Horizon scanning
Investment and exits
For many high-growth companies, equity investment is a crucial ingredient to help them grow and scale. Equity investors are driven by the potential for high returns and the opportunity to be involved in a company from the ground up. The chart on this page shows the role that equity investment has played in the growth journey of this year’s Fast 50 over the last five years.
The companies secured an impressive £1.26b last year. Although the number of deals completed in 2021 was the same as in 2019 the amount of equity investment secured in 2021 was over seven times that raised in 2019. This speaks to the growth journey that this year’s Fast 50 are on; they are becoming increasingly attractive investment opportunities.
Of course, 2021 was an unusual year for investment for the UK’s private markets. The COVID-19 pandemic resulted in the creation of new business models suited to unprecedented times which attracted investors seeking tech-driven growth amid the uncertainty.
The investment environment is different in 2022. The first half saw the Fast 50 raise a significant £688m from funders including Equity Gap, Seedrs, and Octopus Ventures. This speaks partially to the resilience of fast-growing UK tech companies - they can progress even in times of economic uncertainty.
Looking forward to 2023, it is unlikely that the UK’s private markets will witness the same level of overall investment as it has over the last two years. However, funds have raised significant capital during 2021 and 2022 and will continue to deploy capital to growing companies with innovative ideas such as the Fast 50.
“The biggest risk for tech companies would be to completely stop investing in innovation, R&D and growth... To put themselves in a position to reach profitability and achieve better margins, they need to make sure they are prioritising sustainable growth.”
Sophie Winwood
Investment Principal, Anthemis Group
Gender diversity
There are many reasons why gender diversity among founding teams is important for the UK’s high-growth economy. A key reason is that it can help to create more balanced and effective teams. When there is a mix of genders on a team, different perspectives and ideas can be brought to the table, which can lead to more successful outcomes.
There is a significant opportunity to see more balance among the gender breakdown of Fast 50 company founding teams. This is also true of the UK’s wider high-growth population. As the charts show, a significant majority of the Fast 50 companies have all-male founding teams. This aligns with the UK’s population of scaleups (companies that have grown an average of 20% year-on-year over three years) based on data from Beauhurst.
The Alison Rose Review of Female Entrepreneurship was published in 2019 and found that only one in three UK entrepreneurs is female. The review also found that women are less likely than men to start businesses and that businesses owned by women are less likely to grow and scale. The review made many recommendations to increase female entrepreneurship in the UK, including increasing access to finance, networks, sponsorship, mentorship, and role models.
Aoife Zakaras-Nally, Chief Commercial Officer of femtech company Elvie, highlighted in her interview how the company initially faced difficulty accessing finance because it was creating technology for women. “Series A was really difficult to be completely honest because at that point femtech was just a non-entity, it didn’t exist,” explains Zakaras-Nally. “We just had door after door shut on us. It was a niche industry, despite the fact that it’s 50% of the population. Investors really struggled to talk about female bodies.”
Part of the rationale for the new Fast 50 Women in Leadership category is to elevate the incredible success stories of companies that have a woman CEO or a founding team of at least 50% women. Hopefully, by providing a platform for women in technology and entrepreneurship, we can help to change the gender diversity of future cohorts of Fast 50 companies.
Loubna Bouarfa, founder and CEO of OKRA.ai and inaugural winner of the Fast 50 Women in Leadership category, says in her interview: “It’s important for women to be part of the new revolution of AI and technology. It’s also important to have women equally involved in creating the new systems that will make future decisions. It’s important for our world. For all this to happen, it is absolutely necessary to have an inclusive and diverse culture. It is the core of innovation work itself.”
“I don’t buy into the notion that there are not enough diverse candidates in the market. If a recruiter doesn’t send us a diverse range of candidates for a role we are hiring for, we won’t work with them.”
Ylva Oertengren
Chief Operating Officer, Simply
What are the key tax issues for CFOs at VC-backed companies?
Paul Clay
Partner, Tax, Deloitte LLP
International workforce
We know fast-growing VC-backed businesses care deeply about their culture and people, and flexible working can help increase employee engagement, as well as attract and retain top talent. Share schemes are another valuable incentive, and you may be looking to introduce plans more widely across your team. If these are part of your growth strategy, there are a few things to keep in mind.
Geographically mobile employees
Having a geographically mobile workforce can incentivise employees and help build global brand awareness and an international client base. However, there are corporate tax risks and payroll obligations when people work cross-border.
For example, inadvertently establishing an overseas branch or putting undue pressure on tax residence status can lead to more operational and administrative complexity, compliance costs, tax risks and in extreme cases, litigation.
There are safeguards, such as introducing a remote working policy to restrict the duration and types of activities performed overseas. But the level of protection this affords can depend on the work involved, the relevant tax authority, and any double tax treaty that may be available. We recommend businesses understand the risks, recognise the uncertainties and adopt a case-by-case approach.
Incentives for overseas employees
Care is needed when awarding share incentives to employees in new jurisdictions, and it’s worth seeking tax and legal advice at the earliest opportunity to make sure local requirements are met. Often overseas tax rules can be very different to your local jurisdiction, and approaching the grant of (even unapproved) options to overseas employees can result in a myriad of issues, which can be highlighted upon any due diligence.
For example, unless options granted to US-based employees are appropriately structured, this can result in annual, and additional tax charges for the US employees, as well as complications for the employer. These issues can include the need to grant at a certain market value, obtain valuation reports and/or have specific clauses included regarding timeframes for the exercise and/or sale of the underlying shares.
