Are fundraising prospects improving?

Mark Tasker, a specialist in the technology sector at corporate law firm Fox Williams, considers the current outlook for  businesses seeking funding.


Mark Tasker, a specialist in the technology sector at corporate law firm Fox Williams, considers the current outlook for  businesses seeking funding.

Mark Tasker, a specialist in the technology sector at corporate law firm Fox Williams, considers the current outlook for  businesses seeking funding.

When desperate for cash, after having searched the jacket, the coat and behind the sofa, my next port of call is often the children’s moneybox. Many tech businesses over the past two years have been in a similar predicament.

Bank borrowing remains hard to find and somewhat expensive. In terms of investment capital, the last two years and in particular 2009 has been the worst period for a decade for deal activity in the private equity and venture capital markets.

This picture contrasts sharply with the current optimism of practitioners. Despite the cancellations of several flotations of late, the market expects activity in corporate fundraising, IPOs and mergers and acquisitions. I think there are some grounds for this optimism, in particular in the tech sector. Our corporate finance adviser friends are reportedly seeing more activity in the first few weeks of 2010 than they experienced in the whole of 2009.

However, optimism alone does not make it easier for businesses to raise investment. A compelling business case, the ability to open the right doors, a good management team and acceptable valuations are key. Early-stage businesses will continue to find it tough to raise investment, but that was the case even before the economic crash.

So what tech is pushing investors’ buttons at the moment? In our experience, cleantech is the current darling and businesses in this sector are likely to be a significant focus for investor activity in the next few years. E-commerce, cloud computing and SaaS businesses are also fertile playgrounds for investors. It is perhaps too early to say whether the marketplace for Web 2.0 ventures is over-populated, but those with established profitable businesses are likely to remain popular. Smart tech for healthcare is also attracting a keen interest from the investor community and there is sure to be continued interest in technology for the financial services sector.

In terms of the numbers, the trend has moved firmly towards demonstrable profit streams. Businesses unable to show a growth trend in profits will struggle to raise significant investment.

If we look at the US, where the market is ahead of the UK (perhaps because investors there generally understand the technology better) the trend is towards investing in bigger businesses. We suspect that the same is likely to be the case in the UK in the immediate future.

In this highly competitive market tech businesses must do whatever they can to increase their chances of being successful in raising investment, including the following:

1. Developing relationships
with potential investors well in advance of seeking funding. This enables the desired trust to be established and helps to ensure that the investor understands the business.

2.
Ensuring that pitches and business plans do not contain fanciful statements or forecasts which stand little or no chance of being verified. Trust and confidence is hard to win and easy to lose.

3.
Seeking introductions to investors through trusted sources or intermediaries. This will often give the investor a level of comfort as to the credibility of the business.

4. Using a corporate finance adviser to obtain more than one offer of funding, to maximise the chances of obtaining a favourable valuation.

5.
Making sure that the “house” is in order from a legal perspective. Investors will undertake pre-investment enquiries into the business and if this reveals undisclosed problems it can shake investor confidence.

6.
No matter how many times management have to pitch their business plan, they must remain positive and enthusiastic about the idea.

Attention to this sort of detail will increase the chance of getting funded and reduce the need to raid the children’s moneybox.

Nick Britton

Lexus Ernser

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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Corporate venture capital