Why the accountant is your tech start-up’s best friend

12 September 2019

On almost a daily basis we see the launch of a new tech start-up. In an age when 50% of start-ups fail within 3 years, intelligent implementation of your tech idea, from launch through to scaling-up is key. Success is dependent on a combination of a good idea, entrepreneurial financial savvy and having a range of expert advisers laying the paving stones to guide you through the potential pitfalls.

The entrepreneurs behind tech start-ups tend to be savvy in more ways than just those that involve a great business idea. Increasingly we are witnessing business owners adopt all roles within their business: legal, company secretarial, bookkeeper, tax compliance, HR and so on. In many situations this approach can reap short term rewards by virtue of protecting the pretty pennies in the initial stages. In relation to, for example, the tax advantages that are available however, it’s easy to inadvertently breach the qualifying conditions or not adequately scrutinise whether the business is eligible for the relief, leading to costly mistakes at a later date or implications that impact the perception investors have of the business. It’s for this reason that it can be better to befriend your advisers at the earliest opportunity.

The tech business model

For traditional businesses, the business model is structured around identifying the customer base for its products and identifying the sources of finance. Broadly speaking, tech businesses fall into one of two categories: they deliver technology-based products and services in a new way or create new innovative technology-based solutions.

The Four Categories of Tech Business

  • Hard science which uses technology to advance solutions in, for example, material science, age-related health decline, genome challenges, robotics and so on
  • Deep tech, the scope of which encompasses big data, machine learning and artificial intelligence
  • Fintech that delivers financial services digitally
  • Platform which has the aim of enabling interactions between users, producers and consumers.

While the traditional approach to developing a business model still holds as a foundation for tech businesses, the way many tech businesses make money does not follow the proven path of ‘sell goods or services to customer’. In the world of tech, there is no set way of doing things. In fact digital disruption is the basis on which the global success stories have erupted. Business models in tech hinge on a different set of factors and so this means a different approach to accounting, advisory and tax is required.

Adopting a new financial lens for managing tech businesses

The business processes that power the digital economy are very different to conventional businesses and so traditional approaches to accounting and finance are simply insufficient.

The majority of today’s tech businesses do not amass resources under one roof. Traditional businesses focus on generating money by achieving economies of scale – they focus on the supply side. For tech businesses the focus must be on the demand side. Especially for platform-based businesses, technological innovation is used to create and expand networks. The value chain is entirely redefined and traditional financial measures of performance simply won’t cut it.

Tech businesses continuously experiment and innovate. This can result in repercussions that unleash changes at the strategic level. What the business will require is a system that enables close-tracking and monitoring of experimental activities to determine what actions need to be taken in a timely manner.

The resources many tech start-ups require to create and deliver solutions is not based on owning physical assets. This alters the amount of money start-ups will require from investors, it also throws complexity into the mix in terms of being able to raise finance, having little or no collateral over which to secure debt finance.

Tech business are also differentiated from traditional business because of the range and volume of non-financial data that is available to them. This big data collection and analysis offers predictive insights which, used appropriately, can help improve the strategic planning process rather than using traditional historical trends accounting information.

The digital revolution

Today we find ourselves at the start of what could be described as a fourth industrial revolution. The first, the mechanical revolution, came roughly 250 years ago and was the process that replaced agriculture with industry as the foundations of the economic structure of society. The second came about a hundred years ago and focused on the use of electric energy to enable mass production. In the second half of the 20th century, electronics and automation started a third revolution. Electronics and information technology were used to automate production, this against the backdrop of the emergence of nuclear energy.

In this fourth revolution we are witnessing exponential expansion characterised by merging technology that blurs the lines between the physical, digital and biological spheres to completely uproot industries all over the world. This is changing the way we produce, consume, move, communicate and interact.

This fourth revolution separates itself from the others as its roots are underpinned by a technological phenomenon, digitalisation, rather than a new source of energy. This digitalisation has created a platform on which physical and virtual worlds collide. With the first three revolutions, the scale of the changes that were set to take place were not predicted, however with the digital revolution, we are consciously entering a period of transformation which enables us to influence its direction, demonstrated by the start-ups that became big businesses in a short space of time: Facebook, Amazon, Google.

In this series….

This article is the first in a series of business strategy and tax related Insights I will be releasing over the next couple of weeks. The aim is to take some of the traditional early stage start-up tax considerations that can affect early cashflow for the business and explain some of the progressive business strategy models and tools available which can help business owners navigate some of the challenges that result in the failure of 50% of start-ups within the first 3 years when inadequately addressed. 

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