scruttonbland.co.uk TECH Business
Contents 3 Welcome to our Autumn 2021 edition of TECH Business
8 Is it a bird?
Is it a plane? No, it’s a drone!
10 The Digital Sector in East Anglia – how are we doing?
4 Implementing a
system that drives key insights for rapidly expanding businesses and their investors
12 The Art of Making People Thirsty
6 Research &
Development Tax Relief is Evolving
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2021: a year in tech and what’s coming in 2022? Tim Robinson, CEO of Tech East looks back at the tech business year, and makes some predictions for the year to come
What does Levelling Up mean for this region? We end the year with a political concern about what exactly ‘Levelling Up’ means for this region. There is uncertainty over local structures (LEPs are under review) and the new Shared Prosperity Fund which replaces EU structural funding is not yet live. Looking ahead into 2022
2021 has been a year of significant progress in the East of England tech ecosystem. Tech businesses have mostly thrived despite Covid, and many have recorded significant wins in terms of growth, finance and international expansion. While big stories like Facebook’s plans for Meta and the IPO of Cambridge- based cybersecurity specialists Darktrace have dominated the press, there are many success stories closer to home. Tech East has a strategic partnership with Scrutton Bland and together we are helping startups and scaleups grow and succeed. Major trends Back in May, Tech East published a report entitled 12 Clusters of Tech which highlighted many of the unique features of the region and selected three hot technology areas where the East excels: AI, Net Zero and Healthtech. Two months later the government published its Innovation Strategy which chimed well with our view. There are significant opportunities for the UK and our region in AI, Quantum Computing, 5G, Bioinformatics, Robotics and Net Zero and we’ll be building on these in 2022. Challenges and concerns The skills gap remains a concern, with digital skills increasingly underpinning businesses and organisations of all kinds post Covid. The good news is that there are lots of positive initiatives including four shiny new skills centres in Ipswich/Martlesham and in Norwich, including the new Digitech Centre at Adastral Park.
Here are a few predictions:
Following COP26 the tech sector will really start to engage with the Net Zero agenda, building on local successes like Liftshare, Mobilityways, EO Charging and Spark EV Technology. I expect the convergence of the Offshore Wind sector with digital, data and AI to be a major breeding ground for innovation. More research will emerge on the lack of major VC funding outside London and hopefully government will work with private equity firms to address this. On skills, we’ll learn whether Suffolk and Norfolk will get an Institute of Technology to drive technical and vocational skills. New hubs will progress, including a new innovation hub for Ipswich, building on the early successes around the waterfront and University.
Freeport East (focused on Felixstowe and Harwich but stretching to Stowmarket) will move forward and start to unlock investment, skills and innovation in the ports, logistics and manufacturing sectors. There will be a greater focus on increasing diversity, inclusion and neglected coastal towns, enabling digital to play its role across these essential themes. The Ox-Cam arc will move ahead with more pace, providing better links with Oxford and Milton Keynes. And finally we’ll learn whether Suffolk gets the green light for the gigantic infrastructure Sizewell C. If so, digital innovation and digital skills will be fundamentally important for that project over the next decade.
So lots happening, lots to come. These are exiting times.
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Implementing a system that drives key insights for rapidly expanding businesses and their investors Businesses have many things they need to consider in their day-to-day operations and strategy. What sets the technology sector apart is that these things tend to happen much faster. It is commonplace for a business in this space to have instant and unpredictable hypergrowth and need to rapidly scale all areas of their operations to accommodate this. Implementing systems that are cost effective at an early stage but are primed for this growth is key, and on that basis, it is no surprise that the tech sector puts cloud technology at the heart of their operations.
