Private equity-backed tech firms more likely to succeed

Alice Murray
05 August 2013

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An extensive study of high-growth technology start-ups has found those backed by private equity and business angels are more successful than those financed with bank loans.

New research by accountancy firm CBW, which tracked the progress of 102 TMT start-ups established in 2005 against 50 insolvent firms founded in the same year, found that private equity is funding a significant part of the UK's technology sector. The study revealed 78% of successful TMT start-ups had received an equity investment from inception compared with only 7% that received bank loans in the early stages of development.

Private equity's practice of implementing a finance director was found to speed up the pace of TMT start-up growth. TMT companies with finance directors tended to grow sales at a faster pace while using less cash. They also made cash injections work harder by operating at lower profit margins without compromising solvency. Those with finance directors tended to report stronger balance sheets and attract more external investment.

"FDs clearly allow businesses to ‘put their foot down hard on the growth accelerator', and the end result of this is the business achieving greater revenue through highly efficient cash utilisation. This should be a critical consideration among entrepreneurs, since the higher their sales revenue, the higher their company's value will be," says Nyall Jacobs, partner at CBW.

The study also found that wealthier entrepreneurs were more likely to sell equity rather than keep it to themselves. The founders of the best performing companies extensively diluted their ownership to facilitate external investment and growth, whereas founders of unsuccessful businesses tended to hold on to more of their equity.

"Our research found that most successful businesses had founders who sold at least 50% of their equity to outside investors within their first six years," says Jacobs.

The research revealed that teams of founders were more successful than entrepreneurs starting up by themselves. Teams of two or three founders accounted for more than 50% of the successful start-ups, while lone entrepreneurs dominated the firms that had failed – more than 50% of insolvent start-ups were set up by just one person.