Exploring the rising trend of tech sector insolvency

Oct 16, 2024

As insolvency figures remain high for businesses across the UK, we turn our attention to the rising trend of insolvencies in the technology sector.

Why is it that this sector has consistently been one of the hardest hit in recent years?

According to latest data from the Insolvency Service, professional, scientific, and technical activities are currently among the top five industries experiencing the highest levels of insolvency right now.

What factors are combining to drive tech sector insolvency?

It’s quite the melting pot. But not all that surprising really when you consider the nature of the industry – its sensitivity to economic changes, the pace of innovation, intense competition, and reliance on venture capital and private equity funding.

    1. Economic squeeze: The tech sector, like so many others is not immune to the devastating impact of high inflation and high interest rates
    1. Access to capital: The tech sector is heavily reliant on investor funding for research and development. But in the current economic climate funding providers have lower risk appetites, in fact the sector has suffered from contracting levels of investment since the pandemic. Not only do these conditions serve to restrict access to capital but they also drive up the cost of borrowing, which in turn impacts cash flow.
    1. Cash flow: The innovative nature of tech sector means business have high costs and delayed time to revenue. This significantly impact cash flow and levels of debt.
    1. Skills shortages and high cost of talent: Like so many other industries the tech sector is facing difficulties in attracting and retaining skilled talent. Additionally, wage expectations are high so recruiting and retaining the best talent puts a significant squeeze of profit margins.
    1. The cost of competition: It’s a highly competitive and fast-moving industry, failure to keep pace can result in products becoming obsolete quickly. R&D costs are also increased by the ever-pressing need for differentiation.
    1. Supply chain instability: The high cost of energy and raw materials is challenging for the tech sector, impacting cash flow and eroding profit margins.
    2. Mismanagement: Tech entrepreneurs are incredible innovators, but they don’t necessarily have the critical financial management skills they need to operate these businesses. But with cash flow tight, bringing in external support is not always a viable option.

What can we learn from recent high-profile tech insolvencies?

The collapse of Silicon Valley Bank UK and bankruptcy of WeWork highlight perfectly the volatile nature of the tech industry right now. Whilst it might be smaller tech firms and start-ups that are finding current conditions the toughest to navigate, these examples also demonstrate that even large technology enterprises are not immune to financial distress.

The Silicon Valley Bank UK collapse puts into stark reality our commentary above regarding access to capital. It shook the tech sector to its core and highlighted its reliance on funding for survival. It points to the need for tech companies to diversify their banking and funding relationships, as well as the need for robust contingency plans that build resilience to financial exposures and unforeseen roadblocks to success.

WeWork was a fast growth business, so fast in fact that it outpaced itself. WeWork straddled real estate and the tech world, attracting many tech businesses as tenants and a great deal of investment. However, it struggled to generate predictable and sustainable revenue, overextended itself financially, and ultimately put itself into significant financial distress. At the same time investors lost faith in its leadership, as they struggled with governance, mismanagement and cultural issues.

Technology firms of all sizes must armour up against insolvency risks

Leverets can assist tech businesses of all sizes from the risk of insolvency, providing guidance and support in dealing with cash flow issues, funding and debt issues, challenges with investors, and corporate governance:

  1. Restructuring Options: We can assist tech companies facing financial distress explore various restructuring options, such as formal arrangements with creditors (CVAs) or refinancing
  2. Corporate Governance Support: We can help ensure that directors understand their legal duties, navigate their responsibilities and avoid personal liability.
  3. Mitigating Insolvency Risks: We can offer advice on mitigating risks and avoiding the long-term consequences of insolvency, including guiding companies through complex disputes or avoiding breaches of fiduciary duties.
  4. Blended Legal Expertise: Our team of barristers and solicitors, with over 30 years of experience in both contentious and non-contentious matters, can ensure that tech companies receive precise, high-quality advice tailored to their specific needs.

For more information get in touch today.

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