Financing Manchester’s tech sectorFriday, 23rd February 2018
The UK is – by a long way – the foremost destination in Europe for tech investors, with tech firms raising close to £3bn in 2017, double the amount raised in 2016. To put this into context, the UK received four times more funding in 2017 than Germany, the next largest EU country in terms of tech investment. However, there continues to be a huge regional disparity, with London accounting for more than 80% of all UK VC tech funding.
As the government’s recent patient capital review noted, the financing environment generally for scale-ups in the UK (and particularly the North West) is not as strong as it needs to be to enable more UK firms to grow beyond the start up phase. As a consequence, many younger tech businesses fail to realise their growth potential, remaining stuck with slower, incremental growth or find themselves selling too soon to trade buyers who may be purely interested in acquiring competing technology rather than in developing the business itself.
This shortage of funding options is acutely felt by many of our tech clients here in the North West, despite Manchester being a key tech hub. Whilst smaller sums may be (relatively) straightforward to raise for businesses with the right product and management team, there is a lack of options locally – particularly for ambitious companies looking to raise above £10 million. Often there may be simply no alternative but to cast the net wider afield and seek suitable investors in London or the US.
There are a number of options for startups looking to raise up to £2 million, including angel investor networks such as Co Angel Investment, Liverpool’s Spark Impact fund:tmt; and local government-funded bodies such as the Greater Manchester Investment Fund and the Northern Powerhouse Investment Fund (managed by Maven). We’ve worked with a number of early stage tech businesses who have successfully secured funding from these sources.
In addition, R&D tax credits continue to be an important opportunity for growing, technology enabled businesses to receive a regular cash injection. With £2.9bn claimed by over 26,000 claimants in HMRC’s latest statistics – an increase of £470m (20%) on the previous year – it’s important not to overlook this valuable source of funding.
Another option for vibrant, profitable businesses seeking finance is the region’s buoyant private equity scene. Several key local players such have bought tech-savvy talent on board and are turning more attention to dynamic tech companies with potential for high growth and high returns. Recent examples of successful PE funding have been NVM’s £4m investment in HelloSoda, a Manchester based data analytics business, and Foresight’s investment (together with angel investors) in Salford Quays AdTech company PowerLinks.
Many tech founders struggle with scaling their businesses, and this is where the experience, network and expertise of VCs and Private Equity can make a real difference. However, investors will often have a relatively short investment window and look to recover their investment within a three to five year period.
Looking forward, we’re receiving an increasing number of enquiries from tech businesses looking to bypass the more traditional funding routes altogether and raise financing through an ICO (Initial Coin Offering). Manchester-based energy trading business EnergiMine, led the way here, recently raising £12 million through a successful Energi token sale (which was also the first UK ICO outside London). A key advantage for entrepreneurs is that they do not have to give up equity in the underlying business.
ICOs could well become more mainstream as applications of Blockchain – based technology grow. With rapid growth in the ICO market, regulated exchanges (for example in Gibraltar) and surging demand from investors in the cryptocurrency community, some commentators are of the view that this way of raising finance could disrupt VC funding as an option for tech businesses. It’s still very much the “wild west” though, and it remains to be seen how governments around the world regulate (or even prohibit) the ICO market.
Although the UK will – Brexit considerations aside – continue to be a favourite destination for tech investors in Europe, it’s unlikely that the structural and regional issues will be resolved soon for North West businesses looking to raise larger amounts of finance – the concentration on London and the South East will continue. Perhaps this will be the trigger for businesses in the North West to explore new ways of solving the financing puzzle – who knows, we may one day have our own Manchester Cryptocurrency Exchange as a platform for vibrant local tech businesses seeking to raise funds.
About the Author – Philip Grindley
Phil is an advisory partner based in Spinningfields, Manchester. He heads up the Grant Thornton technology team in the North West and specialises in deal advisory work for strategic and financial investors in the digital, media and technology sectors.
Telephone: 0161 953 6452