What are the central challenges facing tech startups, scale-ups and fast growth companies?
SECTION 3 - Capital
Meeting the challenges faced by UK-based tech companies
Tech companies tend to grow faster than those in other sectors; their rate of expansion often determines whether they will succeed, stagnate or die.
This is because, with the ever increasing pace of innovation, new technological capabilities rapidly become obsolete unless they are taken to market quickly and, once there, rapidly and repeatedly innovated. UK start-ups should also be viewed as being in a race with those from other nations. It is not necessarily the best technology which will win out; those that have greater marketing budgets or simply reach the customer first are often the ones which are widely adopted.
This has led to a particular feature of tech companies: their overarching need for financial support in the race for development, market delivery and innovation as they grow. Whilst financial support can come from Government (in the form of both direct and indirect investment) or the private sector (in the form of individual, venture and institutional investment), that support comes with significant risk.
For every unicorn (companies with a $1bn+ valuation), a huge number of other businesses fail. Estimates suggest that the general failure rate for start-ups is 90%, with 75% of venture capital-backed start-ups failing.
Beauhurst reports that there are currently 24 active unicorns in the UK, whilst 1,009 UK start-ups are in a troubled financial situation or showing minimal activity.
At the same time, viable start-up, scale-up and fast growth companies are exposed to buy out by, and incorporation into, existing tech giants. This strategy is driven by the desire of tech giants either to bolster their own business through acquisitions (namely, the underlying intellectual property, talent and data), rather than expensive and riskier R&D investment, or to remove potential threats to their market hegemony. Indeed, during the last three years alone, Apple, Microsoft, Amazon, Alphabet and Facebook have spent $35bn between them on acquisitions.
For the Government to achieve its ambition of transforming the UK into the best place to start and grow a tech business, a healthy appetite for both investment and risk amongst public and private sector investors is required – as is the financial muscle to fend off initial acquisition advances from Apple, Facebook, Google and the like. This will require more and better directed public sector investment, a robust state aid strategy and the incentivisation of long-term private sector investment.
…during the last three years alone, Apple, Microsoft, Amazon, Alphabet and Facebook have spent $35bn between them on acquisitions
More, and better, public sector investment
The Government is able to invest in private enterprise indirectly through education and skills policies, improved infrastructure projects and R&D funding and directly through grants and providing seed finance.
Whilst an analysis of the Government’s education, skills and infrastructure policies is outside the scope of this report, centrally funded R&D investment does appear to be a good measure of national propensity to drive a tech focused, entrepreneurial economy.
In The Entrepreneurial State, Professor Marianna Mazzucato explored the role government can play in supporting private enterprise by shouldering the cost, and risk, of R&D investment.
Mazzucato’s central thesis is that it is the public sector that makes the biggest investment in, and takes the biggest risks with, technological R&D, not the private. All big tech has really done, she argues, is to package up government-funded innovation (in the case of Apple, this includes GPS, voice recognition and touch screen technologies, amongst others) for the benefit of its shareholders rather than the taxpayers who funded central R&D investment.
Whether public sector R&D drives private enterprise, or private enterprise is adept at commoditising publicly procured R&D, what is clear is that government R&D spending is central to a nation’s economic growth prospects. On this measurement, the UK lags significantly behind the governments of the US and China in its gross R&D expenditure as a proportion of GDP.