Possible reasons for a rise in insolvencies among IT companies

21st November 2014

The Exaro Insolvency Index identified a significant rise in insolvencies among IT companies in the third quarter of 2014 compared with the same period last year. The Index draws on data from the London, Belfast and Edinburgh Gazettes and from Companies House in compiling its figures. Despite insolvencies in other sectors remaining relatively unchanged the rise in IT insolvencies was 36.2%.

Why should this be?

There could be a number of factors.

Firstly many IT companies are micro businesses, consisting of just one or two people and there has been a proliferation of them in the aftermath of the 2008 recession. Arguably there are more than the market requires.

Secondly, the greater the competition, the more pressure there is to cut prices. There has been a significant rise in the self employed, many of them micro businesses, which may have pushed up demand for business websites, apps and other technology.

Thirdly, it can take a significant amount of time to develop new tech applications then test them before they can be marketed, particularly in the case of medical technology. And significant sums of Capital are often needed to market a new product and fund development until the break even point is reached.

We came across on a case where the whole process of developing a portable biotechnology machine to conduct common blood tests and give results in minutes took almost nine years from concept to manufacture to market.

Many of the developers of these kinds of products are likely to be from an academic background and therefore unused to thinking in the way an entrepreneur would need to. Doing the research on whether there is a market for their idea and finding the finance during the development period is likely to be a challenge.

They may need to identify and persuade a commercial sponsor or find some other form of investment finance willing to take the risk of supporting the lengthy development period.

With confidence in the global economic recovery currently waning thanks to continued problems in the Eurozone, the IMF revising its forecasts downward and uncertainty in both the UK and USA, investors are unlikely to be willing to take risks or be patient in the longer term.

Could the rise in IT insolvencies also be caused in part by some investors wanting their money back more quickly in the current uncertain climate?