Summary: There is increasing optimism amongst start-ups as to the outlook of the technology market in 2017 and recent indications suggest that the UK’s digital technology industry is fast outpacing any other industry in the UK in terms of turnover; new technology in payment processing, digital applications that facilitate easier payment and the increased use of electronic devices to transfer money between accounts are key areas to watch.
Unsurprisingly, in addition to London, we are also seeing broader growth in the technology sector in overseas jurisdictions. Traditionally, this sector has been dominated by the U.S., China and the U.K., however, other jurisdictions are playing a more active role in the industry, for example, Israel is an up and coming technological hub.
Technology companies have traditionally looked to equity and, in particular, venture capital and private equity funding as a flexible way to finance their rapidly growing businesses. However, some are now seeking more traditional methods of financing such as debt financing as an alternative source during their development life cycle to supplement or replace equity funding, which can often be unpredictable and challenging to raise.
Technology companies have historically posed some unique challenges to players in the European debt markets because:
- Their prior profitability track record may not be strong, as rapid growth requires investment in research, development, sales and marketing to obtain market share.
- Growth of technology businesses is much more rapid than a traditional company and so the normal checks and balances provided for in loan documentation may not be appropriate.
- Assets available for security are often intangibles (for example, intellectual property, software or commercially sensitive data), which sometimes only have limited short term value.
These considerations mean that lenders may need to:
- Adjust their usual approach to assessing the value of an asset-light tech business.
- Take into consideration the fluid nature of these types of business which may affect the types of covenants and representations incorporated in documentation.
- Ensure that they obtain expert advice in terms of taking security over intangible assets such as IP, which, depending on the applicable jurisdiction, may require the completion of additional registration and notarisation formalities.
If these obstacles can be overcome and lenders are able to adapt their approach to accommodate the distinctive nature of the technology sector, there is definite scope for these types of companies to make more use of debt financing and benefit from potentially cheaper financing, with less oversight from equity investors in respect of the decision making of management.