17th November 2020
The adage ‘cash is king’ remains true for any start-up business, but for the PropTech industry these words have never been more accurate. The uncertainty around COVID-19 has without doubt had an adverse impact on confidence, and with the future of the property industry ever changing, it’s become more important than ever for PropTech companies to plan ahead and monitor their cash flow.
Managing cash flow can be challenging at the best of times, but in the current economic climate there are further additional aspects that PropTechs need to consider:
The demand for PropTechs is expected to continue to increase exponentially as the property industry continues to adapt to new ways of performing tasks, such as maintaining buildings remotely, conducting viewings virtually and processing sales online.
It’s essential for PropTech owners to consider the short, medium and long-term viability of the business. Managing cash flows in the short-term is essential, but having plans in place as to how the business intends to disrupt the industry in the medium to long-term is key, as well as planning how to finance the intended growth. Without a clear vision, and whilst frequently managing the initial cash flow challenges, a business risks being reactive rather than proactive.
The various government schemes arising from COVID-19 have been well documented over the past six months, and it will remain important for PropTechs to make use of these in the coming months. Such schemes include:
- Extension to the Coronavirus Job Retention Scheme
- Extension to the Statutory Sick Pay regime for SMEs
- Access to the Future Fund
- Business Interruption Loans
Consider external investment
The question that all PropTechs should be asking is whether or not to seek external investment and, if so, at what stage in your lifecycle? Whilst there is no right or wrong answer, what is important is making sure the business is ‘investment ready’. It is good practice to have a detailed business plan in place and considering some form of vendor due diligence process can help the chances of raising finance. Having the ‘know-how’ of an experienced external investor, as well as much needed cash flow, can make or break a business.
Michael Murad, Head of Finance at Pi Labs, Europe’s most active PropTech VC, comments: “When considering external investment, it is important to make sure you understand two key things. First is the core understanding of yourself and your business, which will in turn help you identify the type of investor you require. Questions you will need to ask yourself include: how much capital do I really need? How much of my business am I willing to give up? What kind of investors will help accelerate the growth of my business? Second is to understand your investor (whether a VC/angel investor/strategic investor) and what they are looking for in the short and long term. Be prepared to answer various questions relating to your business, such as: what is the problem you are solving? What is the overall market opportunity/size? How deep and scalable is the technology you have created? What is the strength of your management team? It is important to keep in mind that you will be entering a partnership for the foreseeable future, so you will want to make sure you can work well together.”
Making use of tax benefits
There are substantial rewards that PropTechs can benefit from to help manage their cash flow. Investigate early as to whether the business can benefit from R&D tax reliefs, whereby the company can reclaim a percentage of any spend made on R&D.
Many businesses have considered implementing Enterprise Management Incentive (EMI) share option schemes during the pandemic, in lieu of salary increases. The benefit of the EMI scheme is that options over shares can be granted to key staff at today’s value. As the company grows, the growth in value is immune from employment taxes and is instead taxed at the Capital Gains Tax rate of 20% (or 10% if Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) is applicable), substantially lower than the effective rate of employment tax. This has the benefit of incentivising staff, whilst also providing an option to reduce cash outflows in staff salaries.
How we can help
Preparing detailed business plans is essential for PropTechs trying to manage their cashflows. Business owners need to consider the short, medium and long term, as well as considering when is the appropriate time to bring external investors on board.