investing to support their growth plans. Clear evidence of market research, as well as customer and market understanding is needed.
What does the post-pandemic future look like?
Many markets have changed significantly during the crisis and some may not return to their pre-pandemic norm. Tech entrepreneurs should review and refresh their business plans to take account of these 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.
Get a tech roadmap
Investors are looking for tech businesses with a strong development story to tell. Put in place a tech roadmap that documents the course of their research and development activity. It should also include learnings along the way. This can help to attract and maintain investor interest.
Keep reports, accounts and forecasts in good order
This may sound basic, but preparation is key. Tech entrepreneurs should ensure that business reports and accounts are maintained and in good order from day one. Investors will want to view these documents for proof of demand and a track record of trading activity. They will also need to see evidence of robust cash flow forecasting, which takes account of any market changes arising during the pandemic.
What do prospective buyers want?
To optimise their appeal, business owners should consider what private equity firms or other investors might be looking for. Are they aiming to diversify their portfolio or infill a product range? Are they looking to leverage cross-selling opportunities or is geography a key factor in their decision making? Understanding what potential buyers might be looking for can help the entrepreneur to present their business in the right way.
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. Consider using other IP rights, such as registered designs and trademarks. With patent protection in place, businesses can also benefit from Patent Box tax relief on any profits generated by their patented technologies.
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 this investment is a further indication of a well-managed business that is investment-ready.
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.
Move your Tech start-up forward
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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