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Starting up your Technology business

Technology is one of the most important sectors of the economy in the Thames Valley with tens of thousands of people engaged in this market across the region. By its very nature the sector is extremely dynamic, with significant numbers of new entrants each year – either as spin outs from one of the many local research institutions or large technology businesses or as UK subsidiaries of large overseas corporations.

At the early stage end, spin outs and start-ups are still occurring despite the current economic climate, -companies such as Oxford Yasa Motors and Zyoxel, but it is undoubtedly more difficult to get off the ground – so how can such businesses give themselves the best opportunity of being successful?

Sue Staunton who heads up the Technology Team at James Cowper believes the first step towards success is the completion of a robust business plan.  “The business plan should act as the road map for the business – it identifies your objectives – where you want to get to and gives you your strategy for getting there.  Because of unforeseen obstacles you may have to deviate from the route you chose but the plan helps you to keep the end in sight”.

A business plan is also the document for communication of what the business is about to the company’s stakeholders, i.e. shareholders, employees, banks and investors.

Many early stage businesses will not be forecasting revenues within the short-term so it is critically important that the business plan identifies milestones against which their performance can be assessed.

A key issue for such emergent businesses is the raising of finance.  Alongside a good business plan that articulates the potential commercial worth of the core technology it is important that the company can tick the right boxes to ensure optimisation of tax reliefs for investors.  This can be achieved through the Enterprise Investment Scheme (EIS).  This enables smaller high-risk companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.  In order to qualify, a company needs to ensure that at the point of investment and for at least three years thereafter it complies with a number of qualifying conditions including:

  • It is not a quoted company
  • Must carry out a qualifying trade
  • Gross assets post-investment should not exceed £8 million
  • It must not have more than 50 employees
  • Substantially the whole of its business activity should be in the UK

Tax Partner, Sharon Bedford, who works with many of the firm’s technology portfolio comments;

“EIS can deliver substantial tax savings for investors and we have seen a number of cases where the fact that a company was EIS compliant was critical to the investors’ decision to fund the business”.

Raising finance in today’s environment remains a challenge.  Volumes are down and we are seeing companies raising less than in previous years although funding is still happening, as indicated by the recent $10 million raised by Southampton spinout, Perpetuum.

“We are recommending that the earlier stage technology businesses look beyond more traditional sources of finance” comments Corporate Finance partner, Nick Rogers “and consider grant income including European funds, as well as looking outside the UK for equity.  We have clients at this stage who have recently funded with Eastern European and Middle Eastern money.  Sometimes attracting funds from overseas may come with conditions attached such as a requirement to establish in an overseas location”.

Getting the right level of funding involves understanding the current status of the market – who’s investing; who’s only doing follow-on funding for an existing portfolio; who’s investing similar levels of money to those that you require.  It’s also important to keep on top of new development in Government type funding such as the Capital for Enterprise Fund.  It may mean bringing in the assistance of the professionals who deal in these markets all the time and who are, therefore, familiar with what is going on and can assist you in positioning your case.

Quite apart from considering the quality and commercialisability of the technology underpinning the company, an investor is looking critically at the quality of the management team.  It’s, therefore, important to bear in mind the following when putting together the team;

  • Ensuring a balance of skills
  • Ensuring there is relevant experience of successfully managing a business of this kind at this stage.
  • Having the right support team to assist with the company’s development, all of whom understand these types of businesses.

So in summary, the key to raising finance is a clear and focused plan which clearly identifies the road map and milestones ahead, a structure that is tax efficient and attractive to investors and a wide approach to raising finance.

Please feel free to contact Sue Staunton on 01865 200500 or email: sstaunton@jamescowper.co.uk