In addition, the potential for hyper growth brings opportunities for both a large and rapid return on investment, which is why speculative investment is rife in the sector. This form of investment comes with high expectations and it is important to ensure that stakeholders (such as business owners and investors) are kept suitably informed of the ever-changing business position. T here are a few key metrics that are used in this sector, such as customer conversion rate, retention rate and satisfaction, as well as the very valuable spend per customer. Whereas most businesses can rely on standard management accounts, most of these By utilising cloud technology effectively, this underlying data can be stored in an accessible manner and updated in real time via integration to other systems. This not only enables the business to benefit from internal efficiencies, via the automated data share, but also enables the conversion of business insights into relevant information held in these systems. For example, you can pull data from your CRM or marketing system, website, social media accounts, finance records as well as others. This enables the reporting of the key metrics mentioned above, as well as many others. Now this all sounds great, but there are several things that need considering when looking to make best use of these dashboard tools. These tend to follow the logical process of:
indicators are non-financial and so need to draw on information from in different sources. Traditionally this would have been a manual and time-intensive process where data was always out of date due to how fast the business was moving.
Business dashboards have been growing in fashion in both operational and financial systems over the years. As well as those embedded in pre-existing set-ups, there are also cloud-based consolidator and analytics dashboards that bring data together from multiple sources into a central view. Software such as Klipfolio and Cyfe enable businesses to benefit from using best of breed systems from an operational perspective without sacrificing the ability to report on data within.
Who requires access to information and how often do they need to see it
What information do they need to see and where would this information be held
What systems are being used to hold this information
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Generally, points 1 and 2 will determine whether a dashboard tool should be used and with it what other dashboard tool(s) should be used. Not all stakeholders will need to see live data, and you may not want them to see anything until it has been vetted. There may be many options here but ultimately what systems you are using will narrow this down, as not all dashboards link directly to all underlying systems. You can sometimes bypass this via an indirect link utilising a connector tool such as Zapier, but even these do have limitations on what data you can access in the underlying systems.
The best approach is to determine the reporting requirements prior to implementing systems as the optimum combination of software can be selected to not only maximise flexibility and efficiency of operations but also guarantee systems will integrate in the correct manger to enable the reporting. Once a number of systems have become embedded in operations it is harder to make these changes. Businesses selecting and implementing systems will frequently utilise an external consultant to get guidance on what systems to bring in. Historically these consultants have tended to have an IT background, with a focus on operations and not overarching reporting requirements.
Aligning your IT strategy with your financial strategy is key to getting the most out of your business and therefore utilising a consultant with experience in both areas will help ensure this is suitably considered.
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Research & Development Tax Relief is Evolving As many readers will already know, Research & Development (R&D) tax relief is a government incentive to encourage companies to innovate and push the boundaries of science and technology.
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Keen to make the UK a world leader in R&D, the tax relief has become more generous in recent years and enables some companies to claim a cash repayment from HMRC. As a result of this, the number of companies making claims for R&D tax relief has doubled in the last six years to more than 85,000 claims per year. W ith the aim to increase spending on R&D from 1.8% of GDP to 2.4% of GDP by 2027, the government is eager to encourage R&D Given the increased scrutiny, it is vital that any company considering making a claim, seeks professional advisers who fully understand the mechanics of the tax relief and can advise on which projects qualify for enhanced relief and, just as importantly, which projects do not. We have seen an increasing number of cases of companies being cold called by ‘specialist’ R&D tax advisers who have ‘guaranteed’ that the company will be 100% successful in making
However, what the Chancellor gives with one hand, he takes away with the other, and there will also be a tightening of another aspect of the relief. From April 2023, only expenditure on R&D activities undertaken within the UK will qualify for tax relief. The Chancellor says that this is to ensure that the reliefs incentivise UK innovation and are appropriately targeted in a way that best benefits UK industry, as well as bringing the UK R&D relief in line with similar tax relief in the US and Switzerland. The change is however a significant shift from the current position whereby the R&D activities can be carried out anywhere in the world as long as they are on behalf of a UK company. It will have a huge impact on many companies who effectively outsource their R&D away from the UK. Increased Scrutiny As the cost of R&D tax relief to the Exchequer increases, claims for the relief has come under increased scrutiny from HMRC, who have recently hired 100 new inspectors to focus solely on the review of R&D claims. Over the past 12 months we have seen both the number of investigations into R&D claims and the number of tax cases brought by HMRC start to increase.
