The chancellor’s recent decision to announce a review of Capital Gains Tax (CGT) has alarmed many tech business entrepreneurs , who rely on venture capital and angels to fund their growth plans.
If such investment becomes harder to access in the future, will they be able to scale when the time is right?
With rumours that tax changes could be introduced in the autumn Budget, tech business 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 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?
Despite being cash rich and ready to invest, many venture capital firms have paused investment 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.
Some businesses with deals on the table are finding that the terms are not as favourable as they were before the pandemic and the impetus to complete on both sides of the negotiations has weakened.
Tech sector resilience
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 technology linked to 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 £4.1bn 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 which might arise as markets begin to recover. For new start-ups and seed businesses however, investor interest and access to finance are likely to be more limited in the months ahead.
Rather than reaching out to investors now, some early-stage businesses may decide to pause their business plans, holding out for better terms in less challenging market conditions.
However, in order to capitalise on a post-pandemic growth surge, they need to ensure they are investment ready and prepared to act swiftly when the time comes.
7 things to do if you want to raise money for your tech business
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:
#1 – How well do you know your market?
Venture capital 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, knowledge of market size, as well as customer and market understanding are needed.
#2 – 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.
#3 – 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.
#4 – Keep accounts and forecasts in good order
This may sound basic but preparation is key and tech entrepreneurs should ensure that their management 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.
#5 – 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.
#5 – 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.
#6 – 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.
#7 – 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.
Stephen Hemmings is partner and tech sector specialist and John Foundling is corporate finance partner at accountancy firm Menzies LLP