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Current trends in tech exits and financing

Shoosmiths’ London office hosted its first hybrid seminar on 23 November, With Alastair Peet, Steve Barnett and Lisa Faragher from our VC team teaming up with Pietro Strada and Paddy MccGwire from technology focused corporate finance house Silverpeak to discuss current trends in tech market exits and financings.

The seminar also included a panel discussion with David Cocks, co-founder of CloudTrade and Simon King, Partner at Octopus Ventures.

The seminar was broadcast live to an audience that spanned North and South America, Europe and Asia.

Technology trends

The presentation highlighted that global investment in tech businesses has doubled in value since 2020, with figures having reached €70 billion in H1 of 2021 following increased investor appetite in the UK and Europe since the COVID-19 pandemic. Statistics shared by Silverpeak also suggest a positive uptick in investments in the last 6 months, due to a greater availability of capital and new tech fund entrants wishing to invest.

The definition of ‘technology’ has expanded, with innovation spreading across more sectors than ever – including clean tech, mobility tech, health tech and fintech in particular. The US and Canada remain the most active markets, although Europe is catching up - with the UK boasting the largest concentration of tech targets within the region.

Simon King of Octopus explained that ‘valuations are running high’ as the sector is growing in Europe and there is now more competition from US investors for European targets, once considered more affordable. Growth is not just being seen across funding but for M&A and IPOs too.

Companies are also now staying private for longer as there are ever increasing options to raise funds.

2021 is expected to be ‘the year of the SPAC’ (special purpose acquisition companies), with these firms becoming the preferred way for many experienced management teams and sponsors to take companies public. In a SPAC transaction, the private company becomes publicly traded by merging with a listed shell company—the special-purpose acquisition company (SPAC).

Unsurprisingly, COVID-19 has also had an impact, both positive and negative. The online food delivery sector saw the largest growth during the pandemic, followed by an increase in quantum computing and the use of data centres. Conversely, a lack of interest continues within the travel technology market – a result of damaged consumer confidence and demand.

Legal insights

Shoosmiths’ partner Steve Barnett and senior associate Lisa Faragher addressed the impact of the mandatory approval regime under The National Security and Investment Act 2021. This regime becomes effective in January 2022 and provides that transactions in 17 specified sectors where control of a target company is acquired will require notification to, and prior approval by, the government. The regime is intended to allow the government to identify transactions which give rise to national security concerns, before those transactions are implemented, and is likely to result in a significant number of transactions being submitted for approval, partly as a result of the threshold for the control test being set at the very low level of 25%, and partly because a failure to obtain approval will render the transaction void.

The 17 broad sectors requiring mandatory prior approval are:

Advanced Materials, Advanced Robotics, Artificial Intelligence, Civil Nuclear, Communications, Computing Hardware, Critical Suppliers to Government, Cryptographic Authentication, Data Infrastructure, Defence, Energy, Military and Dual-Use, Quantum Technologies, Satellite and Space Technologies, Suppliers to the Emergency Services, Synthetic Biology and Transport (ports, harbours and airports).

It will be crucial that parties and their advisers take appropriate care to establish whether approval is required – the consequences of getting it wrong are significant. (Full briefing can be accessed below).

Advice for founders

The panel discussion opened up questions to the floor and useful advice was imparted by CEO of CloudTrade David Cocks, following the sale of CloudTrade earlier this year.

His advice:

  • Register your company’s IP as early as possible
  • Speak to others who have sold their business
  • Try to keep a clean cap table and offer equity to employees wisely
  • Incentivise employees at every level (either with share options or an alternative benefit) to ensure they keep focused on operating the business throughout the sale process.
  • During the sale process consider how you will concentrate on both the operational workings of the business whilst also driving the sale.
  • Involve key stakeholders from the outset and keep them on side, establish those redlines whilst openly acknowledging the sale process will not always run smoothly.
  • Keep the intricate details of any transaction within the executive team.
  • Ensure that team morale is managed throughout.
  • Avoid rumours impacting a successfully established team culture and affecting the performance of junior staff.

Above all, the power of having strong legal and financial advisors in place from the outset was emphasised throughout discussions. The opportunity to utilise that resource as soon as strategic opportunities arise is invaluable, such as when being approached by a potential venture capital investor or an investor at a later stage of the company’s life-cycle. Advisers can help to increase the exit value through their involvement, so worth involving as early as possible.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2022.

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