For every quick growth success story in the tech sector there are numerous failures with cash flow and under-capitalisation cited as key challenges. Chartered Accountant Chris Langrick talks about the importance of robust business planning, HMRC schemes and funding options to allow ideas to flourish
There has never been a better time to be a tech entrepreneur with tech investment deals in the North quadrupling in the last 12 months. The North West has seen significant investments into its regional tech companies with the top three - The Hut Group, Push Doctor and Cubic Motion recently commanding £165m of cash – a massive vote of confidence in the market and these companies in particular.
Add to that a recent survey, compiled by Tech Nation from Pitchbook source data and supported by Hiscox, telling us that investment is growing faster in the North than anywhere else in Europe in the last five years and we get a unprecedented picture of economic opportunity for the region.
Deeper analysis of the new data reveals that Manchester is the key performer within the region, with tech investment growing at an incredible 668% over the 2012-17 period.
Of course behind the headlines and the success stories there are many tech businesses that do not make it and one of the key challenges is almost always cash flow and being under-capitalised.
In a fast-moving, complex and competitive sector like tech it is essential to have a robust business plan in place. And this can go against the grain for heads of tech enterprises who see it as boring and restrictive.
But it is fundamental to understand cash requirements at the outset and you can bet your bottom dollar that these big investment deals that have stolen headlines in recent months have been based on sound financial management to date and a clear vision for the future.
There are many sources of cash funding available so look around and find the best options. These include;
- Debt – whilst tech businesses often have limited assets to leverage, there are some banks offering very interesting products to start-up tech businesses.
- Equity – there are many VC and PE companies investing in the sector as we have seen, albeit at the cost of equity. Choosing the right equity partner is important and once the best partnership has been formed, there is likely to be more support than just the cash investment.
- Crowd funding – not for everyone, but this can be a useful channel.
Other key things to consider at the outset for all businesses, but certainly in the tech space, is whether the business might qualify for Enterprise Investment Scheme (EIS), making it more tax efficient and more appealing to private investors. Another question to ask would be do any of my business activities qualify for research and development tax relief and could it qualify for the HMRC patent box? These are all worth exploring.
With so many public and private sources of support funding there are really no excuses for good techies with great ideas in this space to fail. But it is only those who can marry good commercial sense with entrepreneurial flair who will ultimate reap the big growth rewards.
But clearly there is no better time to be doing it.