Here’s an experiment for you to try. Ask 10 random people on the street if they’ve heard of ‘Global Switch’ (www.globalswitch.com) and you’ll likely be confronted with a vacant expression. You may well find a similar response if you mention ‘Anaplan’ (www.anaplan.com). Yet both are ‘unicorns’, an expression in the tech arena to describe a company that has attracted a valuation in excess of $1 billion.
Both are UK based businesses that have disrupted their way into the portfolios of venture capital firms and family offices around the world. Indeed, these so-called ‘informed investors’ have been content to pay sums that value these startups at a level sufficient to put them into the FTSE 100 and 250 respectively, yet both remain private businesses.
But still, the UK entrepreneurs that created them belong to a group of innovators that remain far, far behind their US counterparts in terms of volumes. The number of UK spawned unicorns, and their valuations, remains well below those achieved across the pond. Can the UK tech firms really compete for talent and capital in the Brexit era?
The billion-dollar threshold may seem an odd focal point but there is a logic behind it. Historically, the top venture funds have delivered returns from share ownership in just a few companies that have gone on to become uber-successful – the vast majority fail. And in turn, as these funds have grown in size, larger exits are required in order to deliver acceptable returns.
For example, a small $500 million fund would need to own 10% of five different unicorn companies at exit in order to merely break even in performance terms. In reality, the funds are looking to end up owning 10-20% of a unicorn that achieves multi-billion dollar status and becomes a part of the Silicon Valley establishment. Big is beautiful in the Valley.
The European market for tech is a curious beast. Once upon a time, Europe was the home of innovation. Indeed, if you go back a century and a bit, it was the UK that was the centre of the Universe – the home of the industrial revolution, the centre of global innovation, the place to be. The steam engine inventor Thomas Newcomen, the mechanical engineer that improved it, James Watt; and George Cayley – arguably the greatest inventor of all and still unknown to most (original inventor of the aeroplane, the seat belt, safety curtain, mechanical hand, continuous track as used on tanks and tractors to this day) – all hailed from our family of nations.
I digress. The point being made here is that we, Europe, are no longer the centre of the Universe and the US leads the way in most things; tech investment, valuations and ultimately in the volume of success stories, it remains king.
It is no coincidence that the most successful entrepreneurs of today (think Mark Zuckerburg, Elon Musk, Larry Page et al) all live and work in Silicon Valley. Capital attracts brains as much as brains attract capital, indeed there has been an unquestionable migration of brain power moving from Europe to the US over the past few decades, particularly in the last 10 years.
In the seven years up to 2015, the number of US companies as a proportion of the FT Global 500 climbed 24% whilst the number of European constituents fell 22%. This is no accident. Why? Flight of brainpower to the US and a very real difference in founder expectation. After all, if you tempt a UK domiciled founder with a few million and the prospect of an exit, they might well succumb to ‘countryhouse’ syndrome, a term that used to illustrate the many British firms that bail under pressure from investors (and an offer to exit). Chip designer ARM and keyboard software outfit SwiftKey are two UK domiciled examples.
But until recently, one might have made the argument that an absence of scale-up capital was the principal cause of founder frustration – forced to grow organically and without the rocket fuel to pour on the fire that their US counterparts more readily enjoy.
A solid start to 2017 indicates that change is afoot, however. The total value of European IPOs was up almost 30% in the first quarter and the average deal size was 6% higher than the corresponding period in 2016. Positive returns inevitably attract more capital – more exits equates to more investors, more investors leads to a greater appetite to fund the next would-be unicorn.
If these positive returns are maintained, Europe’s tech sector – historically led by the UK and financial technology firms – has a better shot at holding on to its entrepreneurial talent and in turn, the circle of life could see access to funding sweep across the board from seed through to secondary funding and scale capital. Ensuring European founders remain in Europe is critical, as brains and talent are the driving forces that bring all great ideas to life.
