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The opportunities and challenges in financing growth for technology companies

But it’s not all digital, social media and e-commerce. Software development and a whole range of product and process innovation in sectors such as aerospace, science, and cleantech, are seeing activity. Certainly, the job creation across the wider technology sector has been impressive since the financial crisis. Some people are even crediting the sector with the UKs economic recovery.

Whether in London, the M4 corridor, Scotland or anywhere else in the UK, technology firms like all others need capital investment. But it is investment for start-ups or at an early stage of expansion that is particularly critical in the sector. Not all companies have access to loans or government funding (for instance, quantum technology, a cutting edge area of scientific research, has become a 270m beneficiary from the recent Autumn Statement). For start-ups or small companies looking to grow quickly, equity investment in the business from venture capitalists should be a serious consideration.

The UK traditionally attracts a lot more venture capital (VC) investment than any other European country, and an increasing interest from investors from the US. The UK also has the most developed and active private equity (PE) community in Europe. The dynamism in the technology sector in the UK is highly attractive to both the early stage VC and later stage PE investors. 

Traditionally, initial sources of pre-VC funding have been through friends and family and/or angel investors. Seed funding platforms like Seedrs are now offering new opportunities for companies to raise that difficult to find initial seed funding and will play a more important role in the funding process in the future. Later rounds of funding through VC fund investment typically involve more than one VC fund more than half of VC backed businesses have more than one fund investor. 

At the later stage, developed, profitable technology businesses are highly attractive investments for UK private equity houses to back. Although the UK economy is back in positive territory, many PE investors are looking for fast growing businesses which have opportunities to grow and expand internationally from a UK base. Technology based businesses in particular software or cloud based businesses – can be scaled to become truly global businesses. Cloud platform services such as Amazon EC2 and Windows Azure allow technology businesses to grow quickly without the expense of funding and building their own hardware infrastructure. 

When looking at raising VC investment or private equity funding, getting good corporate finance advice is essential. There are a number of strong technology specialist corporate finance advisers and from experience, getting the right adviser involved early on makes a massive difference to the outcome. 

Only share information with potential investors when you have a good non-disclosure agreement in place and even then take care to limit the information you share. Once you have found the right VC / PE partner to work with, take time to negotiate a detailed term sheet or offer letter with the support of your corporate finance adviser and lawyer. 

A VC or PE investor is more likely to agree terms that you request at the term sheet stage rather than later in the process when due diligence and negotiation of detailed legal investment documents are underway. This is the time a good corporate finance adviser and lawyer will earn their fees getting the best commercial terms possible for the technology business and its owners. 

UK Technology businesses have the opportunity to play a big part in the re-balancing of the UK economy and its post-recession growth. Funding from venture capital and private equity houses will provide the financial fuel to fund this growth.

Tim Hewens is Partner in Squire Sanders Global Corporate Practice

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