Is Size Everything?

Having just returned from a technology conference in the US where I mingled with tech investors and private and public companies operating in a variety of tech arenas, I was interested to read the views of Simon Segars, CEO of ARM Holdings, on the subject of why the UK is failing to produce world-beating technology companies:  See FT’s ‘Arm chief laments lack of capital for start-ups’. This commentary led me to think more about what I saw in the US and how this compares to the UK tech scene.

The first, and probably most notable difference identified by Mr Segars, is the level of funding available to UK technology businesses. The average value of a Series A (i.e. first institutional) round in the US is around $7m, whereas in the UK it is around less than half that. This is important in a globalised world where speed to market and brand creation are increasingly critical – the more money you have the easier this should be. Beyond the Series A round there are a significantly greater number of US-based VCs  who will provide further funding for the growth stage – the number of Series B, C and even D growth funding rounds is significantly greater in the US, enabling their technology ventures to continue growing to a much larger scale.

This level of funding has the knock on benefit of creating larger eco-systems of tech companies and like minded people – Silicon Valley is on a different scale to London’s Silicon Roundabout. The benefit of sharing experiences with a large peer group should not be underestimated, neither should the benefit of having a large cohort of successful companies to look up to and learn from. In a sense this becomes a self-perpetuating virtuous circle – success breeds success!

US companies also have another innate advantage – their home market is huge in comparison to the UK, which gives them the ability to grow to a significantly more sizeable business much faster prior to having to take on the challenge of overseas markets. Despite the advent of the EU, language and cultural issues still create significant barriers to calling this a home market for UK companies. Expanding geographically is much easier from a position of strength (or scale).

The ability of US companies to grow in their home market is also aided by the willingness of larger companies to buy ‘best of breed’ products regardless of the size of the supplier. This is embedded in the more entrepreneurial and risk-taking psyche prevalent in the US. The reverse attitude amongst ‘buyers’ in the UK is headlined by a ‘no-one ever got sacked for buying IBM’ attitude. This is a trend we have first hand experience with a number of our portfolio companies that are increasingly having the most success exporting their products and services. (See Tony’s related commentary  ‘Innovating here, expanding overseas’ in the  latest Midven newsletter).

‘Attitude’ also has a much wider role in this. Failure is not considered to be a bad thing in the US. If you have started a US venture and failed it is almost a badge of honour and considered to have been a fantastic learning experience that means there is less chance of you making the same mistakes again and therefore have more of a chance of success. In the UK however, it still remains extremely difficult for somebody ‘tarred’ with a failure to raise funding and be given a second chance.

Hopefully, in the UK we are starting to see the first signs of change towards a more entrepreneurial/risk-taking culture with significant growth in employment numbers being largely under-pinned by a surge in the number of people being self-employed. Additionally, the fast-growing world of digital media, in all its auspices, is presenting opportunities for a greater number of graduates to branch out on their own.  Both of these trends are arguably a natural side-effect of a long-running recession but will hopefully continue as the UK economy grows and embed a new culture within the UK.

However, on its own, a change in culture will not suffice. A fundamental change in the structure of UK venture capital is probably required. Midven is the 5th most active tech investor in the UK and yet in comparison to our US cousins we are very small. We think it is time to ‘double down’ to coin a poker phrase, and fund new  ventures that can compete in a global market. As one part of that effort, Midven is currently in the process of raising an Advanced Manufacturing and Materials Fund to support the development of new technologies in, amongst others,  the aerospace and automotive arenas – two sectors in which the UK has world-class expertise and in which it arguably leads the world in innovation.  Promising enterprises in this field will find funding — it is key that they get this funding in the UK or they will increasingly look to the US for investment. Or even worse, the expertise itself will move to the US, which would be a crying shame and a hammer blow to UK innovation.

Roger Wood