Venture capital is critical to the success of many technology companies around the world - particularly in the US where VCs have been a huge part of the global success of Silicon Valley. In his autumn statement George Osborne signalled that he would make changes to the UK's VC landscape, to stimulate more seed investment and start-ups. The initial response has been welcoming, but will the changes really help the UK to be more competitive with Silicon Valley?
An article in The Economist earlier this year highlighted that for all the vibrancy in UK tech start-ups, very few have grown to any scale. Only two British firms (ARM and Autonomy) were world-class: respected (or feared) in Silicon Valley and big enough to matter (FTSE100 listed). After HP's acquisition of Autonomy it leaves only one world-class British technology company.
Does that matter? Perhaps not - it is a truly great result and all credit to Mike Lynch and his team for creating $11bn of value. Moreover, the sale could have many potential benefits for the wider tech sector.
As Dan Crow puts it: "Many of the employees will become wealthy...and use that money to fund new start-up companies. This virtuous cycle is at the heart of Silicon Valley's success."
There is also another talent-based cycle - people get the bug of working for fast-growing companies. When it gets bought, they leave and form new-start-ups; Andy Grove leaves Fairchild to start Intel, then people leave Intel to start other firms and so it continues.
And yet, and yet...the UK still only has one "world-class" technology firm left. Is something broken?
What's wrong with UK tech?
ARM was founded in 1990, Autonomy in 1996. Did innovation stop 15 years ago? That would certainly be a problem, but clearly isn't true: there are 1400 tech companies in Cambridge, 500 start-ups around Old St.
No, the problem in the UK is different. We have a lot of start-ups. There are even a reasonable number of successful "grown-up start-ups": medium sized companies with profits and rep:(
utation: CSR, Wolfson, Moshi Monsters, Picochip, etc.
But the UK seems incapable of growing these companies. A few (but only a few) make it to $100M revenue, and virtually none to $1bn. If a company is somewhat successful it gets sold with almost indecent haste. In 2006 Facebook turned down an offer of $1bn from Yahoo. Can you imagine any UK firm turning that down?
The lack of IPOs means banks have fewer specialist analysts, so there is less expertise in the sector, which leads to less understanding, lower multiples and less liquidity than a US-listed company would enjoy. That makes that future IPO look less attractive and so the wheel turns...
There is a similar negative spiral with people. A lack of firms going "from start-up to world-class" means we lack role models - an Andy Grove, a Steve Jobs, a Marc Benioff, or a Mark Zuckerberg explaining how they started something and, quite literally, inspiring. Someone you've never heard of saying the same thing about a company you only vaguely remember because they sold it before you might have heard of them doesn't have that impact, does it?
Finally it comes back to money. The USA has more VCs, with more experience, and deeper pockets. While there are good VCs in Europe, there are far fewer of them under more pressure for quick results. They simply do not have the funds to invest into growth of late-stage businesses.
Last year there were 462 active US venture capital firms, investing approximately $22 billion into nearly 2,749 companies. In the UK there were about 180 VCs making 397 investments. Funding shrank to just £313m last year from £454m in 2009. Although investment into seed or A-round might be comparable (allowing for size of economies), for growth and late stage then the lack of fire-power matters more - according to the BVCA the average deal size in the US was 5.5 times bigger than that of the UK.
So UK can fund start-ups, but we are undercapitalised for growth.
Gearing up for growth
The lack of successful large companies means the UK loses out on role models, on re-investment, on talent, on financial returns and on IPOs. All of these feed into each other and themselves to hinder other companies growing in turn.
10 years ago we worried about the lack of start-ups, and we are still worrying if Osborne's plans are anything to go by. However, what we really need to do is solve the problem of what happens once we have the successful start-ups. They need the support and access to capital to get to successful IPOs with the opportunity to be truly world-class companies.