While the tech deals market remained active throughout the pandemic, making the most of business that could be done virtually, there are even more opportunities for investment as restrictions ease and the world opens up again.
Many investors, including private equity houses, have built up “dry powder” – money yet to be deployed – and are actively looking for acquisition or investment targets. Funds from the US, the Nordic countries, Europe, as well as other parts of the UK and Scotland itself, are casting their eyes over what our tech firms have to offer.
And Scottish tech firms have a lot going for them as recent activity shows. For example, Edinburgh-based fintech success story Nucleus Financial has just been sold again, a matter of months after being acquired by James Hay. And HPS Investment Partners, a private equity division of Highbridge Capital Management within JP Morgan Asset Management, has bought a majority stake in Nucleus for an undisclosed sum.
But, if a tech firm wants to attract the right type and level of investment, it needs to get its house in order first and be well-prepared for their business to be scrutinised by potential investors as they carry out their due diligence.
Firstly, it’s important for a start-up or scale-up looking to expand to the next stage to have trusted advisors in place to guide them on what can be a long and complex journey. You need to know what potential investors are looking for, including recurring revenue and a pipeline of high-quality contracts. While it’s natural to want to be ambitious and aim high, companies should resist the temptation to be unrealistic by over-valuing themselves. High valuations, seemingly plucked from the air, will obviously deter potential investors.
It goes without saying that the key to attracting money or making a sale to allow you to exit a business is presenting it in its best possible light. Founders and senior management may know their tech inside-out, but they are also likely to be entrepreneurial in nature and focused on running their business. That’s why expert advisors are vital.
An experienced advisor who knows the market – if not necessarily the tech – can build on their in-depth knowledge and wide network of contacts. Such advisors can make useful introductions, tap into support available from the government, bodies such as Scottish Enterprise and the Scottish National Investment Bank, and various accelerator programmes, and generally add value.
At AAB, we also know that most of our clients will be happy to lend their support to other businesses, as long as they’re not in direct competition, to help them on their growth journeys. Such insight is incredibly helpful as a company gears up for investment and I’m always impressed when I see how supportive our client base, and the wider Scottish community, is willing to be. There’s a real sense of collaboration across the ecosystem, so start-ups and scale-ups should never be afraid to ask for support.
And we can advise on what investors are looking for in an organisation, based on what we’ve picked up from many years of getting deals over the line for our clients.
More and more, investors are wanting to see market traction. They want to know that what a company is offering actually works by fulfilling a need and that there is a clear market for it.
Intellectual property is still really important and investors wants to see barriers to entry to prevent a competitor quickly coming in and offering the same – or better – product or service. And a constant piece of advice is that without the right management in place, a business is not going to get over the first hurdle when seeking investment.
At the early stage, a business needs to demonstrate that they can successfully go from proof-of-concept to making commercial sales to show they are offering more than great ideas and can actually make money in the long-term. And start-ups shouldn’t underestimate the time and other resources involved in making that leap forward.
Investors are encouraged when they see that a potential target has a trusted advisor in place. They may have worked with that advisor in previous deals or heard their reputation through word-of-mouth. And investors are bound to feel reassured that they won’t be coming up against unfeasible valuations. Investment proposals will be far better if there is a good understanding of the business’s financials and forecasts all round and if the quality of information being shared is sound and comprehensive.
To sum up, bringing in an advisor at an early stage of a business venture should help both the company looking to be financed and the potential investors. And, therefore, Scotland’s tech sector as a whole will benefit.
Brian McMurray is head of tech and business advisory group partner at AAB.