Raising Finance

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New digital-focused Enterprise Capital Fund could solve funding woes of mid-market tech leaders

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According to business advisory firm BDO’s first technology business report, the over-inflated IPO values and volatile share price performance of the world’s leading tech firms have left a third of British tech SME bosses unable to secure the vital funds needed to fuel their own growth.

The employers said the hype surrounding the floats had made some investors “wary” of the sector and left them “missing out on funding”.

Almost half, 45 per cent of those surveyed, said access to finance was the biggest barrier to growth in the tech sector – with around 55 per cent also blaming a general lack of understanding from lenders. There was a large 40 per cent of firms bemoaning an inability to explain how a new product might generate revenue.

Around three-quarters of firms said they were looking to use new funds specifically for new innovative product development, with 31 per cent expecting the availability of finance to restrict their growth over the next five years.

The BDO report said: “ With many banks only assigning specialist teams to businesses turning over more than £25m, and private equity investors reluctant to get involved with companies turning over less than £5m, tech businesses at the lower end of the mid-mark are being squeezed. Running out of development cash is keeping bosses awake at night.”

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However the BDO survey found there were grounds for optimism, with venture capitalists, private equity investors and alternative funders all telling their analysts that they were “crying out” for opportunities to put cash into the sector.

Indeed, BDO added the funders were urging medium-sized tech firms to “come forward” with some even claiming there are not enough investment opportunities to go around.

Paul Russell, BDO partner, said: “Tech companies at the lower end of the mid-market are being squeezed. They don’t have the ‘rags to riches’ appeal of startups or command the multi-billion pound excitement of the larger corporates and as a result access to finance is a real issue. What is more concerning is that this disconnect between the tech and finance community is impacting the UK’s competitiveness as the tech centre for Europe – it’s hampering innovation.”

Russell said SMEs had to know where to look to secure the necessary funding and should go beyond bank debt and private equity backing to alternative forms such as crowdfunding, peer-to-peer lending and even government grants. 

“There is more that could be done by the government too. A second digital-focused Enterprise Capital Fund and increased public investment into both funds would be a good start, as would a specific innovation credit for technology businesses which would give an R&D type credit to a wider range of technological innovation than under current rules,” he suggested. “If we want to create a market where mid-sized tech businesses can develop into global tech leaders in their own right, we need to support them along the way.”

Image: Shutterstock

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