Mankind has always had a fascination for mythical beasts, and none more so than the unicorn. Despite allegedly dying out in the flood after failing to board Noah’s Ark in time, they are still all around us in popular culture, from Harry Potter to children’s toys. I even found an exhibit in a Vienna museum labelled matter of factly as a “unicorn horn” – it was actually from a narwhal.
The horned horses are back in the news, in the world of tech at least, with any startup valued at over $1 billion by venture capitalists now dubbed a unicorn. However with more than 100 companies now achieving unicorn status there’s a growing worry that startups are trading short term valuations for longer term success. True, unicorn status helps attract skilled staff, but down the line it requires either a trade buyer that is willing to pay big money or an IPO to translate mythical (paper) valuations into hard cash. There have also been a raft of stories on how investors have structured their unicorn funding in ways that protect their cash (rather than the shares of others, such as founding teams) if the company should lose its value.
A focus on unicorns also favours certain sectors and types of company. A browse through Fortune’s latest unicorn list reveals a large number of consumer electronics (Xiaomi, Jawbone), retail (FlipKart, Snapdeal) and sharing economy (Uber, Airbnb) companies. In many ways this is what you expect – company valuations are based on what the addressable market is, so the biggest investment goes into those startups that can make most money.
However, it does potentially limit where investors put their money. There are lots of startups that will never be a Facebook or an Uber, but have the potential to be extremely successful niche players that could well grow into billion dollar valued companies. Look at ARM – when it began as a spin-off from Acorn Computers with a completely new business model, very few would have predicted its current success.
There’s also a definite geographic bias where unicorn investors are putting their money – Silicon Valley, China and India. Out of the latest Fortune list just three are in Europe, one in Australia and one in Israel. This doesn’t reflect the energy, ideas and potential in any of these places, particularly in emerging sectors. The danger is that if investors spend their time chasing unicorns they’ll miss out on the startups that could do with their help to build long term businesses that can make a difference to many markets.
So I think we need to add another category alongside unicorns. Keeping the mythical theme I’d go for centaurs. Sturdier than a unicorn, probably better in a fight and with a bit more intelligence (and opposable thumbs). They may not have the beauty or the (frankly over the top) horn of their flashier cousins but they are built for the long term, rather than mythical valuations that don’t necessarily deliver. Given the potential returns they can produce, it is time for investors to move away from the fascination with unicorns to more realistic startups that may be uglier, but have just as much potential.
According to a new report, more and more of us are working in digital technology companies. Research led by Tech Nation has found that 1.46 million people (or 7% of the workforce) are employed by more than 47,000 digital companies across the UK – and of these just 250,000 are working in inner London. 74% of digital companies are located outside London.
To put that in perspective, according to other government figures, agriculture employs 535,000 workers, construction 2.2 million and manufacturing 2.6 million. So nearly three times as many people tend computers instead of animals. Heartening stuff, and a welcome antidote to some of the more extreme London-oriented digital stories seen in the media.
The highest density clusters in the report are Brighton & Hove, Inner London, Berkshire (including Reading), Edinburgh and Cambridge, while the highest rates of digital employment are in London, Bristol and Bath, Greater Manchester, Berkshire and Leeds.
It is easy to be cynical about the timing of the government-backed report, with an election coming up fast. I’d also query the definition of ‘digital’ – my PR business makes it in, which seems to show a wide classification range (not that I’m complaining). The headline findings that certain sectors have more digital companies than the national average (Brighton 3.3x, Cambridge 1.5x, for example), is interesting, but needs to be put into context. Brighton employs 7,458 people in digital, out of a population of 155,000 – under 5% compared to other clusters that potentially have a greater proportion of digital workers.
But what is more interesting is how the research reinforces the importance of clusters. Statistics include:
- 77% of respondents have a network of entrepreneurs with whom they share experiences and ideas. This rises to 90% in Cambridge.
- 54% believe their clusters help attract talent (65% in Cambridge).
- 40% believe their cluster gets them access to affordable property (such as science parks or co-working spaces).
- 33% believe their cluster helps attract inward investment
- For Cambridge, access to advice and mentorship was seen as twice as important to growth than nationally (scoring +100%), and the positive perception of the Cambridge brand (+62%), was also a key driver for expansion.
