After a series of successful roundtables earlier in the year, BOOST&Co, in collaboration with Shakespeare Martineau, gathered a group of industry experts to discuss its latest report on how Technology, Media and Telecommunications (TMT) firms can navigate the economic downturn.
As a specialist TMT lender, BOOST&Co drew upon data from its own portfolio and compared it with a 2019 McKinsey study to reveal how the most resilient firms are navigating current uncertainty.
Metrics such as sales and marketing spend, last twelve months’ revenue growth and expected outcomes for the next six months, provided the basis for the report.
Attendees were invited to discuss the findings and share knowledge from their market position. Some key themes emerged, including the current funding landscape, talent, cash conservation and creating value.
The funding landscape
The report found that firms’ approach to investing in innovation is quite varied, but of the firms that have been investing in new product research and development (R&D) or capital expenditure during the past 12 months, most expect to continue doing so.
For companies seeking external funding, it was agreed that there are an increasing number of options available, with shorter term cash flow solutions plugging the gap where more traditional forms of finance might not be achievable or to delay a larger fundraise.
Recent economic headwinds demonstrate that the funding landscape is ever-evolving, and the consensus around the table was this will continue as we head into a challenging financial period. While it is difficult to predict what this will mean for TMT businesses specifically, keeping abreast of market changes and the ability to stay agile is important.
Looking back at the past two years, Adam Brinn, Head of London and East at BOOST&Co, described a slight market distortion as a result of government-backed lending schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS) and the Recovery Loan Scheme (RLS). Lenders, investors and businesses are all trying to understand what the post-covid funding landscape looks like for UK SMEs, a landscape which is changing rapidly given the current economic backdrop.
While there is a new RLS scheme in place, Paul Sullivan, Senior Manager at the British Business Bank, describes it as an additional product: “the market should now be working and functioning properly in terms of lender appetite and then RLS should be stepping in to plug the gaps, much like the old Enterprise Finance Guarantee scheme.”
From a venture capital perspective, Clara Probert, Managing Partner at Madonna Capital, believes confidence might begin to shift in this space as the availability of capital decreases. For early stage businesses, they might need to turn to alternative sources of finance, which can be less competitive as these “institutions do not need to back one horse in a race, unlike a venture capital firm.”
Valuation-wise, Ed Reid, Associate Director at PWC, advises businesses facing lower valuations as a result of the volatile market to consider what is most important to them. “Equity may still be the best option for funding a business and decent valuations are still achievable, however it’s equally as important that it is one you can grow into otherwise there will be challenges justifying true value at the next round.”
One of the findings from the report was that disruptive firms are continuing to strengthen their expert teams and despite turbulent economic times, sourcing and retaining high quality talent is on the agenda for the majority of them. Nearly two thirds of respondents had recruited during the past 12 months and more than half expect to continue doing so in the next six months.
Attendees echoed these findings, citing talent as an area of risk and focus for SMEs in the short term.
Francis Mainoo, Head of Sales at Moore Kingston, said, “finding and retaining talent is key for our clients at the minute, our HR consulting team is busy putting in structures and schemes to try and help our clients keep individuals – or the experts that you refer to in your report – engaged.”
In the pursuit of getting the right talent, diversity and inclusion is important to consider. Philip Olagunju, Partner and Head at PEM Corporate Finance, said, “wherever your business is in the economic spectrum, you are going to need diversity of thought to survive during economic uncertainty.” For him this means focusing on pooling opinion from different backgrounds, to challenge thinking and rationale to drive a more robust agenda.
The subject of finding and retaining talent led the table to evaluate the significance of workplace flexibility, as employee expectations have shifted since working from home during Covid-19.
Chris Lowe, Founder and CEO of Notwics, proposed that the recession might be leverage for employers to encourage workers back into the office and cause a paradigm shift back to how things were previously.
However, Nick Owers, Regional Partner at the CFO Centre, argued that for tech start-ups, many have never occupied an office, or do not intend to do so, at least in the short term, as a cost saving measure.
Pauline Li, Managing Partner at Madonna Capital, thinks there is a difference between what employees expect and what employers can reasonably offer, as what is possible for a business is not necessarily what is beneficial to a business. “You’ve got people working from home and there is work-life integration, but when we have downturn upon downtown, it is really about how we work together to be more productive, to push the economy back to an acceptable level, so businesses can meet targets,” she says.
On the topic of productivity, Nick Owers also stressed the need to recognise the hybrid world that we now live in and how the office environment needs to reflect this. This might cause a cash headache for businesses, as they have to create a space that promotes collaboration but also accommodates privacy for virtual calls.
The general agreement, however, was that the labour market might begin to loosen in the next 12 months as a result of the current climate, so it might become easier for firms to find the right talent and invest in the right people to support their business. It may also offer them leverage to adopt preferred working models as the power shifts back to employers.
One of the identified characteristics of a “resilient” business in the report, was the ability to create capacity by reducing leverage, however there were a few contrasting opinions with what people are seeing in the market and how they think businesses are best to respond.
Adam Brinn, argued that during the past couple of years, the market has been awash with cash that has been backed by the government and because of this, some businesses have taken on debt that they did not need and quickly repaid it when they realised the cost. This needs to be considered in the context of this report.
Russell Jarvis, Partner at Shakespeare Martineau, said he has seen a “slowing down at all levels, people are taking stock and keeping their dry powder back a little bit.”
In East Anglia, and Cambridge more specifically, Philip Olagunju describes it as an “economic bubble,” across the whole economic paradigm. The area is home to a world class university, businesses are being created on an annual basis and at the other end of the spectrum, you have got tech unicorns, such as Apple, Amazon and Microsoft all investing in real estate, so it doesn’t feel like cost cutting is on the agenda just yet.
Nick Owers’ opinion is that established businesses during recessions typically “become more prudent, make more from what they already have, cut costs and ride it out,” rather than taking on debt. However, the same strategy cannot be applied to early stage businesses – they have to keep moving and continue to spend to avoid failure.
An optimistic result from the businesses surveyed was that 83% of them expected to grow in 2023, but of these, only 36.6% plan to increase spending on sales and marketing in the next six months. If value isn’t going to be driven by marketing activities, where is this expected to come from?
From Francis Mainoo’s position, he has seen spending on R&D and innovation, specifically on tech to produce financial information so that businesses have the confidence to make informed decisions. From here, they can confidently communicate with investors, as well as evaluate how best to spend capital as they see the return on investment more quickly.
Adam Brinn said he has seen companies focus on Environment, Social and Governance (ESG) as a way to widen their audience and appeal to customers that are more sensitive to the social impact of a product or service.
Conversely, Mark Rowntree, Associate Director at Price Bailey, has seen that ESG can still be quite far down the list of priorities for private equity firms looking to deploy capital in UK SMEs but it is more prevalent in the mid market space.
As the economic reality sets in, Ed Reid believes preservation might be a bigger focus for businesses, which means their ESG strategy could begin to wane as a result.
Nick Owers highlighted, however, that if you do not spend any time on ESG and you suddenly need funds from a place that values this, you will not be able to access that part of the investment market.
Adam Brinn also added that while it’s hard to measure the return on investment of these types of initiatives, once we come out of the current environment, businesses that have been able to maintain their ESG activities might succeed faster as a result.
Like the report itself, the roundtable generated many points of interest and we are grateful to all who participated. Interested in taking part in our next roundtable? Get in touch with Adam here.