Tech City News’ editor Emily Spaven takes a look at what happened in the UK tech space in the first half of 2016.
The lasting legacy of H1 2016 will undoubtedly be the nation’s decision to leave the EU.
The Brexit vote has left pockmarks in the nation’s political landscape, with MPs and ministers resigning left, right and far right.
Forget those in Whitehall, though. We’re here to focus on the UK’s tech community.
What happened in terms of investments in the tech space? What policy decisions were made that impact digital businesses across the nation?
First of all, let’s talk money.
Investments
The first half of the year produced some absolute blinders when it came to multi-multi-million-dollar funding rounds.
My home town of York birthed a unicorn, in the form of software provider Anaplan, which raised $90m in January.
That same month saw Skyscanner raise $192m, which is still the largest round of the year to date.
H1 was a bit top heavy in terms of investment – of the six month’s top 10 tech investments, seven took place in the first quarter.
| Company | Amount | Date |
| Skyscanner | $192m | 11/01/16 |
| Farfetch | $110m | 04/05/16 |
| Anaplan | $90m | 14/01/16 |
| Student.com | $60m | 11/02/16 |
| Blippar | $54m | 02/03/16 |
| HighQ | $50m | 27/01/16 |
| WorldRemit | $45m | 10/02/16 |
| NewVoiceMedia | $30m | 28/01/16 |
| Condeco | $30m | 20/06/16 |
| Roli | $27m | 04/05/16 |
But Suranga Chandratillake, partner of Balderton Capital, didn’t notice anything out of the ordinary.
“We’ve seen typical investing activity in the UK in the first half of the year,” he explained, adding that, as with the rest of Europe, the UK has been in a “broadly healthy place” with respect to early stage venture financing.
“The key driver at the very early stage of the market continues to be bullish angel investing, which is probably helped by the tax benefits the UK government has provided.
“On a more institutional level, low interest rates have continued to lead larger investors to look for return in the form of high-growth private equity,” he added.
Chandratillake said the usual popular tech sectors in the UK – such as AI, media, FinTech and fashion technologies – did well in terms of securing investment between January and the end of June.
Peter Dickinson, partner at legal services firm Mayer Brown, agreed that FinTech proved particularly popular with investors in the first half of the year, although he conceded the statistics were impacted by a small number of mega funding rounds. He said Q1 2016 saw a 98% increase in FinTech investment on a global basis (in comparison with Q1 2015).
“The continued growth of investment in FinTech is reflective of the way in which FinTech has been adopted by the established banks. Previously, they saw FinTech companies as being disrupters. Now they see them as co-creators, assisting the established banks in their drive for greater efficiency, specialisation and regulatory compliance,” Dickinson explained.
Tech M&As
Only 75 M&A deals, worth $3.1bn, were announced in the first half of 2016. This represents a 57.5% decrease in value compared with the $7.4bn across 74 deals that took place in H1 2015, according to Mergermarket’s H1 2016 M&A report for Technology, Media and Telecommunications. Three quarters in a row have now produced a decline in deal value.
The report states the UK’s Tech M&A market faces uncertainty following the nation’s decision to exit the European Union. It predicts the ongoing period of political turmoil could lead to a slump in activity for UK Tech M&A, particularly within London, with its FinTech investment hub.
Dickinson said that, perhaps inevitably, following 2015’s record year for M&A activity, the first half of 2016 saw a rebalancing of market activity to more sustainable levels across all sectors.
Of the M&A deals that have taken place so far this year, he said: “In the tech sector, activity has been especially strong in areas related to big data analytics, Internet of Things, healthcare information technology, cloud/Saas, connected cars and advertising and marketing.”
Policy
The referendum has caused much disruption to the tech industry, which is a shame, as there were a number of positive policy developments in the first half of the year.
Romilly Dennys, executive director at Coadec, a non-profit that campaigns for policies to support digital startups in the UK, explained the main policy developments in H1 focused on the government’s commitment to make the UK a world leader in the digital economy.
These included a “futuristic vision of driverless cars, improved broadband, a new 5G strategy and business tax cuts for the digital age”.
She claimed the changes to business tax, which were announced in the Budget, will probably have the largest positive impact for the tech sector.
“Similarly, lower taxes on capital gains, and the extension of Entrepreneurs’ Relief to long-term investors should help further boost investment in early stage businesses (alongside the EIS and SEIS reliefs),” Dennys added.
A number of specifically FinTech-friendly policy updates were made in the first half of the year, too. For example, the Innovative Finance ISA, which became active from 6th April, extending the tax advantages of ISAs to investments made through peer to peer lending platforms.
Also, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) agreed to establish a unit designed to support new prospective banks.
“The aim is to have 15 new challenger banks in the market by the end of this parliament,” explained Sameer Gulati, policy and research advisor at Innovate Finance, the independent industry body representing financial technology organisations.
He went on to highlight the incoming Digital Economy Bill, which aims to ensure the UK has good digital infrastructure, for example by providing a new Broadband Universal Service Obligation – giving all homes and businesses the legal right to have a fast connection installed if they request it.
“The Bill is currently going through its first reading, and is expected to complete its passage through the Commons and move to the Lords in Autumn 2016, with Royal Assent expected in Spring 2017,” Gulati explained.
The referendum took place towards the end of the second quarter of the year – on 23rd June – but were there ripples of panic in the tech investment space in the months preceding the polling day? Not really, according to Balderton Capital’s Chandratillake.
“I believe that most assumed a Remain vote, whatever their personal views – as did the polls, the betting odds and most experts and pundits. Therefore, most would have proceeded with a ‘business as usual’ mind-set,” he explained.
Dickinson disagreed, stating that the second quarter of 2016 was “undoubtedly” impacted by the uncertainty created by the referendum.
What next?
Dickinson said the uncertainty is set to continue for the foreseeable future, which will inevitably have a negative impact on the transactional markets. However, he believes the significant fall in the value of sterling against the US dollar will lead to acquisitive US corporates looking to the UK to secure opportunities.
He also predicts London could lose its position as the digital capital of Europe due to a lack of available talent.
“One obvious issue – if the UK no longer accepts the free movement of EU nationals – will be increased skills shortages. In the tech sector, there is already a shortage of skilled EU workers coming to the UK. That can only get worse, as Brexit will make it more expensive and complex for tech companies to attract and retain talent,” Dickinson explained.
One of the primary concerns post-referendum is that UK-based tech firms will decide to relocate, opting for other European tech hubs, such as Berlin, Dublin or Amsterdam.
A number of technology startups, including DueDil and customer service software provider Conversocial, have already said they’re considering opening offices overseas, while the CEO of TransferWise said he has been contacted by representatives in Ireland, Switzerland and elsewhere in a bid to tempt him to move his company abroad.
The results of the Innovate Finance Post-Brexit Member Survey showed a significant number of UK FinTech companies are considering relocating jobs/expanding the team primarily outside of the UK.
Chandratillake said we should expect to see a huge amount of very public to-ing and fro-ing between UK and EU over the second half of 2016 and beyond, which will impact the general appetite for investment.
“Overall, though, we are confident. Entrepreneurs are, by their very nature, all about navigating hard obstacles and getting over high bars. They are not fair-weather people. They thrive in the uncertain environments, which is why nimble innovators so frequently leave old-school incumbents mired in hesitancy and decision-making by committee,” he said.
“Having said this, entrepreneurs will need support from their employees and investors during this period of uncertainty,” the investor concluded.
What do you think the second half of the year has in store for the UK tech industry? Let us know in the comments below.