- Issues highlighted in Cambridge include poor transport infrastructure (scoring -111% compared to the UK average) and lack of available property (-31%).
This clearly demonstrates that to succeed and grow, tech businesses need to be part of an ecosystem that provides support, the right conditions to start (and grow) and that more and more of these are springing up across the UK. Nurturing a cluster takes time, so everyone involved, from local government to academia and investors have to think long term if they want to develop a tech ecosystem in their area.
What I’d like to see is companies and regions use this report as a starting point to build closer ties. Firstly, any businesses that feel they’ve missed out need to get on board and be given the chance to be added to the report. This is vital to keep it as a living, interactive document that maps changes over time.
Secondly, local government and organisations need to take a look and make sure that they are reaching the companies in their area, and providing them with the conditions for growth. At the very least local networks (or in their absence, local councils) should be making digital companies aware of their existence, and what they can do to help them. That way more sub clusters will form and grow, strengthening the overall picture.
I don’t think we’re yet the full Tech Nation that the report and research promises, but we’re definitely on the way – we therefore need continued focus and investment if we’re going to move forward, across the country.
This week the election campaign has been focusing on education, with the Conservative Education Secretary, Nicky Morgan, promising that every child leaving primary school must know their times tables up to 12 and be able to use correct punctuation, spelling and grammar. It follows her predecessor, Michael Gove, revamping the history curriculum to ensure that pupils know about key dates in British history – a move that some saw as a return to Victorian rote learning of facts.
Morgan complains that Britain has slumped in international education league tables, and has vowed to move the country up in rankings for maths and English. But ignoring the fact that children are already tested on times tables, I think she’s missing the point about modern education and the skills it teaches. Of course, children should know their times tables, and be able to read and write. These are basic skills that everyone should have.
But we are in an era of enormous change, and the skills that the workforce of tomorrow requires will be very different to those of today. Increased globalisation, the advent of the knowledge economy and greater technology are impacting on all jobs. Previously safe, middle income management occupations will be broken into smaller chunks and either computerised or outsourced, hollowing out the workforce so that what remains are high end, knowledge-based roles or more menial tasks.
What we need to do is prepare our children for this world by helping them to develop the skills that they require to work in this brave new world. A large proportion of today’s pupils will end up working in jobs that don’t currently exist, so you need to focus on three areas:
1. Learning to learn
Rather than simply teaching facts and tables, you need to instil in children the skills they need to keep learning. These range from problem solving, resilience and working as a team, to ensuring they have inquiring minds and are always pushing themselves.
2. Lifelong learning
Alongside learning to learn, everyone needs to understand that education doesn’t stop when you leave school or university. Whatever field you are in, you’ll need new skills as your career evolves, so it has to be seen as natural to keep learning. The days of working for the same company for ever are long gone, and the days of working in the same role throughout your career are going the same way. So, people will have to make radical moves into new industries and careers, and that will require ongoing investment in learning new skills.
The UK government has re-introduced coding to the school curriculum, which is a major step forward in ensuring that everyone has the basic skills needed to understand and work with technology. While most jobs have required IT for a while, the spread of software into every corner of our lives means that those who understand and program computers will have a big advantage over those that just use them to type emails or surf the net. I’d like to see more government investment in coding for all, alongside schools, so that everyone learns the skills they need.
Don’t get me wrong, it is a laudable aim that every child should leave primary school knowing that 12×12 is 144 and how to use an apostrophe. But we need to be teaching our children a lot more than that if we want to nurture a workforce of self-starting, motivated and problem solving adults that can drive innovation and wealth for the country and wider society.
Countries and cities across the world are busily trying to build tech clusters. Partly this is due to the sexiness of tech (expect the UK election to feature plenty of photo opportunities of candidates with startups), partly down to the fact that it seems easy to do, and a lot to do with the benefits it delivers to a local economy. In an era where technology is radically changing how we work, play and live, high value tech companies are always going to be prized.
But how do you build a tech cluster? It may seem easy to do on the outside – set up some co-working spaces, provide some money and sit back and wait for the ideas to flourish, but it is actually incredibly difficult. This is demonstrated by the diverging fortunes of the locations of England’s oldest universities – Oxford and Cambridge. As a recent piece in The Economist explains, over the last few years Cambridge has added more well-paid jobs, highly educated residents and workers in general than its rival. This prompted a visit last October to the city from an Oxford delegation, with the leader of Oxford City Council admitting that “Cambridge is at least 20 years ahead of us.”
