John Lewis has founded and grown high tech companies. Here he gives a personal view about the current state of the technology sector in Northern England.
“The first principle is that you must not fool yourself – and you are the easiest person to fool” – Richard Feynman
That quote applies to those who hype up the North’s tech sector.
Several of our Northern universities have excellent Computer Science departments; we have lots of aspiring entrepreneurs, workspaces and hubs-a-plenty, and while the tech scene is a lot better than it was 20 years ago, we are not producing nearly enough global ‘winners.’ Why?
Having spent three years of my career in Silicon Valley, the root cause is fairly obvious to me. There are a number of secondary causes, but first, let me try and debunk the ‘Unicorn Myth.’ We don’t have anywhere as many ‘tech unicorns’ as you may have read about in the press. Boohoo.com for example is a great company, very disruptive but they are the first to admit that they are not a technology company, they use technology but do not create it. AO.com, Missguided, The Hut, Moneysupermarket.com, Bet365, Ladbible are also, I am sure, good companies but they are users of technology rather than creators of it.
This definition of a tech company is narrow but using a wider definition – ‘digital’ (users of technology) – pulls in the likes of Marks & Spencer, Barclays and even the Government’s Department and Work & Pensions! Many companies need to use ‘digital to interact with their customers. Some, like Xerox started doing so 15+ years ago, others are still thinking about it. ‘Digital’ is generally not a good definition of a tech company, but some traditional companies – Lego is a very good example – have been able to use digital to transform their businesses.
Digital – a meaningless term
Since so many companies need to be ‘digital,’ it is a fairly meaningless term. Tech companies however need ‘pace’ – if they have not grown to a critical mass in a short time, they will not make it; faster, better-funded competitors will take the market.
This post is focused on tech-based companies – ones with defensible IP – that in a fairly short period of time (10-15 years) can grow to dominate a technology sector – prospective tech unicorns. Some maintain their independence on a stock exchange (e.g. Atlassian) others get a listing and then get gobbled-up by the likes of Oracle (e.g. NetSuite, BEA).
Building defensible IP is expensive – probably 20 person-years is the absolute minimum needed, either acquired from an academic source or built by a team of developers – say £2 million in development costs. But it isn’t just cost, time is also very important. It is a jungle out there, and the story of the two missionaries who meet a lion has relevance – if you have a good idea and talk about it and someone with a lot of funding (or smarts) decides to copy it, they will run faster than you.
Without the money to invest in product development (while sales build), others will steal the market.
True tech unicorns grab the global market
One common factor is that true tech unicorns grab the global market (Atlassian was founded in Sydney – where bed-linen departments are still called Manchesters). Woefully few UK SMEs have attempted to export, less than 20 percent. Exporting is also expensive, so when raising initial funding you need to add another £2 million or so to cover legal, sales and marketing costs.
Because tech is a global market, those startups that have pace are more likely to succeed. £5 million of funding is therefore the minimum funding needed in the first couple of years of a potential tech unicorn. And that is just the start, further funding rounds need to follow quickly.
If you haven’t built a significant business within five years, you are probably not going to make it. The fundamental problem that Northern startups have is that other locations fund bigger and faster at all stages.
Knowing what you want
So, an important question that any aspiring northern entrepreneur has to ask is “what sort of business do I want?” Do I really want to be a tech unicorn or am I (and my family) happier with something that is more modest? If your startup only intends to address the UK market, that is a good thing to understand early, entering other markets with their own regulatory and cultural hurdles is not easy and requires deep pockets. Brexit will likely make it more difficult.
But someone has to export! To do that, to grab the global market, to aspire to be a tech unicorn, means that the entrepreneur has to have the vision and commitment to do it. That also probably means the sort of support network that a top venture capital firm provides, e.g. building the team, global contacts etc. If your ambition is to become a ‘tech unicorn,’ venture funding is probably the route you have to go down. Autonomy was able to get on NASDAQ early but the UK’s AIM is nothing like NASDAQ.
Another potential route to success is to be disruptive. Being disruptive is also a good thing. Uber and Airbnb have been disruptive – they also raised huge amounts of funding. Uber had lots of competitors in their early days (including a Swiss one I did some work for). Their technology was nothing special but they ran fast and then did a technology “catch-up”. Being disruptive is not an easy road politically, as Uber is finding in some countries and Wonga and Deliveroo have discovered in the UK.
VC funding comes at a price and there are very few good VCs out there that can help you down that route. How many Northern companies have raised £90 million in their first three years?
In search of the best VCs
Having met lots of VCs, the most impressive ones – almost without exception – are those with a strong technical background that have built their own companies. If you want a good VC, you have to go to London, or as far as Silicon Valley.
A few of the good Silicon Valley VCs – like Accel and Summit Partners – have established themselves in the UK and are investing in some of our best firms. Summit has invested $22.5 million in Darktrace – a 3 year-old company that has now raised $90 million.
Darktrace is a spin-out from Cambridge University and is also a good example of a ‘chocolate fountain’ – a successful tech-savvy entrepreneur investing and supporting other start-ups.
If the primary cause for the poor performance of the North in the tech sector – and it is poor, both in absolute and relative terms (London ranks sixth in the top 20 globally) is the ‘wrong type of money’ what are the secondary causes?
Some blame must be attached to the Northern universities. They generally have a poor record of exploiting IP – graphene is a good example – and it would be sensible to create collaborative super-initiatives to focus on key technology areas e.g. blockchain, secure/safety-critical IoT, machine learning etc. – similar to Philip Treleaven’s fintech centre.
To be effective, these initiatives need to leapfrog the existing global state-of-the-art and create world-beating IP. This is a challenge to academics who, given funding, seem to take the approach of building a new building – “build it and they will come”, rather than focusing on what is really needed. The Germans have a better approach with their Fraunhofer Institutes but the UK needs a faster solution to regain industrial competitive advantage.
Corporate venturing has largely disappeared in the UK – some companies were very entrepreneurial – Vodafone was a spin-out from Racal, for example. Done well, this has tremendous possibilities but we do not have many industrial companies left that can do this.
So beware the “rah, rah, rah.” Any aspiring Northern entrepreneur needs to look past the hype and not fool themselves. They need to understand the funding problem and find solutions. As far as finding good VCs are concerned that might mean getting on a plane to San Francisco. The investment scene in the North is undoubtedly improving but until I see a UK VC putting £50 million into a Northern startup I’ll withhold my enthusiasm.
22 Jun, 2017
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