Using ‘employers of record’ for overseas offices
More companies are using employers of record - independent third parties that hire people and run payrolls - in new jurisdictions. While this can offer greater flexibility and enable faster expansion, there can be complications:
- tax-advantaged employee share awards may not be available
- share plan rules, such as leaver provisions, need to be tailored to acknowledge participants are not group employees
- additional tax considerations can require very clear communication to make sure the employer of record operates the payroll with respect to the share awards, when required
- in the worst case, the granting of options to non-employees of the group (which in theory is the situation for the individuals on the books of the employer of record) could invalidate the entire option scheme, resulting in a number of adverse tax consequences for the group and its employees
As participants are not group employees, the legal and regulatory position will need careful review.
UK investment incentives
We are seeing rapid change, especially across the key incentive areas listed below. This will require planning to ensure reliefs are optimised for businesses.
R&D
After HMRC’s consultation on the R&D regime, the following will start to be introduced from 2023:
- the inclusion of cloud and data costs in R&D claims
- the exclusion of overseas costs from UK claims (with some exceptions)
- pure mathematic activities will qualify
- changes around compliance to tackle abuse. These include 100 new HMRC inspectors to review claims, R&D claimants being required to name advisors, and needing a senior officer to sign off R&D claims
Further changes are expected in the Autumn Budget on 17th November 2022.
Capital relief
The super deduction regime offering 130% relief on capital expenditure is now in force and in the Spring Budget, further changes were announced that may come in for capital spend.
These include:
- raising the Annual Investment Allowance to £500,000
- increasing Writing Down Allowances from 18% and 6% to 20% and 8%
- introducing First Year Allowances and full expensing so businesses can write off the costs of qualifying investments in one go
Patent Box
With the grandfathering of the old Patent Box regime coming to an end, companies are required to use the Nexus approach plus track and trace to claim the relief. In addition, with corporation tax rising to 25% in 2023, the benefit of Patent Box will increase from 9% to 15%.
Grants
The Government is announcing new UK grant funding for companies across all sectors, with a significant focus on sustainability and the race to net zero.
Global digital tax regimes
There has been a fundamental shift in the international tax landscape. The “user base” concept is increasingly being considered a key indicator of value-driving activity for tech businesses, alongside more traditional incorporation, “bricks and mortar” and “feet on the ground” reference points.
The OECD is continuing its work on addressing tax challenges associated with an increasingly digitalised economy, including international design and implementation of the Pillar 1 and 2 solution. Many countries, however, have taken unilateral steps to self-allocate taxing rights based on local user interaction. This brings businesses into the scope of new direct and indirect tax obligations across the world, creating huge complexities in assessing exposure and maintaining compliance.
The Deloitte Tax Atlas provides a global overview of these regimes. We would also be pleased to discuss any of these tax and legal requirements with you.
Emerging technologies
Emerging technologies are those that are still developing and are not yet widely commercialised. Such innovations are important because they have the potential to change the way we live and work by driving productivity and increasing standards of living. The chart on this page breaks down the top emerging technologies employed by this year’s Fast 50.
Companies are increasingly being targeted by cybercriminals and state actors, who are using sophisticated methods to disrupt operations, divert capital, and steal data. As digital technologies enable so many companies to reach new heights of productivity and profitability, they are also creating vulnerabilities that can be exploited. In such an environment it makes sense that we’re seeing the rise of digital security as an emerging technology. Fast 50 companies in this category include Panaseer which has developed software to assist businesses in producing and analysing metrics to understand the security of their data. London-based Xydus which has developed facial recognition software for user authentication of digital accounts, used by customers such as Adobe and Vodafone.
Big data deals with the storage, manipulation, and analysis of data that is too large or complex to be processed using traditional data processing methods. As our digital environment creates more and more data, big data tools can provide organisations with insights that they would not be able to obtain from smaller data sets. Often companies use such tools to streamline operations or better understand the diverse needs of customers. Fast 50 companies in this area include Cambridge-based OKRA.ai which develops machine learning software to enhance the speed of data analysis for life sciences customers and offers insights and predictions. And there’s London-headquartered Pupil which develops software that reconstructs 3D, real-world spaces digitally using massive datasets and machine learning.
A thread that links together the emerging technology areas for the Fast 50 companies is the sophisticated use of data. It provides the raw input that these technologies rely on to function. We will undoubtedly see Fast 50 companies making increasingly innovative use of data in the future.
“I’m a big believer in the intersection of markets. For example, tech and bio, tech and finance, research and technology - generative AI is an example. This is something the UK excels at, and in particular London, which is a melting pot of great ideas and people.”
Hussein Kanji
Partner, Hoxton Ventures
Location trends
Economic diversity is strongly linked with prosperity. When an economy is diversified, it is better able to weather economic downturns and periods of slow growth. A diversified economy is more resilient to shocks, be they economic or viral. Examining the regional distribution of the Fast 50 companies is informative because while London-centric, it shows that growth is possible across the country.
As the last five years show, companies in London dominate the Fast 50. The high number of companies in the South of the country reflects the population density - and therefore access to tech talent - as well as the availability of capital and access to facilities such as accelerators and lab space.
This year’s cohort has a lower proportion of London-based companies than the last four years. Many of the companies in this year’s cohort have found innovative ways to grow that were catalysed by the pandemic, potentially helping to increase the proportion of companies based outside of the Capital. Another aspect that may be encouraging this shift is the move to remote and hybrid working styles. Companies can now tap talent across the UK - and the world - benefitting from skilled workers wherever they may be located. Offering hybrid or remote working can be a way to boost employee retention and also keep down operating costs. Such shifts may help to disperse the economic benefits of fast-growing company populations across the UK.
