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!)

What next for Dr Lynch?

It is no surprise that Mike Lynch and HP are parting company.


Hard to see how working for a US mega-corp was going to work for the founder of Autonomy having walked away with such an enormous cheque etc.


The big question is what's next for the UK's most successful technology entrepreneur? 


I don't know or have ever met Dr Lynch, so this is really just in the realm of speculation, but I would be surprised if he disappeared into the sunset following the exit from HP.


So what then are the options. In no particular order:

• Lead a new start up from scratch
• Use his wealth to invest in a series of tech companies, in the UK, or globally
• Acquire minority or controlling stakes in existing companies that he believes he can transform
• Join an existing VC or PE fund
• Philanthropy and public service, either to advance the cause of technology, education or other
• Some or all of the above!

There are not many truly global tech companies in the UK, and very few that have reached critical mass. In Mike Lynch the UK has someone who has seen this from "soup to nuts" and it would be great if he used this talent and experience to help others do the same.


As a direct consequence of the previous paragraph there is also a shortage of talented and experienced execs in the tech arena in the UK, which is part of the chicken and egg situation. 


Perhaps this is an area that Dr Lynch can apply his time and money to help nurture and promote the importance of growing the talent pool and its importance to the UK economy in the 21st century.

In any event I would want to wish him the best of luck in the rest of his life, having dedicated the last 15 years building the most successful British software company of its generation.

Its the P&L, stupid!

I hope that nobody gets offended by this blog! If they do I apologise in advance!

I picked this tweet up which was written by a very respected VC partner and recommended by another very respected VC partner.

I thought - great, I will get some insight from some people who have been in this business longer than me with great track record. What you will find if you read the article is a very basic look at the elements that make up a company's profit & loss account.

I, of course, accept that this is a very important part of any business. The surprising part about the article was the implied assumption that the readers are not very well versed in the various parts of the P&L.

There has been much debate recently about the VC industry and the its business model. I think that also what needs to be debated is the type of mind-set that VC's have created amongst management of the companies that they back.

At Goldrock, we have recently seen a number of companies that have made the initial sales breakthrough reaching several million $'s in sales. However in too many cases this has been at the expense of too much equity capital that has been invested over the previous years, leaving the company in what I call "cap-table trap"!

If managers are used to going back to their VC "sugar daddy" every year for more equity money then they have little or no incentive to worry about basic things like receivables and payables (for the un-initiated, the money a company is owed or owes its trading partners).

In the long term all of us on the investing side need to pay attention to the capital efficiency of our investing models, whether it is at the sharp end of the VC world or the less dramatic world of growth investing or private equity. If we do not, our LP's will not find the justification for supporting this type of investing.

The debate on the VC/PE model must continues, but must also drive everyone on the gravy train to be honest about the way they are achieving returns and the true risks taken in order to make them.