Funding Tech Disruptors

At finnCap our mission is to help ambitious companies grow and we do this through our ability to advise, promote and access capital for both private and public businesses. We have many clients who have raised funds to disrupt a market including Cityfibre, Seeing Machines, Proactis and Intercede.

It remains quite some investment landscape for tech disruptors. In 2001 the top 5 largest public market companies consisted of General Electric, Microsoft, Exxon, Citi and Walmart. A heady mix of oil, consumer and finance. This was post the dot com boom. By 2016 the top 5 looked very different with only Microsoft remaining and with one of the top 5 being founded post 2001: Facebook. The other 3 were Apple, Alphabet and Amazon. Each a combination of disruptive consumer, finance and technology in the new economy, oil is conspicuous by its absence.

These changes speak to a very fast moving market with new entrants revolutionising behaviour in both corporates and consumers. We now carry a phone, television, encyclopedia and social life wherever we go in a world that would have looked like science fiction 30 years ago. Globally a very large number of companies have been well funded both publicly and privately: outside of the top 5 quoteds there are herds of Unicorns, there are well established VC’s, government incentives and tech incubators whilst both private enterprise and academic bodies have continued to fund large research and development programs.

Turning to the UK and London the top down view is equally positive. The Patient Capital Review of August 2017 recognised that “innovative firms have a disproportionate impact on productivity” and “private high growth businesses, those with an average growth rate of 20%, create more jobs than the FTSE 100”. The Government now clearly sees this as a strategic priority.  In our view London remains at the heart of this movement and in the first 6 months of 2017 £1.1 billion was invested into London’s technology sector which remains a world-class destination for technology innovation. Some of the most successful tech businesses have been founded and grown here including Magic Pony (acquired by Twitter) and Deliveroo.

Yet not all is a bed of roses. Challenges remain for businesses seeking funding and for every successful business there are a significant number that fail to achieve funding. This can be for a variety of reasons but in our view there remains a significant gap between start-up capital provided by private investors or institutions under tax efficient schemes or research grants and the scale up capital required to fully reap the benefits of this investment.

As Eric Schmidt, Chairman of Alphabet, commented:

“The UK does a great job of backing small firms and cottage industries, but there’s little point getting a thousand seeds to sprout if they are then left to wither or transplanted overseas….If you don’t address this, then the UK will continue to be where inventions are born, but not bred for long terms success”.

A reflection of this is the decline in the public markets ability or willingness to actively fund tech disruptors at the aggressive growth phase with the average time to a tech disruptor going public increasing each year and capital being in short supply for those who have a time horizon of over a decade.

The issue of funding and success extends far beyond just scale up and in recent years commentators have lamented the sale of ARM to Softbank and Autonomy to Hewlett Packard. Does it show a lack of ambition in the UK or is it simply that the relatively smaller size of the UK consumer means that we will forever be outgunned?

It is hard to say what the future holds but if the past is any guide it seems clear that other large companies will come to the fore over the next 20 years and that some of them have not even been thought of yet. Government policy will remain as pertinent to start-up capital as it does to the behemoths of the tech world many grappling with the consequences of Facebook and Google as utilities and Uber experiencing a real world setback.

Yuval Harari’s book, Homo Deus, provides a fascinating insight in to the potentially disruptive effects of life extending technology, virtual reality, artificial intelligence and the role of algorithms. These are all areas that the London based community is investing in now and all of which are likely to have as big an impact on us as the large players of today have had. If you have not read it I would encourage you to do so and whilst it may be purely the effect of cognitive resonance I think it provides some useful signposts to the direction of travel. 

Stuart Andrews, Head of Corporate Finance, finnCap