Tuesday, May 29, 2012

UK Tech as an Ecosystem

Really liked Ian Spence's thoughtful piece on the dynamics in the London public markets for UK software companies - you can find the full article here - http://tinyurl.com/cfxqj2c. Ian also referred to frustration (via Neil Rimer's blog) that the UK has not spawned signature IPO's matching the fizz of FB, Zynga, Linkedin, Groupon etc

One of the issues has certainly been that the capital released from the many "take privates" over the years has not been recycled by the City institutions into new IPO's and at best has been invested in the ever decreasing number of surviving companies.

Don't know if anyone has researched this yet, but it would be interesting to know what has happened to those PE backed companies within the UK tech sector that have then been re-financed or sold to strategics? What has become of that money and has it, on the whole, generated new wealth.

Bear in mind that there are probably more tech-minded PE firms in the UK than there are out and out VC funds. In the US and in Israel, it is the opposite, and whilst there is growth in the non-venture private tech strategies in both of these markets, they are both still dominated by the supply of venture for new businesses. The is the life-blood of new innovation, and certainly when you want to see ultra-ambitious and "global-domination" ambition.

A second issue has been that historically most of the public "software" companies in the UK are really IT services companies with differing levels of IP. By their nature, they have tended to be domestic and very few real IP-driven global businesses have been created or backed by the City.

The TechMARK itself is a hotch potch of engineering, telco, and IT services companies with a smattering of hardware thrown in. (Very few obvious exceptions like Autonomy (now HP of course), ARM, CSR and maybe Sage, which is global, although not a traditional global software company in the US sense of the word).

Finally, It is completely unrealistic to build an expectation that London can compete fairly with the US when you look at the make-up, size and global reach of the companies on both sides of the pond (Apple, Microsoft, Oracle, Cisco, EMC etc vs Sage, Logica, Misys etc is just not a fair fight!), and hence why Ian's piece was thoughtful. It takes into account the risk appetite of the UK ecosystem and its long term affect on the type of companies that have and will be built and funded all the way through to being public.

Without a see-change (business culture, incentives, passion, risk appetite etc) this is the way it will continue to be, and in a macro environment that places a premium on cash-flow and visibility and a discount on future growth it will be even more sharply felt.

In Israel (where I am based) there is a much more mature strategic M&A market for tech companies and whilst some of this money recycles back out of Israel to the foreign VC's and institutions that have given their previous backing, much of the money is recycled into creating the next generation of start-ups.

The big question for the UK is whether they have the critical mass across the value chain to create this type of self-supporting ecosystem, and if not, what intervention is required to assist this in happening! (Your thoughts on a post card!)

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