What are the challenges facing tech businesses looking to raise funds?
The tech sector is one of the UK’s most successful and contributes billions to the UK economy. The businesses within it also attract millions each month in funding. This feature looks at current funding levels and what the aspirations for tech companies are going forward.
Are you seeing investment levels into UK tech businesses rising or falling?
Konstantin Sidorov – Founder and Chief Executive Officer of the London Technology Club: “The UK remains a leading country when it comes to tech investment globally. Funding for UK’s tech firms seems to have remained robust and we are continuing to see lots of great opportunities coming through despite the crisis.
“According to Ascendant Corporate Finance, the number of deals in H1 2020 (>£0.5m) is down slightly on the same period last year, however the amount raised by tech firms in H1 2020 is up almost £500m on the previous year. The mega trends that were around pre-crisis are not going away, many have been accelerated by it and investors recognise that.”
Roland Emmans – Head of Technology Sector at HSBC: “Loans are not being asked for in high volumes by tech firms and, broadly, firms have been able to access cash facilities to support their plans.
“This has allowed velocity to remain in the sector and with high levels of funding available, it has allowed businesses to pay suppliers and keep activity in the sector.
“I am hearing murmurings that from September, we will begin to see an uplift in M&A activity, but there are now different valuation methods in the tech sector. Businesses that have come through COVID-19 unscathed and have true recurring revenues – and a sticky customer base – will be valued on a high base or the same as pre-COVID-19.
“For businesses that have had a difficult time, they will be valued in a different way and you will have a repeat versus recurring revenue valuation model.
“I think you will also start to see different deal structures, where acquired businesses receive half the money today when the ink is dry on the agreement and the rest in 18 months, for example, when agreed targets have been met.
“I also expect to see a flurry of M&A activity in the tech sector due to some very large corporates sitting on cash balances, of which they are looking to divest parts of to fund activity in the sector.”
Rosie Bennett – Investment Manager at SETsquared: “There has been consistent interest from investors for companies in the SETsquared network throughout the last five months of lockdown, and our ‘virtual’ investment events have been well attended. The change has come in what happens next.
“While institutional funders are continuing to follow up with companies seeking seed or growth stage funding, there has been a marked drop off in engagement from angels and private investors who are either looking after their existing portfolio companies or suspending investment activities for a while.
“This means it has become increasingly challenging for pre-seed and early-stage start-ups to attract the funding that they need to deliver an MVP, proof of concept or to support their early market traction.”
What would you say are the challenges tech businesses seeking funding are facing?
Rosie Bennett: “The companies we work with at SETsquared are led by innovation and this means they tend to be continuously fundraising for research and development as well as working hard to drive revenues. This parallel track puts a pressure on cashflow, and the challenge is to deliver on the growth milestones whilst ensuring enough runway to close the next funding round. This is challenging at the best of times, but in a global economic downturn, it will be especially tough.”
Which tech verticals are particularly interesting to investors looking at UK firms?
Konstantin Sidorov: “It is about looking at the larger trends, seeing what technology underpins those trends and the ability of the management teams to turn the opportunity into reality. There are some obvious ones related to homeworking and eCommerce because of the crisis, such as remote working tools that are seeing major growth.
“Similarly, the mobility sector is undergoing some dramatic shifts, driven by changing consumer needs, as people limit their movement and look for more sustainable methods of travel.
“We are also seeing some interesting opportunities in nutrition and FoodTech, and MedTech as people look to lead healthier, more sustainable lives.”
Roland Emmans: “Digital transformation, data and CRM platforms and robotics all stand out.
“MedTech is also seeing huge growth and opportunity for disruption as it’s illogical to think that in the future, we will wait in a GP surgery as we have historically done. This is allowing for a rise in telemedicine, and what has been interesting is that the NHS has been given huge amounts of free software by companies looking to help during the pandemic and it will be interesting to see which ones they adopt going forward on a more commercial basis.
“The growth in this sector will be around proactive treatments instead of reactive. So, how can you share your data with technology providers and apps so that when your wearable device flags up something that is irregular, it can inform your doctor and you can prevent and take action on a potential medical issue, rather than waiting for the worst case scenario.”