The writer is the founder of Thamesan FT-backed media company covering European start-ups
While the strongest companies are created during the toughest times, the outlook for the UK tech sector looks bright. The economy appears to be sliding rapidly into recession as inflation and interest rates rise. Private market valuations for tech companies are now driving down public market stock prices. And the British Prime Minister has never spoken a truer word than when he said: “fuck business”.
By imposing a hard Brexit, the government of Boris Johnson succeeded in imposing sanctions on his own country. Not only has Britain squeezed out of the world’s biggest single market, but it could now also be kicked out of the EU’s €95 billion Horizon scientific research programme. As a leading technologist told a government minister at a Founders Forum event last week, Brexit resulted in the greatest loss of sovereignty since the Norman Conquest in 1066. With the world rapidly merging into three technological blocs (the US, China and the EU), Britain now finds itself in soggy isolation.
Yet despite the return of tougher times, the mood at London Tech Week last week was decidedly optimistic. Given its performance over the past decade, the sector has cause for celebration. As a recent Tech Nation report pointed out, the number of startup unicorns valued at more than $1 billion has grown from 12 to 123 over this period (although many of them may lose their spiral horns during the last recession). The number of employees in the technology sector has fallen from 2.2 million to just under 5 million. A word cloud summary of London Tech Week might have generated the phrase: opportunity in adversity.
For now, London remains the hub of venture capital in Europe, although it faces competition from Paris. The ‘golden triangle’ of British universities, spanning London, Oxford and Cambridge, is one of the most dynamic think tanks in the world. Big US tech companies have also doubled their presence in the UK with Google’s headquarters, longer than the Shard, built next to London’s King’s Cross station. “The UK has a great opportunity. The talent in science and technology is extraordinary,” Kent Walker, Google’s president of global affairs, told me during a recent visit.
Some venture capitalists are even trying to reinvent and rebrand Europe’s entrepreneurial geography for a post-Brexit world. In the same way that the concentration of entrepreneurial, academic and financial expertise in California’s Palo Alto fueled the rise of Silicon Valley, London and Paris are the two poles of a decentralized “New Palo Alto”, according to Saul Klein, co-founder of venture capital firm LocalGlobe. Its own offices are nestled close to Google DeepMind, which says it employs 700 PhD researchers focused on artificial intelligence, the brilliant Francis Crick Institute, which conducts biomedical research, and University College London.
Hop on a train (at least when they’re running) and in four hours you can reach several other tech hotspots, including Bristol, Manchester and Paris. You can also find a thriving life sciences cluster around Leuven in Belgium and a deep tech cluster around Eindhoven in the Netherlands.
Seven of Europe’s 10 most valuable tech start-ups have emerged from this New Palo Alto, according to Dealroom. Collectively, this European cluster ranks third in the world, after California and China, in terms of creating new business value.
But despite the progress made by the UK tech sector over the past decade, there is still a long way to go. According to Jonathan Haskel and Stian Westlake, authors of Reboot the future.
Over the past 15 years, investment in intangible capital in the UK has only grown by 2.3% per year, compared to 4.4% in the US, which has contributed to a wide divergence in economic performance . Take a modern company like Apple and its tangible assets are only 2% of its market value. But British financiers remain in the grip of the “tyranny of collateral”, preferring to lend against tangible assets, such as buildings, factories and machinery, rather than investing in intangible assets, such as software, brand and design. “We have an 18th century financial sector that is not fit for purpose,” Westlake concludes.
The answers include investing more in education, research and innovation, expanding access to venture-style venture capital, and changing the rules to favor equity financing over debt financing. . But it will require a big change in the collective mindset. Hopefully, tough times just might trigger this much-needed overhaul.