Given the longstanding competition between the two cities, it is easy for people in Cambridge to sit back smugly, pat each other on the back and congratulate themselves on a job well done. However, a better course of action is to take a look at what is behind Cambridge’s success, and see what can be done to improve things. After all, there are startup and tech clusters around the world – competition is global – so there’s nothing to stop entrepreneurs setting up in Silicon Valley, Munich, Paris or London rather than Cambridge.
I see five factors underpinning the success of any tech cluster:
1. Ideas and skills
The first thing you need to build any business is obviously a good idea. Universities, particularly those involved in scientific research such as Oxford and Cambridge have plenty of these. But you need a specific type of person to be involved with the research – with a mindset that goes beyond academia and understands how a breakthrough idea can be turned into a viable business. You then need to be able to access the right skills to develop the idea technically, whether through commercial research or programming.
2. Support infrastructure
This is where Cambridge scores highly in being able to commercialise discoveries, through a long-established support infrastructure. The Cambridge Science Park opened in the 1970s, while the University has put in place teams to help researchers turn their ideas into businesses. Research-led consultancies, such as Cambridge Consultants, provide another outlet to develop ideas, as well as helping to keep bright graduates in the city. There is also a full range of experienced lawyers, PR people, accountants and other key support businesses to help companies form and grow.
Obviously without money no idea is going to make it off the drawing board. Cambridge has attracted investment from local and international venture capital, and has a thriving group of angel investors, who can share their experiences as well as their funding. Due to the length of time Silicon Fen has been operating, investment has been recycled, with successful exits fuelling new startups that then have the opportunity to grow.
4. Space to expand
Cambridge is a small city, and the combination of its green belt, lack of post-industrial brownfield sites and an historic centre owned by colleges, puts a huge pressure on housing stocks. As anyone that lives in Cambridge knows, house prices are not far shy of London – but spare a thought for Oxford residents. In 2014 an Oxford home costs 11.3 times average local earnings, nearly double the British norm of 5.8 times. Additionally, as The Economist points out, there is space outside the Cambridge greenbelt for people to build on, with South Cambridgeshire Council, which surrounds the city, understanding the importance of helping the local economy. In contrast, Oxford has four different district councils, and a powerful lobby of wealthy residents who want to keep their countryside pristine, hampering housing development. That’s not to say that Cambridge is perfect, far from it. More can be done to improve transport links to reduce commuting time and to spread the benefits of Cambridge’s economic success.
Ultimately tech clusters are judged by the success of the companies they produce. And Cambridge, partly due to the longevity of the cluster, has created multiple billion dollar businesses, from ARM to Cambridge Silicon Radio. This not only puts the area on the map for investors, but attracts entrepreneurs who want to tap into talent and spawns new businesses as staff move on and set up on their own. You therefore see sub-clusters in particular areas of tech develop as specialists use their knowledge to solve different problems. This then further strengthens the ecosystem.
Tech clusters are slow to build and can’t be simply willed into existence by governments opening their wallets. They need patience, a full range of skills and co-operation across the ecosystem if they are to grow and flourish – as the relative fortunes of Cambridge and Oxford show.
Forget city-based startup clusters, as, according to new government figures, the countryside is now the place to launch your business. The Department of Environment, Food and Rural Affairs (DEFRA) report points out that the rural population will grow by 6% over the next decade, with more people moving from cities to the countryside than vice versa. More businesses are starting in the countryside than in cities, and rural productivity is growing for the first time since the industrial revolution.
All very positive, leading to Environment Secretary Liz Truss to talk up the innovation within rural areas and point out that people will no longer have to commute to cities, but can work from home using newly deployed superfast broadband.
This all sounds incredibly positive, but as someone who lives (and works) in the countryside I can see four big issues that are holding back rural growth.
1 Networking in a field
While there are more businesses being started outside urban areas, London is still the dominant place for startups, reflecting its position as the centre of the economy. One of the advantages that London and other cities/towns have, is a concentration of people and companies in a small space. This means that it is easy to network, partner and find suppliers to help you grow. Things are much more scattered in rural areas and it is more difficult to identify other companies. I only know about the two people in my village of 3,000 people running complementary businesses to my own because of chance meetings in the school playground. So, there needs to be more done to link rural businesses together in order to help them network.
