The UK is certified unicorn factory -- the country has 15 current unicorns and has single-handedly created 35% of Europe's entire unicorn count since 2008. But if the UK tech industry is so good at getting a tech business to $1 billion, what's stopping it from growing these companies to valuations of $10 billion, $20 billion or $100 billion?
It's a question that's been plaguing the UK tech industry for a while.
The US, continental Europe and Asia don't really have this problem. The US has dozen of tech companies worth tens of billions of dollars, while Europe has a few -- Spotify being the biggest, followed by Zalando and Supercell -- and Asia, especially China, has companies such as Tencent, WeChat and Weibo. So why can't the UK replicate it's success in the post unicorn stage and grow its successful tech unicorns, such as Deliveroo, Fanduel, Revolut, Improbable, TransferWise and many more? (See The UK Starts & Grows Most of Europe's Tech Unicorns.)
In discussions with investors, companies and organizations which oversee the UK tech industry, we've identified three key issues which causes the bottleneck in the post-unicorn stage for UK tech companies.
Money and access to capital
The UK has 15 unicorns currently, but struggles to grow companies beyond this point.
(Image: Ines Pimental, Unsplash)
Data shows that the UK is fantastic at funding young startups with pre-seed and seed funding -- the UK had the highest level of venture capital investment across Europe in 2017, more than the combined totals of Germany, France and Sweden combined. For entrepreneurs, then, the access to seed funding in the UK is unprecedented across Europe, with many calling the country, and specifically London, "the startup capital of Europe." This access to seed funding indicates that UK-based venture capital and angel investors have a large appetite for risk at early stage startups, meaning they are ready and willing to invest -- after all, the more money they invest, the more confident they are that they will make their money back.
However, with this appetite for early-stage risk comes a downside: there is less appetite in Europe, but especially in the UK, for later-stage deals totaling hundreds of millions of dollars. This results in foreign investors investing large amounts in British startups, cutting out UK investors who aren't prepared to take the risks of investing large amounts in high-growth UK startups.
Beauhurst, a UK startup and investment research and database company, published a report named, "Investors from Abroad," which found that in 2017, £6 billion ($7.8 billion) was invested into high-growth UK tech companies by foreign investors, across 396 deals including at least one foreign investor. That's an average of £15 million ($19.5 billion) per deal.
Beauhurst's Head of Consultancy Henry Whorwood told TechX365: "We're seeing a growing amount of investors from abroad putting cash into fast-growing UK companies. We've also seen that this is positively correlated with larger deals and higher valuations. In short: the bigger the deal, the more likely that some of the cash will come from a foreign investor."
He continued: "This is a double-edged sword; the UK can attract the world's biggest VC funds to invest in its talent, but this simultaneously reveals a lack of domestic appetite for large deals in late-stage venture capital, and a general dearth of pools of capital that such companies can dip into to fuel their growth. We examine this fully in our report on the topic."
Aiming for exit rather than growth
The UK has a good early-stage venture capital industry but has a serious lack of "patient capital" firms specializing in long-term investment.
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The second major issue is that many UK-based venture capitalists, and by extension entrepreneurs, aim for an exit, either by acquisition or initial public offering on the world's stock markets, rather than continued private growth and investment. This is the traditional VC approach; short-term capital for short term gain from investors, and it means that for a UK tech company, it is worth more to be acquired by a larger company, either domestically or from Asia or the US, then continue to grow.
The other approach is known as "patient capital" or long term capital, and it has struggled with in the past. This is due to the way the UK structures business investments, meaning that when a UK venture capital firm invests in a growing startup, there is often a defined time limit after which they need to make their exit, usually through the startup being acquired, or a public stock offering.
Because of the UK's focus on traditional venture capital -- seed, Series A, Series B and so on -- for short-term growth and short-term gain, investment firm struggle with investing large sums of long-term capital, because they need to exit their investment sooner rather than later. Patient capital firms, such as Draper Espirit, do not have this problem. The UK government is trying to fix this problem, and commissioned the Patient Capital Review in 2017 to examine the situation in-depth and find solutions, but it is not an overnight fix.
Commenting on long-term patient capital, Beauhurst's Whorwood said: "We are also seeing a lack of availability of patient capital; traditional equity VC investment motivates investees and their entrepreneurs to grow their companies to an exit event, rather than more patient growth with no pressure of a trade sale or public listing. This means that it becomes more appealing for a fast-growing UK company to be acquired by a larger equivalent in the US or China than to expand into those territories themselves. Our research and input into the Treasury’s Patient Capital Review highlights this need to invest in growing companies without a short-term focus."
Lack of experience
A lack of experience in running large tech companies stifles the UK's entrepreneurs as they grow their companies.
(Image: Rawpixel, Unsplash)
The final problem is the one that may be the hardest to solve: a lack of experience among entrepreneurs in the UK who have run tech companies worth tens or hundreds of billions of dollars.
When tech entrepreneurs are first starting out, there is a lot of experience in the lower depths on how to start a tech startup, grow it sustainably and raise initial seed funding to get the thing off the ground. As the company grows, however, there are less and less people who have gone through the same thing -- because the further up the ladder of growth you go, fewer and fewer people have gone as high or higher.
Because of this lack of experience, entrepreneurs running rapidly growing tech startups valued at a $1 billion or more have nowhere to turn for advice, because very few people have done it before. Running a company is stressful, even more so when the company is growing quickly, raising more and more funding, and decisions need to be made that could impact the future of the organization.
If the UK is to improve this situation and grow a company to the size of Europe's largest tech company -- Spotify, according to GP Bullhound -- it must be able to look beyond the short term growth, acquisitions and public offerings, exits and its reliance on being the startup capital of Europe but not growing companies past the "scale-up" phase of becoming a unicorn.
— Phil Oakley, Site Editor, TechX365