UK start-ups do not need Government funding, they need access to top talent
Much was made of the technology-focused measures in Philip Hammond’s first Autumn Statement as Britain’s Chancellor. Alongside support for high-speed broadband and autonomous vehicles, Mr Hammond’s November announcement included plans for an extra £400m in venture capital funds.
He said this would help prevent “our fastest growing technology firms being snapped up by bigger companies rather than growing to scale”.
The technology sector needs government support but it doesn’t need more government investment capital. Much of the investment in UK startups already comes from funds that are in some way state sponsored. Instead the Government should focus on ensuring an adequate supply of talent.
British technology firms raised $3.6bn (£2.9bn) in venture capital in 2015, according to CB Insights and London & Partners. While that is only around 10pc of the amount invested in Silicon Valley companies, it is significant and growing — the 2015 figure was a 70pc increase on 2014. In 2016, despite some uncertainty following the Brexit vote, investment levels look likely to at least match those of 2015.
Lack of investment cash is not the issue. Businesses that are addressing large markets, have a unique technology and solve challenging problems will not only find investment, but venture funds will queue up to compete for the privilege.
I would argue that the problem Mr Hammond is claiming to solve — start-ups being “snapped up by bigger companies” — is not a problem either, though it is easy to see why it feels like a problem.
In 2016, ARM, the chip manufacturer, was bought by Softbank, a Japanese firm, for $32bn. With the UK focused on its post-Brexit identity, some have suggested that ARM being bought by a foreign company is a blow to Britain. I don’t agree.
Aside from the fact that the ARM deal shows a huge appetite for foreign investment into the UK, it is also important not to draw misleading conclusions from a single deal. Start-ups sell to larger companies for all kinds of reasons and the effect is usually to strengthen the ecosystem.
After exit, the founders of these firms often go on to create new companies or become angels, investing in and advising other startups. Talented executives who have cut their teeth at these firms also go on to found new businesses or to help other startups grow.
We should welcome every exit because each one frees up more capital to invest in new businesses and makes available new talent to help grow these companies. It also, importantly, provides a return to pension funds, who invest in this asset class to fund their liquidity obligations to their retirees.
Take, for example, the case of PayPal in the US. When it was bought by eBay in 2002 its alumni went on to create a range of very important companies. Former PayPal executives Elon Musk, Reid Hoffman, Peter Thiel and Dave McClure went on to create businesses including Tesla, SpaceX, LinkedIn, Yammer, YouTube and Yelp. They also invested in a wide range of companies as angels and created or joined investment funds.
PayPal is another exceptional example, of course, but each start-up that is sold creates a similar release of talent, albeit in a smaller way.
Each exit has a ripple effect across the sector that should not be ignored. That was the case with Just Eat, King and many others. Each success story we’ve witnessed over the years has boosted the ecosystem and raised the ambition levels of the London tech scene.
There is a philosophical point here too: it is not Government’s place to tell the market that it is bad for companies to be sold. Entrepreneurs will make the decision that is right for them, whether for business (there may be a ceiling to the market opportunity) or personal (whether ambition or family related) reasons. Meanwhile, capital will decide where it should flow to earn the highest return.
If Britain establishes a reputation for creating innovative companies with great potential, then it will attract increased inward investment. Large companies, wherever they are based, will often look for ways to diversify, bring in the latest innovation or disrupt their own core business. Again, the market can make good decisions here.
If we take the view that the market will take care of itself, what do we need from government? We need it to create an environment in which startups can flourish and that primarily means ensuring the flow of the talent to staff them.
A 2015 study by the UK Commission for Employment and Skills found that 43pc of STEM (science, technology, engineering or maths) roles are hard to fill because of a shortage of qualified applicants.
Index-backed companies in London create 3,000 new jobs every year and you will struggle to find an entrepreneur who won’t list hiring as their top priority and their main challenge — and that’s even without a single change since the Brexit vote.
The Government has taken some steps to boost those skills but more needs to be done if British start-ups are to continue to grow. And we don’t just need talented STEM graduates and post-graduates. These start-ups need people with expertise in product, design, operations, marketing and sales, and all manner of other areas.
Where in most cases you should follow the money, in tech venture capital you follow the talent. The country with the best talent will create the best companies, create the most jobs and create the most value.
This article was originally published in The Sunday Telegraph.