Cash is king for Irish start-ups and early stage companies

Many Irish start-ups and early-stage companies may have just enough cash to last six months, warns Jason Bradshaw from JPA Brenson Lawlor.

The Irish economy has been brought to a standstill following the outbreak of Covid-19 across the island, which has seen the vast majority of businesses having to limit or cease trading until further guidance saying otherwise is issued by the government.

This is undoubtedly a turbulent time for all businesses; however, start-up companies are facing even greater challenges due to the potential inability of many start-ups to access capital required to continue operating or to make their business model a reality.

JPA Brenson Lawlor has been, and will continue to be, on call and ready to provide professional advice to our current and prospective start-up and early-stage tech company clients. We have continued to advise that clients take a pro-active approach to managing their cash and communicate with funders to ensure they are best placed to access the cash they need. We work with clients from the following accelerator programs and VCs: Techstars, Launchbox, NovaUCD and Frontline.

Those who can weather this storm will be best positioned for growth in the medium-to-long term.

The current financing landscape

Many start-up and early-stage companies will face a difficult task of securing the funding needed to bring their products/services to the market. The task of securing capital is always a difficult process for start-ups for several reasons:

• Scaling back of traditional lending post-2008 financial crisis
• Difficulty in standing out to prospective investors
• Intense competition from other start-up companies
• Categorised as a high-risk investment

However, whilst these barriers to capital are still prevalent, there has recently been a new and challenging barrier introduced – Covid-19. The recent pandemic has significantly impacted the financing landscape for start-up companies and brought a fresh wave of funding challenges to overcome. Start-up companies now face delays in the implementation of their business model due to government restrictions, almost zero levels of consumer demand in many sectors and a shift in focus for almost all sources of funding.

Government restrictions will certainly impact the plans of many start-ups looking to roll-out new products or expand their current operations. Until there is a nationwide easing of the restrictions, it will be difficult for business plans to unfold as intended. The government restrictions have also confined the vast majority of the population to their homes, thus creating a huge drop in consumer demand for many sectors. These challenge’s impact start-ups and established businesses in much the same way, but it is the potential lack of resources which compound the pressure for start-ups.

A recent survey by Scale Ireland found that the key challenges faced by early stage innovation driven companies are the slow responses by key actors, lack of co-ordination between government, banks and others and the thresholds for supports being too high, with support instruments not adequately matching needs.

Outside of the close friends and family circle, start-ups primarily seek external funding from willing investors. However, in the current economic environment investors will be focusing their attention on serving and maintaining their existing portfolio to ensure that current clients/companies are being given all the resources required to secure their future.

The current crisis may lead to lower company valuations in the short to medium term and this may entice investors to part with their cash for businesses which they see as good value. There may be opportunities for start-ups to stay afloat through investor cash, but with the trade-off having to give away increased shareholder equity. Start-ups should focus their attention on keeping the business afloat until the markets hopefully return to normality within the next 12-18 months.

Preserving cash

The vast majority (80pc) of Irish start-ups only have enough cash to sustain the business for the next six months while the remainder (20pc) only have enough cash to get them through the next month according to recent research by Scale Ireland. These are startling statistics and highlights the urgency required in minimising existing cash burn whilst also securing additional funding.

During the current economic climate, we are likely to see many businesses fail as consumer demand has fallen dramatically. With the possibility of normality not returning until a vaccine is found, many businesses will continue to see their cash reserves depleting and the revenues dwindling. Many start-ups will fail without pro-active cash management, those who can stay solvent will be best poised to take advantage of the economic growth which has historically followed large economic downturns. Some tips for start-ups and early stage tech companies on preserving cash are as follows:

Minimise cash outflows: The first priority will be to review all elements of expenditure, focusing on the largest cost centres e.g. Wages, R&D etc. Cash outflows can be minimised by seeking loan moratoriums (where relevant), abatement or deferral of rent and rates, delaying of tax payments where allowable by Revenue, negotiating with employees on reduced hours or pay and shelving non-essential spending e.g. new capex projects or non-core employees. Saving cash now may be essential in order to secure the viability of the business for the next six months. Cash is King and start-ups should budget accordingly.

Communicate with your funders: It is important that start-ups are transparent with their investors and/or funders so that both parties understand the current cashflow risks of the business. Most funders will currently be focused on their existing portfolio companies in order to maximise their chances of survival, communicating clearly with funders on required support can result in additional capital being made available to help your business weather the storm or lenders providing moratoriums on repayments and refinancing options. Communication will be essential for pre-revenue start-ups who will need to instil a level of confidence in funders that their business model still has potential to succeed.

Seek government support: The government has announced a wide range of supports to help businesses and start-ups navigate these difficult times. Start-ups should make use of all supports available to them as these may prove to be an essential lifesaver in accessing the liquidity needed to stay afloat. For example, the temporary wage subsidy scheme can see start-ups receive a subsidy from the government of up to 85pc of an employee’s salary (if it can be shown that investment has reduced by 25pc), this level of cash support is unprecedented. These schemes will help keep many Irish businesses afloat whilst also helping to retain key staff which are often vital to the success of a start-up business.

Funding options

Funding is the fundamental aspect of success for start-ups, as without sufficient capital a business will struggle to grow or fully realise its potential. Start-up founders should familiarise themselves with the various funding options available. Some of the most common funding options available to start-ups are as follows:

Personal Equity: Self-funding is a very common method for start-ups which involves using your own cash or that of friends and family, to get your business off the ground. This funding option is often utilised at the very early stages of a start-up’s life cycle.

Crowdfunding: Crowdfunding is a funding option whereby a business raises capital from a large amount of investors. Start-ups can utilise crowd funding by outlining the business case for their service/product and offering up portion of equity in return for the successful raising of the required capital. Crowdfunding can also be completed without giving up equity, through donation based, exchange based or lending based crowdfunding.