2 Intermittent infrastructure
A lot has been made about the rollout of rural superfast broadband, and that is improving. But I still don’t have a 3G signal or decent mobile reception in my office, making it more difficult to work. Getting all communications channels right is vital if companies are going to set up and thrive in rural areas. The government has talked about addressing rural mobile “notspots” and this has to be a priority to help everyone in the countryside (not just businesses).
3 Transport by tractor
I’m obviously speaking personally about where I live but rail transport links to London are rickety and slow, while roads can be congested and prone to traffic jams. This means getting anywhere takes time – more time than it should. And, given that for a lot of businesses, including mine, you still need to get to London relatively regularly, this is a cost to doing business in the countryside.
4 Finding skills
Locating staff with the right skills to help your business grow is hard, wherever you are based. But it is much more difficult in rural areas due to the lack of networking and also that a lot of the best talent disappears off to cities and universities straight after school. That is perfectly understandable – but it does mean people don’t tend to return to the countryside until they are settling down and starting a family. This leaves a gap in the market when looking for bright, ambitious staff with some experience who are willing to learn. A lack of affordable housing doesn’t help persuade people to stay in the countryside either.
Don’t get me wrong, I love working in the countryside and contributing to a thriving rural economy. However, government needs to do more if it is to create sustainable, knowledge-based companies and that starts with investment in infrastructure, networking and skills.
In previous blogs I’ve talked at length about the UK’s inability to turn a high enough percentage of tech startups into market leaders, compared to countries such as the USA. This may be changing, according to a new report from the Startup Europe Partnership (SEP). This identifies around 400 tech ‘scale-ups’ – essentially startups that have raised more than $1 million over the last three years. 70% of these received funding of between $1-$9 million, with 15 raising over $100m.
Taken at face value this looks like great news – investment is up and the UK is leading Europe when it comes to building viable, long term businesses. However dig a bit deeper into the data and some issues emerge. SEP is upfront that its research just covers what it calls ‘ICT’, and misses out biotech, cleantech and what it calls hard-tech (and there was me thinking all tech was hard).
So the lists of companies named are dominated by companies that essentially use the internet as a platform for their business – such as Wonga, Truphone, Funding Circle and white goods retailer AO World. All, with the exception of Wonga, solid companies that are expanding rapidly, but not really what I’d class as technology companies. The problem is that they tend to attract more capital, and consequently elbow the likes of Ubisense (which raised $14.5 million through its IPO in 2011) from the front page of the pretty graphs. And if you grow organically, without needing additional investment, you don’t show up at all.
Is this an issue? I think it is from both a perception and a valuation point of view. The general public ends up thinking of a startup as being something like Spotify or Just Eat, rather than a company that provides clever technology that may operate invisibly to them, supporting the wider digital economy. This can have a knock-on effect on press coverage, recruitment and ultimately the type of startups that are founded. Additionally investors are motivated by returns, and if they see that the payback is better with less technical, more consumer-focused businesses they are likely to invest accordingly.
It would be rude of me to sound like I’m completely knocking SEP. They are shining a light on the European tech sector and at the same time lobbying to increase the support that startups get, in particular by connecting the fragmented European tech economy. But, if we are to present the tech sector in the best possible light, we need to widen the discussion away from the flashier end of the market and embrace the difficult hardtech area. After all these are the ideas and companies that have the potential power to really change the way we live, work and play, and consequently deliver the biggest benefits to Europe as a whole. We need more ARMs, and fewer Wongas, and to start, more rigorous definitions of what a tech startup – or scale-up – actually is.
The tech market across Europe is on a roll. According to Dow Jones VentureSource European startups raised €2.1 billion (over $2.8 billion) in Q2 2014 from VCs, the highest amount since 2010. The average size of the 365 deals was €2.2 million, up from €1.5 million in Q3 2013. Essentially that means every day of the quarter four startups got funding from VCs.
At the other end of the company journey, Tech.eu counted 92 tech exits in Q2 2014, up 70% from Q1 2014. 10 of these were IPOs, showing a healthy move back to the stock market for tech companies. And while deal size was undisclosed in 72% of cases, 15 were for over €100 million.
