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.

Sage R&D - bang for its buck (or pound)?

Sage announced their interim's this week, to the slight disappointment of the market. There is growing concern that as organic growth continues to trend in the mid-single digits, and acquisitions are hard to come by, the company will start to approach ex-growth with a knock-on effect to valuation etc.


George O (Panmure) picked up on the fact that Sage supports 270 different products on 70 different platforms.


He also made a headline comparison between R&D spend at Sage and some of its obviously comparable companies. Sage spends 11% of revenue on R&D, in contrast to 12.5% at Microsoft and 21% at Intuit. He adds that if anything there should be a higher spend on R&D than at present. (Note 5-year comparative share performance).


Whilst I accept this point, there is a more stark comment to be made. 


With 11% (or in absolute terms 160m GBP) invested annually in 270 different products on so many different platforms, the only real progress they can make is small incremental steps to maintain and evolve the products, at best, rather than push a more innovative product offering.


Within the other companies he mentioned (and true of most of the global software players) there is a global approach to product development and thus the effectiveness of the spend is magnified greatly.


Unless Sage allocates investment to blue sky thinking and more creative approaches to partnering/investing/acquiring tech rather than market share, they will continue to struggle in their efforts to generate real growth. Unfortunately attempts to generate these ideas internally have not yet been successful enough. One just has to look at the several years and attempts made by the company to launch a joined-up SaaS strategy, never mind product, to understand the difficulty it is in.


Given the amazing position that the company has, very large, global and loyal customer base, and a highly visible and reliable P&L, it could afford to be a little more expansive in its approach to creating long term growth engines for the business.


Part of the solution will be to realise that (at least for the time being) the era of growth via acquiring market share has passed. This will force the company into looking more organically for that growth.


I have always been of the view that there is sufficient talent within the company to rediscover the growth, it does however need to show confidence and leadership to make this happen. 

Professor Elmo explains the National debt in 1 graph

Its incomes that matter. Its incomes that pay the mortgages and supports small businesses. Not GDP. Government expenditure, however it is misspent, is incorporated into the GDP. But have the US citizens been helped? No. Increasing the national debt by 54% in the last 42 months has not had any affect whatsoever on income per capita. And thats in nominal terms. Add in inflation, and they're actually worse off than they were in 2006. To the tune of about 12%. 

Elmo cant make it any more obvious!

Falling unemployment - everything's fixed now? Part 2!!!

This is a follow-up to my previous posting found here: http://goldrockthoughts.blogspot.com/2012/03/falling-unemployment-everythings-fixed.html


Since my posting of earlier today, I have since been on the St. Louis Federal Reserve (FRED) website. I came across several fascinating graphs; which to me imply anything but a stellar recovery in the jobs market that the headlines are screaming out at you from every direction.


Consider that since the year 2000, the workforce has increased by some 33 million people:

wheras the number of total jobs, including full time jobs, part time jobs, temporary jobs, increased by a mere 4 million:

Of these 4 million new jobs, exactly ZERO of them, are full time jobs.

The number of new part time jobs? An additional 28 million jobs. And dont forget the part time jobs can just as easily be 20 hours a week, or an hour a week. Real earnings are falling and the number of jobs you can actually live on remains stuck at 115 million--all the "added jobs" are marginal: marginal hours worked, marginal security (temp), marginal pay (part-time=low pay and no benefits). Hardly the recipe for a roaring labor market.

Falling unemployment - everything's fixed now?

The latest unemployment report was released on Friday, showing the unemployment rate in the US steady (at a still elevated but falling) unemployment rate of 8.3%. I've long maintained that Employment is arguably the biggest problem that the Americans face today, as if you somehow manage to get people back in the workforce, all the other "problems" over time will fall into place. Government defecits, budget defecits, trade defecit, consumer confidence etc etc should all improve with an improvement in the labour force data. The US economy is a consumer led economy; however, for a real recovery, and confidence to return to allow the economy to get back on track, a real improvement in the jobs data is surely a pre-requisite.

Surely then falling unemployment can only be good news? Not necessarily.

Firstly, just to appreciate just how far we had fallen off a cliff, and what the rebound has looked like, lets compare the current cycle to previous ones.

We see quite clearly the extent of job losses in the current employment recession is in a league of its own when it comes to previous downturns in the job cycle; both in terms of extent and duration.

Surely though, a falling unemployment rate can only be a good thing?

The red line, shows the unemployment rate. 8.3% and sharply falling, yes, that is certainly an improvement. However, to be confident that a fall in unemployment will feed through to the real economy, one would like to see that the fall in unemployment rate would be accompanied by a rise in the participation rate, basically that the fall in the unemployment rate would be felt by a higher proportion of the population. Alas no. Extrapolating from the graph, the US is well on its way to becoming the first country with no unemployment, yet nobody participating in the labour force!!!

Yes, jobs ARE being created. But not enough. The steady/flat black line (employment/population ratio) is indicative that the number of jobs being created are only enough to keep up with the increase in population. 

But the news gets worse. The unemployment rate, and all the other statistics/graphs shown only deal with the quantity, they do not account for quality. Problem number 2, is that as with all statistics, the output is only as good as the input or assumptions made. The data in the labor force data, is subject to many revisions, often with a many year time-lag. Additionally, numbers are often not comparable, as a later consensus will suddenly show an additional x million people that previously hadn't been accounted for.

When looking at the quality of jobs generated, I prefer to go to the Feds website and look at tax data. Those figures are not played with whatsoever, there are no seasonal adjustments etc, nor is the data dependent on any population census. The numbers are reflective of the income tax received by the Government. No fudging whatsoever. A rising number is indicative of rising employment, and/or rising wages. And the numbers are startling.

The table is one that I made based on figures taken directly from the Feds website. They take 2 corresponding periods, the 4 month period from 1st October 2010 until 31st January 2012, and the corresponding period the following year. We can see that in the first period, the Government received $592.985B and over the course of the 4 months, there were an additional 571,000 jobs created. In the corresponding period the following year, the cumulative tax received by the Government FELL to $592.676B, despite an additional 715,000 new jobs created. Over the entire period, between 30th September 2010 and 31st January 2012, a period in which there were an ADDITIONAL 2.5 million jobs, aggregate tax revenue received fell. This means that yes, DESPITE new jobs being created, they were lower paid, poorer quality.

This is not a healthy state, and it seems to me to need some catalyst, to end this cycle. This has serious and substantial ramifications to the Treasury's forecasted debt issuance schedule. When issuing new debt, the Treasury works on many models, one of them being the rate of unemployment. Their working assumption of lower unemployment is going to need serious modification if the current trend of falling Government revenue despite falling unemployment continues.

And whilst I have focused on, and highlighted the negative trend in the US employment, Europe is in a far worse state.

  In the US, whilst the unemployment trend is very much down, in Europe and the UK it is still on the way up.

I think the graph is pretty self explanatory ...... and scary!!!

The full article as originally published in the New York TImes appears here:

http://www.nytimes.com/2012/01/22/opinion/sunday/the-dangerous-notion-that-debt-doesnt-matter.html