February review

The team sees an exceptional number of UK tech start-ups every month. In February, this meant talking to over 100 start-ups for the first time, and over 30 of those applying for a loan.

We also wrote over £2mm of new business - we could easily have done more by either lowering our credit standards (that will never happen) or if we hadn't been quite so capacity constrained on the Venture Debt side.

The key take aways for February have been three significant trends in businesses who have applied for a loan: cost cuts to reduce the cash burn; highly selective headcount reductions; and extension of cash runway by creative means.

#1 Dealing with the cash burn

A significant percentage of businesses we work with have slammed the brakes on costs - the median being around -20% year on year cost cuts. Increased revenues have also helped reduce some of the cash burn - our clients are, for the most part, still growing sales at a rapid rate.

What the data does not show is the quality of the businesses or the management team. It's fair to say that, on average, we have been more impressed with businesses that reacted quickly to the current environment and cut costs early.

#2 What's being cut?

Our data shows that the brunt of the cost cuts have, across the board, been taken on staff. Even B2C companies that spend perhaps 30% of their revenues on advertising have cut staffing costs at least as much as ad spend. The salary cost cuts have been achieved through redundancies - it's not unusual to see businesses that have been through two or even three rounds of redundancies in the past six months.

#3 Plugging the gaps

Faced with significantly decreased VC appetite and/or significantly lower valuations, companies have also been fund raising in alternative ways:

SAFE - Simple Agreements for Future Equity. For companies with supportive venture capitalists who are founder friendly (and do not wish to mark down their investment), this is an excellent solution. However, we've only seen businesses which have a credible plan to be at least EBITDA flat by the end of this year receive SAFE investments.

Convertibles are more common as the new investment becomes senior to the existing equity holder. Founders should be careful on the exact terms so as not to jeopardise their ability to take on other debt funding. A strike price at or below the previous fund raise will have the same effect as a down-round.

Debt - We've seen a very significant increase in demand. Here are the criteria we look at: Is the business able to repay us from cash flows (income from signed contracts, recurring revenues, grants and R&D Tax Credit)? Are the sales forecasts realistic? What other creditors are there? We will usually look to be the senior-most creditor on any loan we make.

Conclusion

The businesses we're most likely to lend to are those that have already adjusted for the current environment. If you haven't cut costs yet and you're not EBITDA positive, what are you waiting for?