External Investors: Funding can be sought from external investors who take an equity position in the company in exchange for providing capital. Angel investors or Accelerator programs will often invest seed capital at the very early stages of a start-up whilst Venture Capitalists will invest during subsequent funding rounds when the potential of the business becomes more established. Angel investors typically invest smaller amounts than venture capitalists, but both will generally want a 15pc/20pc plus equity stake, whilst Accelerator programs often require circa 10pc equity stakes. External investors will often present themselves in the early stages of the funding life cycle.

Employment Investment and Incentive Scheme (EIIS): The EIIS Scheme was established by the Irish Government through the Revenue Commissioners. Third party investors can make investments into start-up companies and they can then receive income tax relief of up to 40pc on their investment. The funds are repayable by the Company to the investors after four years and can be issued as non-equity shares. This option is a very attractive opportunity for start-up owners as it is possible to avoid diluting their equity in the company. For more details on this scheme please click here.

Lending Institutions: Lending institutions such as legacy banks and alternative financiers may provide funding for start-ups, although it is often quite difficult due to more restrictive lending criteria brought about after the 2008 financial crisis. Funding is provided on the basis that it is repaid along with an interest rate and applicable fees. In order to secure bank funding, the business must be cash-generative and be able to repay monies borrowed on a monthly basis.

Government Support Programmes: There are a range of Government programs that assist start-ups by providing capital. Support is provided through cheap loans, vouchers, tax credits and grants etc. A list of financial supports for Irish businesses impacted by Covid-19 can be found here

Top tips for securing funding

Get Your Pitch Right: Arguably one of the key factors of success for start-ups is getting the pitch right. The pitch is vital to helping your company stand out from the hundreds of other transformative ideas out there. The pitch will consist of several elements which when combined will instil confidence in potential funders that your business is the right business for which they should part with their money. The pitch will entail drawing up a business plan which conveys the business model, market analysis, financial projections and ultimately the story of where this business intends to go and how it intends to get there.

Target The Right Funders: Whilst every start-up founder wants the capital required to make their dream a reality, they should not jump the gun and make hasty decisions on funders. The relationship between start-ups and founders should be mutually beneficial and have a common goal in moving the business forward. It is important the founders assess whether a potential investor is the right fit culturally for their business as the investor will more often than not will become part owner through their acquisition of an equity stake. Founders should ensure their potential investors are also committed to the business idea and not just the financial reward. The investor should also have resources other than capital from which the start-up can leverage e.g. connections, expertise, office space etc.

Demonstrate Your Personal Credibility: In addition to the business plan, it is crucial the start-up founders understand the importance of demonstrating their own credibility to funders, who are often investing just as much in the person as the business. Venture Capitalists, investors and lenders all want to know whether you have the competency, knowledge and grit needed to lead the business on a successful trajectory.

Use Accelerator Programmes: Accelerator programs are an excellent resource for early stage tech-start-ups, not only do members of these programmes benefit from seed capital but they access mentorships, networking, and recognition opportunities. Applications to Accelerator programs are competitive and places are usually reserved for the most promising start-ups. These programs aim to literally accelerate the growth of your business and provide you with additional resources needed to succeed. We here at JPA Brenson Lawlor work with many accelerator programs and have advised several high potential start-ups within these programs, assisting them with financial and strategic objectives.

Financial supports for businesses impacted by Covid-19: Many supports have been created or expanded to support SMEs in Ireland during this time including from Enterprise Ireland, SBCI, Revenue Commissioners, the LEOs, Microfinance Ireland, to name a few. A list of financial supports for Irish businesses impacted by Covid-19 can be found here

Looking forward

There needs to be a coordinated effort by many actors in the Irish start-up sector in order to ensure our famous start-up culture is preserved. Existing start-ups should focus on managing their cash and securing required capital, government agencies will need to focus on expanding existing supports to be more inclusive of the broader start-up sector and there will need to be continued encouragement for innovation so that we do not lose a generation of start-ups.

Whilst it is easy to focus on the negatives for start-ups during this pandemic, we should recognise that there is potential for start-ups to flourish during these uncertain times. Originally the pandemic was viewed as a systematic shock which affected all businesses, it is now becoming clear that some sectors are benefiting such as logistics, education, online entertainment, Information Technology, and food retail.

The huge increase in those working from home is likely to fundamentally change the way businesses operate. Businesses can save money on rent and overheads through allowing employees to continue working from home and employees are likely to be much happier as a result of less commuting and more flexibility in achieving their required output.

Working from home will provide many new business opportunities through the need for communication solutions, IT hardware & software, and cyber security solutions. The logistics sector has seen a rapid rise in demand due to the current pandemic, a rise which is unlikely to fall off in the future as people become accustomed to online ordering convenience and reduced risk of contagion.

It is likely that we will see start-ups begin to disrupt this sector and optimising logistics through technology such as drone delivery or the improvement of transport routes due to machine learning and artificial intelligence. Dublin based Buymie, a same day grocery delivery service, recently raised €2.2m in its latest funding round, which shows funders still have appetite for innovative and scalable start-ups.

Moving forward, we are likely to see choppy waters for Irish start-ups, but every storm eventually passes and with this passing, opportunity often comes.

It is important that we recognise that this black swan event will force us to innovate, which may prove extremely beneficial for those who capitalise on opportunities presented.

Jason Bradshaw FCA is Corporate Finance Partner in JPA Brenson Lawlor, Chartered Accountants. Jason specialises in providing financial advisory services for start-up and early-stage tech companies and works with numerous clients from local and international accelerators, venture capital firms, banks and Enterprise Ireland.

Published: 8 May, 2020