Raising the right type of capital to help finance new ventures is fundamental to making a business project successful. According to recent research by accountancy advisory firm and tech sector specialists, Kingston Smith, there has never been a better time to be looking for funding.
It summarises the key elements to consider:
- Venture capital is alive and well in the UK. Tech businesses do not have to be profitable to be a candidate for investment, although being able to demonstrate run-rate revenues of c. £1m will enhance their chances of success.
- Debt funders are primarily focused on security. For tech businesses with few assets, that may require owner managers to offer personal guarantees.
- PE houses are on a mission to achieve 3x their money back within 3-5 years, so their main concerns are opportunities for growth and where the exit is going to come from.
- When people talk of “exiting by IPO”, they should be aware that IPOs usually deliver at best a partial exit for owner managers, who are expected to remain with the business for a considerable period post-float.
- When looking for funding, tech companies could try and look for “smart money” so the investor can provide you with funds as well as valuable and useful expertise and connections which complement the skillsets already in the business.
- Before you approach people for funding, make sure you are armed with all the relevant data. Potential investors will lose interest quickly if up-to-date financials, KPI and forecast information can’t be provided.
- R&D tax relief can provide repayable credits where an early-stage business is yet to become profitable – this can provide a serious improvement to cash flow.
- Tying in key staff with share incentives can be a commercial necessity but can also be achieved very tax-efficiently with share schemes such as EMI.
- Venture capital reliefs such as SEIS and EIS can be a good way for startups and growing businesses to raise capital from business angels. But beware, the rules contain numerous complex conditions and some anti-avoidance provisions. Make sure you take tax advice before using any of these.