And so where will the next Unicorn come from? The UK produces more unicorns than the rest of the continent – a third come from within blighty’s shores. Farfetch, Oxford Nanopore Technologies, Asos, Zoopla, farfetch, Brewdog, Shazam, Blippar etc. etc. the list goes on, each proves that the skill-sets within our islands extend well beyond financial services. Some smart money is betting on the medical technology space – aka medtech – becoming the next biggest subsector of technology.
Indeed, there is a solid rationale for why the breakthrough technology businesses that actually stay the course through to unicorn status might be more likely to come from the UK than elsewhere. Money. The sheer size and joined-up nature of the NHS could well give Britain the edge. The CEO of NHS England, Simon Stevens, has become the leading vocal advocate for the importance of technology as part of his efforts to save in excess of £20 billion per year in the health budget within the next three years.
Evidencing this, a series of wearable monitors and apps designed to keep people out of hospital are being trialled as part of a series of innovation test beds. But it’s still small fry. Stevens is going to need to become a whole lot more innovative and more openly engage with disruptive upstarts if the UK is to deliver on its promise to become the global home of Medtech and the NHS is to save the big bucks that it needs to. Innovation and disruption are key.
Babylon (www.babylonhealth.com), a UK based app that provides on-demand GPs and specialists, has emerged as a leading contender. Proving there is scale capital for the medtech space, it bagged £50 million of new investment last month aimed at developing an artificial intelligence (AI) healthcare platform to supplement its existing live in-app doctor service. It supplements its on-demand doctor services with the sale of various diagnostics, nothing particularly cutting edge on the testing front but the company has already got several hundred thousand users.
At the seed end of the spectrum, TestCard Diagnostics (www.testcard.com) has developed a prototype product that it hopes will allow an immediate diagnosis when its mobile app launches later in the year. The startup, which is about to launch a SEIS seed funding round, has developed a postcard with a pop-out urine test panel. An accompanying mobile app that it hopes to launch in October, is expected to be able to immediately analyse the test and provide an unambiguous diagnosis for urinary tract infections, sexually transmitted infections alongside providing ovulation optimisation and pregnancy testing.
TestCard’s Co-founder, Luke Heron, thinks the opportunity in medtech is substantial: “Non-invasive solutions that facilitate an earlier diagnosis can improve healthcare outcomes and reduce costs”. It is unquestionably true that earlier diagnosis can lead to earlier intervention and cost savings, but it’s a radical leap. As the more established Babylon has found out, radical innovations can be a tough sell. It is worth pointing out that Babylon has achieved considerably more traction as a ‘Pocket Doctor’ from corporates such as SKY and MasterCard than it has from the NHS.
At some point though, one would imagine that the NHS will have to expand its outreach from its self-styled innovation testbeds, to fully fledged incubators – it will have to go through the same process that banking and retail has gone through and welcome disruption. There is risk involved, and risk, it would seem, is what the establishment is afraid of within the healthcare space.
The UK is now faced with its pending departure from the EU, and with it is confronted with both challenges and opportunities. If a company produces a sound product then it will invariably find a market in Europe post-Brexit. It is important to remember that the US is the UK’s largest market, followed by the UK itself and then Germany. Out of necessity, the vast majority of technical standards that affect electronic products have been harmonised over time. Tariffs are low and so one can reasonably expect to be able to export to Germany just as easily as one could export to the US today, once the Brexit dust has settled.
But as the number of European unicorns continues to climb, can the UK continue to position itself as the leading contributor to the unicorn list and arrest the migration of entrepreneurial brains fleeing across the pond. By their nature, startups are agile and tend to operate on an alternative timeline to policymakers, which is all for the good as it may very well take years to negotiate Brexit – more than a typical lifetime for a tech company.
But one would hope that the magic combination of ingenuity, a global pool of talent and access to capital will ensure the UK improves on its current status as an also ran in the world of tech. After all, it’s a friendly environment for tech startups, an easy place to start a business, and, one would expect, it will continue to innovate irrespective of Brexit.
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