What are the funding barriers facing UK tech firms?

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For this article Business Leader talks to funders and industry leaders in the tech space, to get their take on how they see external funding helping them with their growth ambitions. The article also looks at how different tech leaders are using funding in their business and the personal journey they’ve been on.

One of the major barriers that companies face when looking to scale is accessing capital to fund their growth ambitions. This is arguably more acute for tech firms investing in research and development and creating cutting edge products.

The last year has seen a wall of capital available for tech companies and Andy Darley, who is Head of Technology Research at FinnCap, says that tech firms have responded.

He explains: “Technology firms have responded to the unfortunate circumstances of covid-19 and the great shock it has caused and there is an acceptance that disruption is vital and fundamental to the future of the UK. The themes we are seeing from tech firms that are gaining investment is it is about automation of the unglamorous, and anything that drives enterprise and replaces less efficient alternatives.

“Disruptive tech that can form the non-core elements in a business and be a solution that customers adopt on multi-year contacts are also appealing to investors. There is enthusiasm in trade, private and public side and this is making valuations higher as everyone is aware of the opportunities. The investor market is receptive, and if they feel their capital will participate and make a difference to a business model, and it’s not just recycling capital, businesses stand a good chance.”

Anthony Platt, who is a Tech Adviser at Cavendish Corporate Finance, says that on the deal side, tax policy is one of the elements driving activity in the tech sector. He says: “Capital Gains Tax changes forced people’s hands and because of this, business owners have been crystallising value and tech firms with good margins and growth have been seeing high valuations put on them.”

Some in the sector also argued that Brexit may impact investment into the sector, but this is something that Anthony disagrees with.

He explains: “It’s totally the opposite and we’re seeing lots of international deals and activity, particularly in the cyber, health or fintech space, with an awful lot of capital coming into the UK from the US and Europe.

“Everybody is trying to do the same thing though, and there are lots of businesses looking for capital and it is global capital. We are seeing many more US investors coming to the UK market and more from Europe too.”

IPO

One option for tech businesses that have reached a certain stage in their growth is to IPO, or float on the stock exchange as it is often known in common parlance.

The background work is huge, but the rewards are too, says Jonathan Lister Parsons, who is CTO at PensionBee.

He comments: “We always saw an IPO as a long-term goal for the business and it’s an opportunity to accelerate the growth of the business and allow our customers and employees to become shareholders and share in the success of the business. Our funding journey prior to the IPO was through private market and raising through individuals and angels, but never the venture capital route. For businesses pre-IPO, I’d say that angels and private investors are a good source for funding as the government introduced some schemes, such as EIE and SEIS, which provide tax incentives for funders. This space has become an asset class in its own right.”

Private equity

Jennifer Sundberg is the Co-CEO at Board Intelligence, a technology and advisory firm.

When it came to funding for the business, she took the private equity route but was picky about which partner she worked with.

She comments: “We were bootstrapped as a business and we have been able to self-finance our growth, but it did come to the point that we felt it’s now time to scale the business beyond the ability to do it ourselves. This kicked off a process where we went down the aisle with a suitor and we had agreed on a price, but we had a feeling in the stomach that it was not the right match.

“We respect the party and there was complete integrity, but we ended up moving to a new partner. Part of this decision was based around the fact that we were offered patient capital, so there was no drop-dead date by which we needed to deliver to, which we felt was an artificial timetable and would distort our decision-making process.”

Nathan Robinson is the CEO of the Leadership Network, and says that like Jennifer, a large part of the business has been self-funded.

He explains: “We started in a different way, through an MBO from a private-equity-owned business, and we bought out of a division of the business. We then gained stability and built a customer base, and this financed our first part of our growth and we re-invested into research and development. I think finding market fit to fund growth is underrated. It allows you to prove there is demand for your product and self-fund before you scale. Following this, we did go out to the VC market, but we had the courage to walk away from a potential investment as we don’t feel they shared our vision.”

Customer funding

Like Nathan and Jennifer, Catherine Bennett – who is Founder and MD at Caboodle Technology – has self-funded but with an innovative twist.

She explains: “We started with savings that weren’t huge, but we soon realised our largest companies like our proposition – that we would work alongside them to develop the technology and add in features they wanted, and they would fund the development. So, in part we have been funded by our clients and also introduced a recurring revenue model.

“Shareholders did talk to us about raising external funding, so we looked at the private equity option, but what did we want the funds for? We are not a business that needs twenty new salespeople – it is about organic and sensible growth. We did eventually need funding, though, to exit a director and we did this through a cash flow lend.”

Control

One of the biggest things a founder can lose when receiving funding is control, creating a trade-off between fulfilling growth ambitions and taking the business to the next level and operating a much more plural structure.

But undergoing an IPO can often actually mean you retain more control, than opting for a route where you receive funding in exchange for people coming in to run the business.

Jonathan elaborates: “There are lots of stories about losing control and you see tech companies list with crazy share structures. But for me, this is such bad governance; it can only exist in a market where people are happy to pay crazy money and not get treated equitably as a shareholder. We are fortunate as we are only issuing ordinary shares and we do not have any special shareholders and all the management team is in the same position. I would also say though, that when you IPO and you are exposed to the level of scrutiny that comes with it, it does not make sense to want to maintain such a high-level of control anyway as this can only have a negative impact on your stock price.”

Regarding the benefits of listing, Andy Darley says: “Firstly, your customer and employees can buy into the business and, of course, you will get access to significant amounts of capital to fund further growth. What I would also say is that in this climate of ESG and business for good, listing allows employees to participate in something with purpose as you take your stakeholders on that journey through participation.”

A kind of hell

With so many funding options available to scaling companies, choosing the right one can be a minefield and equally, just going through the process is a challenge, begging the question, does it take the owners eye of the business ball having to raise funding?

Jennifer Sundberg gives her take: “It was a kind of hell raising funding and I would describe fundraising as hard work; it really was torture. I was grateful to be a Co-CEO as this allowed us to divide and conquer and I was also grateful for lockdown as I could do the deal from my desk. I would not have liked the Idea of having to get on a plane or attend dinners to attract the funding, as I have a young family. It’s an eye opener – I didn’t realise there were 150 questions about tax you needed to know as a business owner.”

Nathan Robinson agrees: “It’s a draining process for sure and very counterintuitive, as I’m going from selling a product to selling a business model and this is a completely new discipline.”

With lockdown taking away much of the face-to-face meeting, has fundraising become snappier due to lockdown, or do you lose something when not meeting potential investors?

Andy Darley says: “It’s an interesting question as to whether you can automate the process of fundraising but I’m not sure you can as you need to have communication between the business and the funder.

Would you want to invest or have somebody invest if you haven’t met them and gone through the tough process of questioning from both sides?”

The responses and insight were taken from a debate hosted by Oli Barrett MBE, that was part of a series from FinnCap and Business Leader, called Inside the Deal. 

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