activities. Currently, R&D tax relief accounts for £7.5billion of the £38.5billion spent each year in the sector so it is safe to say that the tax relief will remain for some time to come. However, to ensure that it meets the overall objective of growing spending on R&D and delivering wider spill over to the UK economy, it will need to evolve. Changes Ahead In the recent Budget, the Chancellor announced a number of changes to R&D relief which are due to come into force from April 2023. These changes include a widening of the categories of expenditure which are eligible for enhanced tax relief to take into account changing technology. From April 2023, expenditure incurred in the purchasing, manipulating and cleansing of data for use in R&D activities will qualify for enhanced relief. Similarly, costs for cloud computing used in R&D projects will also benefit from enhanced R&D tax relief, bringing the tax relief more up to date with the changing pace of R&D projects.
an R&D claim despite knowing little about the company or the work that it undertakes. In these cases, if something seems too good to be true, it usually is! Within the Tax Advisory team at Scrutton Bland, our aim is to ensure that our clients take full advantage of any and all tax reliefs that are available to them but also to shield them from the risk of a time consuming, stressful and expensive tax enquiry. We do this by working with our clients over the long term, building relationships and fully understanding the businesses we work for so that we can provide comprehensive, tailored advice. So, if you think that your company might be eligible for R&D tax relief, contact our team for an objective review of your circumstances.
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Is it a bird? Is it a plane? No, it’s a drone!
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The popularity of unmanned aerial vehicles (or drones) has been rising, both for private and commercial operators. Events such as weddings are now often filmed using overhead camera drones, and they are regularly used by farmers to track livestock and monitor crops. However, drones are expensive to purchase and costly to repair if damaged, so it is worth thinking carefully about your insurance options if you are using a drone for your own enjoyment or for business use.
Key points to bear in mind if using a drone for recreational use
Do I need drone insurance? Whether or not your insurance company covers your drone depends on how you use it. Many homeowners insurance policies classify small drones as model or hobby aircraft, so if you use the drone recreationally for at least 90% of the time, your policy may classify the drone as your personal property for damage to the drone, theft or loss, but you should check the terms of your policy to be sure of this. It is also worth noting that many insurers exclude damage caused by drones from their home insurance policies, so you may wish to think about personal liability insurance (which is mandatory for the commercial drone use) so that if your drone crashes into someone’s property, or into a crowd, you would be covered for damages and legal costs. Where do I get drone insurance? Drone insurance is provided by specialist insurers who are experienced in the risk management of unmanned vehicles. Your Scrutton Bland broker can advise you of the appropriate policy for you, and the options available. Many of the policies are expensive, as they are aimed at the professional drone operator, so it is worth taking advice, if for example you only need pay-as-you-fly cover, rather than an annual policy. All commercial pilots must have liability insurance for their drones and will need EC785/2004 insurance, regardless of whether or not they have a drone licence. Whilst the technology and applications for drone use are developing, the associated risks are also growing. Knowing which insurance cover is appropriate for your drone and the way that you use it can save time and money.
Drones weighing under 250 grams are classed as a toy. Any drones above that weight need to be registered and the user needs to pass a competency test Small (under 25 kg) unmanned drones used for recreational flights are regulated by the Civil Aviation Authority (CAA) If your drone has a camera you must have permission from the CAA to fly it within 150 metres of a built-up area, or above a crowd of more than 1000 people You must always keep your drone within your line of sight. Using a camera viewfinder is not an acceptable alternative The maximum altitude a drone can fly is 120 metres (unless the drone is required to overfly an obstacle taller than 105 metres in which case permission is needed from the owner of the obstacle, and the drone needs to be 15 metres above and 50 metres horizontally from the obstacle) Never operate a drone near ‘no fly’ areas such as prisons, airports and airfields, government buildings, restricted areas, or at night. Anyone found flying a drone dangerously or recklessly faces a prison sentence of up to 5 years and an unlimited fine.
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The Digital Sector in East Anglia – how are we doing? The Department for Digital, Culture, Media and Sport (DCMS) recent report ‘Assessing the UK’s Regional Digital Ecosystems’ makes for interesting reading regarding the health of our region’s tech sector in comparison to others, and the opportunities for growth over the coming years. A t a National Level, the digital sector employs 1.66 million people, accounting for 4.9% of all employment and the sector contributed £148 billion (gross value added – GVA) to the UK economy representing 7.6% of the whole. The report draws attention to the developing clusters in Norwich and Ipswich providing much needed diversification away from the obvious hub of Cambridge and draws attention to the important work being carried out by the various hub/incubator providers such as Innovation Martlesham, the Innovation Centre and Knowledge Gateway (Colchester) and the EpiCentre (Haverhill) as well as the key contributions of Tech East and Anglia Capital Group, both of whom Scrutton Bland is pleased to partner with.
