Accessing capital – has the world changed?
The venture capital and private equity world is a constantly changing landscape and it is safe to say that many landscapes have changed significantly during 2020. Whilst investors note that there is still plenty of capital to deploy, scaling businesses looking to bring on board high calibre investors for the first time could encounter some different challenges.
Firstly, there has been a noticeable drop in new deal and investment activity. There are no doubt many reasons for this, but significant ones are:
- Investors existing portfolio companies will have funding needs to allow them to work through the current climate and reach the other side with a chance of achieving a favourable exit event for the investor. Investors will therefore have perhaps sought to support existing portfolios rather than take new risks during a period of uncertainty.
- Investors will undoubtedly be more cautious in deploying capital due to increased uncertainty, and perhaps even due to the inability to develop relationships with entrepreneurs that would have established trust and confidence prior to deploying capital.
- Investor sentiment towards certain segments within tech may also have fundamentally changed, which will cause displacement of funds. For example, in the current climate, investors may be relatively cool on travel tech but very keen on med tech, biotech and communications technology.
Investors will undoubtedly evaluate investments and deals very differently now than they did pre-coronavirus. Scaling businesses looking to obtain investment will need to pro-actively engage with investors to build a detailed understanding of the new evaluation criteria. A lot of learning, relationship building and understanding of the investor community over the last few years may need to be revisited as the rules of engagement may have changed fundamentally.
Will your business structure/infrastructure help you grow?
Investors have always looked for confirmation that the business structure will support growth and enable the business to develop into new service lines and access new geographical markets. Simplicity is most often the best strategy, with investors frequently backing businesses with streamlined structures.
Looking ahead, and in light of learnings during the pandemic, investors and potential customers of scaling tech businesses will no doubt scrutinise any potential vulnerabilities in the business supply chain, workforce management and customer base, and assess any significant impediments to flexibility and agility within business, practices in order to gain confidence in the longer term viability of the business. A tech business with aspirations to scale and grow may need to provide a lot more detail and insight into its business infrastructure to secure future growth opportunities.
Finding top talent
Finding and retaining top talent is a major challenge in the technology sector. Fast growing technology businesses tend to succeed when they have a team that buys in to the founders’ vision for the business, understands its role in fulfilling that vision and is rewarded for delivering successfully. However, coronavirus has meant that there has been much reduced opportunity to network at meet ups, collaboration sites and events. Therefore, how does a scaling tech business source its next superstar who will help the business achieve its next phase of growth? CEOs are going to have to find different ways of communicating the business aims and aspirations to future talent in order to attract them to their virtual boardroom.
Successfully navigating a succession event
Times change, and they can change fast, particularly for rapidly growing technology businesses. We have no doubt that the fallout from coronavirus may have led to a lot of soul searching within the boardroom, and potentially a reset of objectives and values of the business. This may have led to some shareholders getting to the end of their journey with the business, and fresh blood being required to push through the current climate into the next phase of growth.
Exiting a shareholder requires delicate handling. One wrong move can absorb significant cost, inhibit growth, and risk the loss of extremely valuable intellectual property. With time and open communication, there is always a solution to be found which is right for the exiting shareholder and the business.
Protecting your Intellectual Property
The intellectual property of a fast-growing tech business is vital to its ongoing success and its value. Robust steps need to be taken to prevent access to valuable components of the IP to protect the business from leakage of its ‘secret sauce’. Coronavirus may have caused significant changes to the working environment, which may increase the need for a scaling tech business to consider how it controls and monitors its team’s access and use of its IP.
Also, in light of coronavirus, has the business identified a need or opportunity to repurpose some of its technology and IP? If so, it will need to ensure that the relevant applications and registrations are filed quickly to protect the IP with its new purpose in relevant markets.
Clarity of ownership and control over intellectual property tends to be a key focus area for due diligence performed on behalf of investors.
The Covid-19 bill
The UK Government has propped up the economy throughout the coronavrius pandemic and businesses, including many scaling tech enterprises, have been able to borrow funds via various government backed schemes such as the bounce back loans, CBILS and the Future Fund, as well as benefit from grant-based support such as the Job Retention Scheme.
All of this is going to have to be paid for in the coming years, therefore scaling tech businesses are going to have to achieve their growth potential against a likely backdrop of higher taxes and cost of borrowing. This may impact the pace of growth in future if the amount of cash that can be recycled within the business to fuel further growth is reduced. Tech businesses looking to scale in 2021 will have much to consider as a result of the current pandemic.