So, does this mean that everything is rosy in the tech market and your startup will receive its deserved funding in a heartbeat? Unfortunately not, and there are three worrying points behind the figures:
1 What is a tech company?
I’ve always been suspicious/puritanical on what makes a startup ‘tech’ rather than part of any other sector. Taking a look through both the Tech.eu list of exits and its corresponding index of EU tech funding rounds so far in 2014, I don’t see that many companies I’d class as technology. IPOs and exits included:
- Takeaway platform Just-Eat (food)
- Zoopla (property)
- Markit (financial information)
- Oldford Group (gambling)
- M and M Direct and Game Digital (retail)
- eDreams Odigeo (travel)
- Jobsite (recruitment)
Companies that received the largest amounts of funding mirrored this list – Delivery Hero, which has raised $285 million to date, is an online food ordering platform, while Ozon ($150 million) is an online Russian retailer.
There are what I’d consider genuine tech companies receiving funding (Klarna is a payments provider, Tradeshift is B2B software and Elasticsearch is a search and analytics engine). And looking at the IPOs, Zendesk (customer service software) also fits into my narrow definition of proper tech.
Obviously consumer facing companies need large amounts of funding – they have to market themselves and launch into competitive marketing which takes cash. But my complaint is that technology is part of every business, so just because you sell via the web, that doesn’t make you a tech company. After all, in the early days of the telephone, no-one created a new category for businesses built on the communications power of the phone. By lumping these companies into ‘tech’, investors and commentators overlook the genuine technology companies making software and hardware in favour of more glamourous consumer businesses. It was exactly the same issue in the dotcom boom, with anything that had a website being lauded to the skies as a tech pioneer.
2 Europe lagging the US
The European figures for funding look strong, but in the US private tech companies raised $13.8 billion in the same period. We’re talking about a similar size market in terms of people, yet nearly five times the investment. No wonder that many EU tech firms are crossing the pond to tap into US funding. Zendesk is a good case in point. While founded in Denmark, its successful IPO was on NASDAQ, where it has seen its share price nearly double from $9 to around $17.97 currently.
Clearly, there are structural and funding issues that need to be addressed to convince European companies that this is where they need to build their startups if we are to build a vibrant tech sector across the EU.
3 Selling out too soon?
Some companies are never going to have the scale to survive on their own and fit better as part of a larger entity. So, trade sales are a vital part of the tech ecosystem – investors get their money back (hopefully), enabling them to invest elsewhere, while founders and management teams are able to move on to the next big idea.
But looking through the crop of acquisitions the largest amount (37%) were by US companies. Facebook and TripAdvisor made two European acquisitions, and the likes of Cisco and Intel bought one business each. The risk is that too many smart European tech businesses don’t turn into long term, billion dollar companies with their own ecosystems around them, as they don’t get the chance to grow before being snapped up for their technology or market position. That holds back the wider European tech economy and reinforces US dominance. It would be good to see longer term backing for European tech, with more IPOs and acquisitions by local companies, rather than selling out to US giants.
I don’t want to come across solely as a whingeing naysayer, as it is great news that funding is up for tech businesses across Europe. But I think there needs to be a narrower focus on what tech actually is amongst the media and investors, and a longer term attitude if Europe is ever to come close to building a sustainable tech economy across the continent.
There can be a tendency in Cambridge to think that innovation ends at the city limits, and particularly that we’ve got the monopoly on tech startups in East Anglia.
Proof positive that this isn’t the case was on show last week at SyncNorwich, where more than 300 entrepreneurs, developers and members of the Norwich tech cluster talked about their diverse successes. This included market leaders such as FXhome, which produces special effects software for both Hollywood blockbusters and amateur filmmakers, Liftshare.com, the world’s most popular car sharing site and mobile interaction/payment firm Proxama. A whole host of newer startups, such as targeted mobile advertising company Kuoob, music community site SupaPass and educational software provider Wordwides (set up by a 16 year old) also talked about what they could offer.
There’s obviously been lots of activity in Norwich for quite a while (FXhome has been going for 10 years and Liftshare.com for 15), but what the evening did was give outside endorsement to the cluster. Mike Butcher from Tech Crunch came along and it gave everyone present belief that they were on the right road and that they should be shouting about it. In the days since, I’ve seen emails offering co-working spaces and there’s even a cluster name (Silicon Broads) being bandied about, along with a startup map.