The report notes that whilst growth has been strong across all of the UK’s regions, this has been particularly pronounced in larger cities which is perhaps a negative for our region on the basis it contains only one such location (Cambridge). The overnight adoption of large scale home working brought about by Covid-19 is a double edged sword in this regard, because whilst it has broken down some of the geographical boundaries and the draw of the larger cities, it has at the same time introduced significant wage inflation to the regions where talented people that did not want to move or commute to places such as Cambridge and London, accepted the reduced earning capacity that brought about can now enjoy the best of both worlds from home. Nationally and regionally, access to talent was consistently highlighted by the DCMS as the most significant barrier to growth. This is by no means unique to the tech sector, but given that the report highlights that growth of £41.5 billion and almost 700,000 jobs is achievable by 2025 nationally, finding innovative ways to break down these obstacles is essential if our region is to take its share (and hopefully more) of that prize. It is noteworthy that between 2016 and 2020, 73% of private funding raised in the digital sector went to London-based businesses. Obviously anything that can be done to shift that dial by even a small percentage would provide a welcome boost to the regional sector and the economy generally. Looking more closely at the report’s findings on the East of England’s digital sector it is interesting to note that it accounted for 5.1% of total output, but perhaps a little disappointingly the annual growth in the sector between 2014-2019 sat at 3% which is behind the national trend.
Agriculture and Insurance are two sectors that are synonymous with our region and the report rightly points to the significant concentrations of AgriTech and InsureTech businesses which have huge potential for growth over the coming years.
Of course, there are challenges which we as a digital/tech community need to focus on to address; most notably:
• The region is in the lower quartile for growth in the sector nationally
• Earnings as a percentage of house prices are the second lowest in the UK regions
Ultra-fast broadband coverage is poor
• Top performing graduates are leaving the region, even accounting for the inevitable impact of the international draw and subsequent return home of some Cambridge students • Perhaps most worryingly, despite the expertise of the region’s Higher Education institutions, the number of computing students relative to population is the lowest of all UK regions. None of these issues are insurmountable, but only by being cognisant of them and working together to address them can we release the full potential that our region undoubtedly possesses.
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The Art of Making People Thirsty
Luke Morris, Corporate Finance Partner, offers his thoughts on how to go about raising start-up capital following his recent talk to the Ipswich and Suffolk Tech Network. No doubt you’ve heard the saying that “it takes money to make money”, and that was the slide I started with when speaking to these budding entrepreneurs.
Unfortunately, the saying fails to mention where the money actually comes from.
But what about when you are pre-revenue, still developing an idea or a technology, or trying to prove a concept? Or what if you are trying to exit your business and realise some cash on the table for the shares that you hold in a business you have built up? The bank will not be a buyer then, so how do you go about generating the liquidity? In my experience the basic lessons of early- stage fundraising are equally applicable to shareholders who may be looking to exit their business by private sale.
Private investors, including “Private Equity”, will often quip that “if you want a loan, go and speak to the bank”. So, we are talking equity investments here, not debt. Why? Equity will become more rewarding than debt for the investor if the company is successful. Equity unlocks the potential of synergy for the investor, who may have good reasons to pay you substantial goodwill, over and above the book value of your net assets, in recognition of all of those nebulous intangible factors that you have built up in developing your business. This is the “risk and reward” factor that leads to the high valuation multiples that you will have read about. In effect, an equity investment offers no means of transaction reversal; that is, you marry your investment partner—unless he or she wants to divorce you. As a result, for all intents and purposes many private investments are permanent equity investments.
In theory the answer is easy. Companies primarily raise finance in two ways: by incurring debt or by selling equity. In practice it is more complicated. It is one thing when you are up and running, with a profitable established business, accumulated assets, and a trading history. With collateral and a demonstrable and predictable ability to pay interest and capital back there will be no shortage of visits from the established banks looking to place debt with you.
