As part of our series of blogs on funding for tech businesses, Senior Associate Daniel Hayhurst reflects on our experiences of securing funding for early stage businesses during the COVID-19 pandemic.
2019 was a record year for SME equity investment according to the British Business Bank Equity Tracker report and this momentum carried on into the first quarter of 2020. Even as the COVID-19 lockdown slowed new transactions, we found that companies that were already into an investment process were generally successful on progressing their funding rounds to completion.
However, against this backdrop, the sub £1m funding bracket has continued to be the hardest to raise funding for. While Manchester has emerged as one of the leading private equity markets in Europe, the pool of investors willing to back pre-revenue businesses remains limited. Coupled with this lack of early stage funding, we found that many venture capitalists took a ‘portfolio first’ approach during the initial phase of lockdown, focusing time and funds to support existing portfolio companies over potential new investments.
Zoom and the like have proved to be great tools for early conversations. However, many institutional investors remain unwilling to commit substantial funds without having seen ‘the whites of management’s eyes’ through meeting them in person. In contrast, we have seen angel networks continue to maintain activity throughout the lockdown period. Networks have found that the transition to virtual pitch events has ensured continued engagement from angels, with many welcoming the ability to access potential deals without committing the travel time to attend physical pitches.
For many aspiring founders, COVID-19 has provided a unique opportunity to focus on new business concepts. Many have used periods of furlough or reduced activity to work-up pitch decks, revise business plans and research target markets. In our view, it is more important than ever that the Government lives up to its promise to the future generation of tech entrepreneurs to provide the funding and connected ecosystem to allow these new business concepts to thrive.
Beyond COVID-19, the outlook for equity funding remains strong. Venture capital and private equity investors have plenty of ‘dry powder’ of funds to deploy, following a series of successful years for raising new venture, growth and buyout funds. In 2019/20, Venture Capital Trusts, funds that specialise in investing in unlisted UK SMEs, raised £619 million in new funds, the third highest amount raised since 2006. The signs therefore indicate that investment appetite for UK SMEs remains strong.
These are our top tips for entrepreneurs looking to raise funding in the present environment:
- Be prepared. Ensure that you have well organised quality business information to support your pitch deck/business plan. This will ensure a smoother ride through funder’s due diligence. Identify and address potential issues head on.
- Understand your EBITDAC. All businesses have been significantly impacted by COVID-19. Be clear on how this has affected your market, supply chain and forecasts. Many tech businesses are seeing a boost from Coronavirus, particularly in the ecommerce space. Understand whether this is a blip or a trend for your business and ensure that you can back this up to secure the best valuation.
- Show how your solution is relevant to the ‘new world’. Presenting a clear solution to a problem is one of the golden rules of a successful pitch. Be clear on how your solution is relevant in the unique current climate and the uncertain future.
If you need guidance or assistance in securing equity funding for your business, please contact Daniel Hayhurst or another member of the Tech Funding Team.