Norwich isn’t the only cluster rising to prominence across Europe – the growth of cloud-based technologies, new agile development methodologies and a focus on entrepreneurship mean they are springing up everywhere. Some people see this as a bad thing – they point to the size of Silicon Valley and wonder how hundreds of disparate European cities can compete or scale. But as Butcher pointed out, the Valley has a 60 year head start and what is needed is to build bridges between the different hubs – after all takes 2 hours to drive from London to Norwich (or Cambridge), the same time to get from one end of Silicon Valley to the other.
What Europe needs to do is to use the nimbleness of having multiple centres to its advantage and turn disparateness into diversity. I’m reminded of the story of the ‘discovery’ of America. At the same time as Christopher Columbus was touting his plans around the courts of Europe, the Chinese Emperor was assembling a great fleet to explore the same area. Given the scale and backing put into the expedition it would have been likely that the first non-native settlers in the present day United States would have been Chinese, not European. However the Emperor died and his plans died with him – there was no alternative power that could take them on. In contrast Columbus, originally Genoese, travelled round Europe for years until he found a backer in the Spanish monarchy. The result? The world we know today.
So it is time that European startups (and political leaders) stopped dreaming of a single super hub that on its own can rival Silicon Valley. It’ll never happen and what we need to do is build bridges between the enormous variety of hubs across Europe. Making everyone aware of what is going on up the road (or further afield) is crucial to driving collaboration, unlocking opportunities and building a successful pan-European tech ecosystem that can break down barriers and silo working and deliver jobs and growth.
Last week Mike Lynch, founder of Autonomy, announced the first investment by his latest venture, Invoke Capital. It has put money into Darktrace, a security company founded by Cambridge mathematicians. Darktrace uses Bayesian logic to spot cyber security issues by learning what is normal inside a company network and then flagging behaviour that differs from this.
Lynch is a divisive figure, but whatever your views on him, he built Autonomy into a multi-billion pound business, achieving the biggest ever sale price for a UK tech company when he sold it to HP for £6.2 billion. Of course, since then HP has sacked Lynch, written down Autonomy’s value substantially and asked authorities on both sides of the Atlantic to investigate possible accounting irregularities at the firm.
But two things that Lynch said stood out for me. Firstly, he believes too many European tech companies are sold too early in their development (normally to US rivals) – raising tens of millions rather than billions. Invoke plans to change that by investing for the longer term and providing experienced managers to take businesses to the next level.
The second thing he really encapsulated was the difference between Cambridge and Tech City businesses. Speaking in The Economist, he said “What you will find in Cambridge is something which is fundamentally clever, while what you are going to find in Tech City is something where the raw science isn’t fundamentally clever, but its more attuned to the market and the consumer.”
So the difference is between Cambridge clever and Shoreditch smart – but (as Lynch also says) we need both if we are going to build strong, vibrant tech sector in the UK. After all there’s no point in clever technology if it doesn’t have a market, while there is a limited opportunity for low IP businesses – we already have enough social networks.
What we need is to bring the two clusters together and develop a mutual understanding so that both can learn from each other, cross-fertilise ideas and even work in partnership. Let’s face it – they are only 60 miles away from each other, just a bit more than the distance from San Francisco and Silicon Valley. Some people in Cambridge have a tendency to look down on any ideas that haven’t originated here (or spent years in development in the lab). In contrast denizens of Silicon Roundabout often view Cambridge companies as too technical, too geeky and taking too long to build in comparison with their agile media startups.
Two immediate things would help this necessary cross-fertilisation. Firstly, a forum to bring the two groups together to share ideas and network, and secondly, a realisation by the government that you’ve got to look at the tech sector as a whole. At the moment a lot of effort goes into TechCity but that needs to be widened to encompass tech companies across the UK (not just in Cambridge, but in other clusters too) with a cohesive set of policies that encourage innovation and longer term investing. Otherwise Lynch’s vision of building billion dollar businesses in the UK simply won’t be realised, and that will hurt everybody.
- Invoke Capital Makes First Investment in Fundamental Cyber Security Technology (prnewswire.com)
- Invoke Capital Makes First Investment in Fundamental Cyber Security Technology (virtual-strategy.com)