Financial management in a crisis: how can early stage technology companies survive a pandemic

Matthew Dreaper

Matthew Dreaper

In the current global climate, many people – and businesses – are struggling. On both a personal and professional level, these are the start of some challenging times, and a clear mind coupled with strong nerves are required for businesses to make it out the other side. But what else is needed from financial managers to carry early stage technology companies through this uncertain time? We spoke to Matthew Dreaper, Chief Financial Officer at UK Innovation & Science Seed Fund portfolio company Oxford Space Systems to gain his expert insights on what it takes.

Planning and preparation

As with most things it all comes down to preparation, being aware of the constant potential for crisis and having a plan in place to deal with it. “In many ways it is the same as pre-crisis planning: make sure there are no surprises with cashflow in the near term and that the business leadership team is nimble and open-minded enough to work out the best route to long-term success.” Have the right talent looking after your finances and ensure the Company is prepared for any eventuality. Also, do not be afraid to modify and update your plan, especially in an early-stage company, as the first plan is not normally the one that works.

However, not all companies, especially those in the earlier stages of their lifecycle, are fortunate enough to have a dedicated finance director. Regardless of the company’s development stage, being aware of the cash flow forecast is a must. “Make sure that one of your management team “owns” the cash forecast. Look at the cash forecast every week, and if you don’t have one, start doing it. Better to do it badly and get better than to fly blind.” Examining your cash week-by-week will help to inform decision making, planning, and provide a keener awareness of how time is passing.

Moreover, not all early stage, pre-revenue SME’s need a full-time finance director. Look for someone internally who can take on this position alongside their current role, engage with an outsourced finance director, or see if you have a NED and/or Angel investor who would be willing to act as finance director.

Government support

Since the outbreak of the Covid-19 pandemic the UK Government has put in place a number of interventions to protect UK businesses and their employees, including business rates relief, grants, sick pay support and the furlough scheme. “In general, I think the UK government has responded in a bold and decisive manner and has worked well with the Bank of England and other supervisory bodies. The furlough scheme has been the most simple and powerful support measure but one of my companies has also applied for a CBILS loan – the Company’s bank have been very positive and supportive but the process takes too long.”

Another scheme put in place by the UK Government is the Future Fund, issuing convertible loans between £125,000 to £5 million to innovative companies that are facing financing difficulties because of the coronavirus outbreak. The Fund provides government loans to UK-based companies subject to at least equal match funding from private investors. In Matthew’s experience, “two of my companies looked at the Future Fund, but in both cases we decided there were more conventional options that remain open to us. The Future Fund is not “free money” (as perceived by some) but will be very helpful for companies that are at a particularly delicate juncture with their growth plans.”

What will the future hold?

Despite the UK Government doing all it can to keep UK businesses afloat, the economy has still taken a significant hit. In the first three months of this year, the UK experienced the sharpest economic contraction since the peak of the financial crisis (Q4 2008), despite the lockdown officially only starting on the 23 March[1]. “I suspect the economic recovery will take some time. The sectors that I work in operate on longer lead times and I sometimes worry that our darkest hours will lie in the months ahead”

Inevitably, this economic contraction is also having an effect on investor behaviour; “It seems that investors are still open to looking at new opportunities, but valuations and terms will be less favourable. Many claim to be focusing on defending existing portfolio companies but may have to make some painful decisions on companies that are fundamentally undermined by the pandemic. Investors need to remember that keeping founders and management teams engaged is important.”

Now, more than ever, adaptability is key and many start-ups are young enough and smart enough to pivot their business plans in response to what they see in the outside world. Moreover, money is earning lower returns worldwide, if anything this should make early-stage companies a more attractive long-term investment.

In hindsight…

When asked what he would have done differently, with foreknowledge of the pandemic, Matthew promptly replied, “I would have spent as much time as possible in pubs, restaurants and ski resorts during January!” – wouldn’t we all!

“On a more serious note – if you are working in early-stage, you are already reconciled to a high degree of change and uncertainty. For sure, the pandemic has put this on another level – but most people in our sector feel in a privileged position compared to many others. We are better placed to make rapid adjustments to the way we work and what we are seeking to achieve in our businesses.”

Looking ahead, many of us are asking how we can best prepare for a potential second lockdown. Matthew shared some advice for early stage technology companies, saying “secure funding when it’s on offer and build enduring and trusting relationships with your stakeholders. The investment in looking after customers, suppliers, staff and investors will reap dividends when you have a period of crisis.”

About Matthew Dreaper

Matthew been a director of a number of small and medium-sized businesses over the last 18 years, including Enigma Health, the UK’s leading pharmacy software business, and Nucare plc, where he was instrumental in their £49m sale to Phoenix Medical Supplies. In 2008 he set up Chilcomb, a niche accounting practice that offers finance director and support services to a select group of high-growth tech companies.

He has raised over £20m for a number of early-stage technology ventures since 2008, with funding coming from both private and professional investors.

About Oxford Space Systems

Oxford Space Systems is a venture capital backed space technology business that is pioneering the development of next-generation deployable antennas and structures for the global space industry. It achieves this by combining new proprietary materials with traditional flight-proven materials, and often uses origami design techniques.

Founded in September 2013 by Mike Lawton and two other colleagues, OSS has successfully completed three rounds of over-subscribed venture capital funding from both UK and US investors.

OSS has won numerous awards such as the UK’s Best Tech Start-Up 2015 at the British Engineering Excellence Awards as well several international awards. The most recent of these is a regional win of NASA’s iTech Ignite the Night competition in Colorado (April 2019).

 

[1] https://www.resolutionfoundation.org/publications/the-economic-effects-of-coronavirus-in-the-uk/

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