R&D under threat as tech firms struggle for funding

Number of businesses finding it hard to secure investment has doubled, says research

Cash is harder to find for tech firms

Technology firms are struggling to find investors willing to put up cash to fund growth and new product development, warn experts.

Research by accountants BDO Stoy Hayward suggests that only 38 per cent of UK technology, media and telecoms (TMT) companies are finding it easy to obtain new funding, compared to 73 per cent in 2008.

And the number of TMT businesses saying they are finding it difficult to secure external funding doubled to 30 per cent from 14 per cent last year.

Tech firms often turn to third-party investors to raise cash to fund expansion or research and development (R&D), and BDO Stoy Hayward’s head of TMT, Julian Frost, said the situation has serious consequences for future innovation.

“We are really concerned about TMT firms' ability to access the funding they need to grow their businesses effectively. We’re hearing increasing levels of frustration being expressed by TMT businesses as financiers say to them: ‘Meet your growth forecasts and we’ll support you with additional finance’. These dynamic innovative businesses need the additional capital to meet their growth forecasts. All this is just creating a chicken and egg situation,” he said.

“As the economic environment remains tough over the coming months, the situation is likely to become increasingly difficult and many businesses may feel that funding has dried up completely.”

Most firms have been forced to cut back on plans to raise extra funds. The BDO research suggests that 55 per cent of TMT companies do not plan to look for external capital, compared to just 17 per cent last year.

The biggest change has come in the likely sources of finance as traditional funders suffer from the credit crunch. In 2008, 59 per cent of TMT firms turned to investment banks, private equity and capital markets for funds – but only 14 per cent have done so this year. Meanwhile, the number of businesses asking for bank loans almost doubled from nine per cent to 17 per cent.

“TMT businesses have found themselves in an ironic situation as the banks, particularly those who have been nationalised, are being encouraged - if not pressurised - to lend. However, there is a perception among businesses that obtaining bank funding has become a very protracted and expensive process,” said Frost.

“If companies continue to believe access to funding has dried up then only those in desperation will be approaching the banks, and the banks will see fewer high-quality lending opportunities. It’s a vicious circle. If this continues there is a real risk that investment in R&D, the lifeblood of many TMT businesses, will dry up, stalling UK innovation.”