The UK tech sector must learn from Silicon Valley’s mistakes and create sustainable companies not sub-prime unicorns, says George Mathew.
The global tech sector is undoubtedly booming. While the number of IPOs may have slowed down, the volume of venture capital being poured into late-stage technology companies continues to rise.
According to PwC, an astonishing 19 startups around the globe joined the ranks of the ‘Unicorns’ – businesses valued at $1bn or more – during the third quarter of 2015 alone.
Looking to Europe, funding for technology businesses is growing faster than any other region globally and nowhere has this leap been more noticeable than the UK. Despite the record-breaking influx of venture capital in 2014, this year is set to be even bigger for the British tech sector.
UK firms secured a whopping $2.2bn in funding during the first nine months of 2015 according to London & Partners, eclipsing the $2.1bn raised during the whole of 2014.
While investment on this scale is undoubtedly encouraging, we have to ask if it runs the risk of steering us off course when it comes to building sustainable long-term businesses.
Over in the US, many entrepreneurs are seemingly obsessed with building ‘Unicorns’. Ever-larger valuations fuel a ‘growth-first’ mentality that is increasingly at odds with long-term business health.
The recent backlash in Silicon Valley against some of these colossal valuations is understandable, as notable investors suggest there are ‘sub-prime unicorns’ out there – companies without the substance to justify their valuations.
The trend over on the West Coast seems to have been to do anything necessary to reach the hallowed $1bn valuation. More and more companies have raced towards that point on the horizon, without thinking past it or giving due thought to the capabilities and assets they sacrifice along the way. Becoming a unicorn has become the end-goal, rather than a milestone on the company’s full journey.
This worrying pattern means founders and directors may make deals and compromises which ultimately hamstring them, preventing them from leading their companies towards long-term business success, post-unicorn valuation. Without careful planning and a more sustainable view of business growth, companies run the risk of defeating themselves with their own short-term success.
Impressive acceleration towards the billion dollar mark should be followed by equally-impressive business momentum after it’s been reached.
London is already the European capital of tech unicorns, with 13 of the continent’s 40 calling the city home. It therefore comes as no surprise that 75% of the UK’s VC funding so far this year has gone to London-based businesses. The city is leading an impressive charge, with investment in local technology companies increasing by a factor of ten in the last five years.
London has even become the global fintech capital, employing 44,000 people within the sector – more than any other city in the world.
All of this momentum is fantastic for the UK economy, but the lessons from across the pond must be learned if this success is to continue. Consistent growth in the UK tech sector for the past ten years shouldn’t lull companies into forgetting that business success relies on long-term planning. Despite short-term benefits, zero-cost capital and unrealistic valuations can be devastating to a business in the long run, particularly when the small print is examined.
Venture capital will continue to remain the critical accelerant in developing successful companies, particularly at times when these businesses have vast reserves of unrealised potential. However, this funding needs to be channelled into developing the business itself for ongoing, self-perpetuating growth.
Potential must be fulfilled on a lasting basis to justify the faith of both investors and employees, otherwise valuations really are just ephemeral numbers.