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What makes a good equity-raising entrepreneur? When you start a company everything you need to run it takes money, and the money you need will not just be given to you. No magic grants, no silver-bullet start-up loans. The serious dosh has to come from somewhere else. Therefore, entrepreneurs need to relish raising capital from the get-go. Though they may not have been academically or experientially trained for the task, it is “entrepreneur activity 101”. It is an activity inextricably woven into the job description, and the success of the troublesome task of raising capital will be inextricably woven into the success of the venture.
But little information exists on the way in which high net worth private investors choose a target of interest, or how funds or private venture capital screen thousands of deals a year to decide what they will invest in. The clue is in the name: private. They are difficult to reach. They safeguard their privacy, expressly avoiding any form of solicitation. Moreover, these investors do not have to invest. Their distinguishing characteristics are that they are very smart, they appreciate honesty and straightforward dealings, and they understand what you are going through. In many ways they are not dissimilar to you and, in many cases, they were once doing exactly what you are now trying to do The main lesson to recognise for entrepreneurs is to build on these similarities in the quest for capital:
This last point is the most challenging and, in my experience, is the defining success factor. The three questions to ask are as follows: 1 Is your deal financeable? Is the management team there, is the market there, do you understand your competition, is your industry emerging or growing, is your technology protected, does it work??? 2 Are you financeable? It is one thing to think about whether the deal is financeable, quite another as to whether you yourself are capable of being funded. One of the facts of life in private placement investment is that “plans do not get funded; people get funded”. No one can expect an investor to believe in a venture in which the entrepreneur has no confidence. 3 Is your risk financeable? Will the management team stick together, could the market change, is there still growth ahead??? As I have said, the main factor is that high net worth private or business angel/early stage venture capital investors, and even private trade buyers, do not have to invest. For this reason, the private investor has a different take on things. The private investor’s reasons for investing are not always exclusively economic. Therefore, the entrepreneur faces difficulty in judging which approach to adopt in trying to locate, attract, and build relationship with such investors. We can help with this process, and have plenty of experience with private investment placement. As Herman Holtz said, “Anyone can sell cold drinks to thirsty people. Marketing is the art of finding or inventing ways to make people thirsty.”
So the first thing to say is you need to have the intestinal constitution for the task.
You need to overcome your insecurities about raising capital and asking for money. You need to reassess your values and attitudes towards asking for money and develop the skills to make money raising part of your job description. You need to take time to appreciate the art of successful private investing from experienced veterans who have made the most and survived to tell their stories.
The good news is that macro-economic conditions have created of substantial amounts of capital in recent years in the pockets of private (both individual and institutional) organisations. This has impacted general capital availability and competition among providers of that capital. A raft of alternative, non-traditional capital resources are now out there. It’s a “seller’s market” as far as capital raising opportunities for investee companies are concerned. The more challenging news is that we are talking entirely about the private investor market. This market is the principal source of serious capital contributions to smaller companies. Successful private investors deliver insight directly into the process of high risk, high return investing.
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Meet the Team We have a long-standing association with the tech sector and our specialists have a thorough understanding of the opportunities and challenges facing the industry.
We seek to build long-term, trusted relationships with our clients. It is important to us that we understand our clients’ business and personal aims and objectives, in order that we can provide bespoke and personal advice.
Get in touch with a member of the team to see how they can help you.
Ryan Pearcy SB Digital Director ryan.pearcy@ scruttonbland.co.uk 01206 417218
James Tucker Business Advisory and Cloud Accounting Partner james.tucker@ scruttonbland.co.uk 01473 945761 Tim Mulley Insurance Partner tim.mulley@ scruttonbland.co.uk 01473 945741 Chris George Tax Advisory Director chris.george@ scruttonbland.co.uk 01473 945836
Luke Morris Corporate Finance Partner luke.morris@ scruttonbland.co.uk 01473 945731
Emma Emerson Insurance Director emma.emerson@ scruttonbland.co.uk 01206 417175
0330 058 6559 scruttonbland.co.uk
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