Dan Cobley, managing partner at Blenheim Chalcot, compares the UK and US tech scene.
Walk through East London’s Tech City and any American VC will be greeted with familiar sights: developers sip flat whites and pound out lines of code on MacBooks, entrepreneurs discuss machine learning in shared workspaces, and venture capitalists tease out valuations in a thriving tech ecosystem. But there is one important area where the UK lags behind the US, and that is the ambition of most founders and investors.
American startups are often built with goals that have more in common with science fiction than their overseas peers; founders aim for world domination. Microsoft set out to put a PC in every home, Google aim to organise the world’s information and make it universally accessible and Uber want to make transport as accessible as running water. The shocking thing is not just the scale of these dreams, but the extent to which they have been realised.
The new world
America is the new world, and the country inspires a kind of aspiration in its citizens and immigrants that some Europeans consider naïve. Yet it has led to the creation of Silicon Valley, the Mecca of global tech. UK successes like ARM Holdings and Swiftkey might be the best at what they do but they did not plan to change the world beyond their sectors, or were acquired by companies with bigger ambition before they did.
The culture of thinking smaller in the UK originates with the investors who help to build these companies. The UK invented modern finance, and, paradoxically, this can be a hindrance. We have been evaluating companies for centuries, and reach for the same tools of linear growth that previous generations used when doing so. US investors are often former founders, and look for the kind of exponential growth that is only possible in tech. They seek out exciting end-game economics rather than immediate profit, and prefer long-term overarching strategy to pragmatic short-term goals. Here in the UK we remain overly reliant on traditional tools of corporate evaluation; Newtonian physicists living in a quantum world.
When Facebook purchased WhatsApp for $22bn, the size of the deal was met with surprise on both sides of the Atlantic. WhatsApp’s financial results for 2012 and 2013 revealed the messaging service generated less than 3 cents in revenue for each of its 400 million active users that year. Yet Facebook paid $55 per user when it acquired the company at a time when WhatsApp’s was losing $138.1m per year.
Yet this acquisition neutralised a competitor while shoring Facebook’s mobile strategy, just as mobile was redefining the tech world. The move was crucial to making Facebook the global titan it is today. In a world where short-term profit is king, this kind of long-term strategy can be overlooked, leaving no room for Apple to invent the iPhone or Google its maps service.
We will not compete with our US counterparts for access to funds in the short-term, as CB Insights report that a record $3.6 bn was invested in UK tech last year compared to $58.8bn in America. But tech is open to global funding, and UK companies that are built for the long-term will make the radar of international firms.
For the UK to build a culture that rivals the US we need to start with the basics. We should mitigate the operational and administrative distraction of startup founders by supporting on short-term pains like office space, IT, legal and hiring, allowing founders to focus on long term strategy. The ability to reach profit should always be part of the equation and the business built on sound unit economics, (the likes of Amazon could turn a huge profit overnight if they were so inclined) but the path to profitability should be viewed over a much longer timeline. At Blenheim Chalcot, we won’t consider an investment unless the company is built for the long-term and the founder has the grit to see it through.
Investors need to display leadership in order to encourage entrepreneurs to do the same. Following Brexit, investment is tightening, and British VCs need to have the discipline to continue to identify, encourage and reward ambition in founders. The tech revolution is still roaring, as the “next five billion” start to access the internet on mobile devices in the developing world. The UK can be the home of world-beating innovators but it will require investors to step up to the challenge.