Interview with the founder of Invoke Capital, the UK’s most high profile tech businessman, London is a dysfunctional capital market for tech; Widening the pipeline to help capital flow; Convincing VCs not to sell out too soon
London is one of the world’s great centres of capital. But are there structural issues which prevent it from investing long term in scale out technology firms?
The UK is good at technology and science. It is good at capital and financial services. It is even good at the business of selling things.
It has the brains, and it has the brawn but does it have the backing? The answer is that there is a huge amount of work gone on behind the scenes and it could be that the City of London is starting to wake up to the long term potential of the tech sector.
The question has been asked often, where are all UK-based, London listed, high growth, profitable multi-billion pound global tech firms? Just what is the UK’s position as a location for growing a technology business beyond £10m, £100m or even to the magical £1bn.
Dr Mike Lynch, OBE, is best known as founder and CEO of Autonomy, now leader at Invoke Capital, starts with a bit of history
"The 1990’s when I set up a technology business, the idea that you could be a technology entrepreneur was extremely questionable. You were pushed to go and get a good job at a bank. And there was almost no venture capital around. And today it is night and day different," he says.
Dr Lynch believes we are at last facing in the right direction.
The UK has many tech start-ups and many of those start-ups do become mid-size companies. Yet even to get to this stage of creating a healthy environment for seeding and growing tech ventures has been a long process. And the UK is still a long way from establishing a pipeline which at one end has someone with a great idea and at the other a multi-national global giant.
Says Dr Lynch, we’re trying to find the narrow bit of the pipe and widen that up and then address next new narrowest point.
"The reason I gave you the history is because we had no start-ups, we fixed that. There was no funding for next stage, there is now. This [scale] is now the problem, it is a high class problem, but the reason is very simple. [Someone like] George O’Connor, [a city tech analyst at Panmure] doesn’t do FTSE100, he does FTSE350 because there is no-one to follow. So the people who do FTSE100 are all experts on mining or food but software is different, you need to understand it. The London market has become disconnected from the reality of the modern world," he says.
Problems persist but are being addressed
"The London capital markets are basically dysfunctional for tech. It is a chicken and egg situation. If you are a FTSE100 [investment] manager there is one software company you can invest in and that is Sage. And it is a wonderful company and [CEO] Stephen Kelly does an amazing job but it is not the most exciting end of the software sector. [Sage was founded in 1981 and floated in 1989].
"But the bottom line is that the expertise is lighter than it should be. And so the London market hasn’t been very good at tech. If you go and ask them [London Stock market players] they’ll tell you that 30% of companies on the London market are technology but what they count as tech are companies such as Vodafone."
"What we’re talking about are the very high growth companies and for these the London capital market hasn’t worked as well as it should. There is a lot of work going on to change that, just as there have been lots of changes in the policy part of the pipeline, there is a lot of change and most if it is positive."
How far can you scale in the UK?
Beyond the world of policy and rule changes such as capital gains tax exemption for entrepreneurs introduced by Tony Blair which in Mr Lynch’s view helped kick start tech entrepreneurship by sending the right message, and tweaks to rules for IPOs, there have been some notable successes coming out the UK.
Of those that IPO’d to success ARM Holdings (founded 1990), is predominantly a design and licensing firm which does mobile microprocessor design, it has grown to a very healthy £1bn revenue and profit of £400m and its FTSE100 listed. Autonomy, although subject to continued legal wrangling, floated and was acquired for north of $11bn. Last year saw cyber security firm Sophos free float 40 per cent of its equity in London in June at 225p, it is currently trading at around 210p valuing the firm at around the £950m mark
What is more common is the trade sale. UK cyber security firm Swiftkey was sold to Microsoft for a reported $250m in February this year. Deepmind Technologies, the artificial intelligence company which recently hit the headlines by building the system which won the board game ‘Go’ against a human champion, was sold to Google for $400m in January 2014.
"When we did Autonomy, it didn’t list onto the London Stock Exchange. It listed on EASDAQ (2001), (Easdaq was an attempt to replicate Nasdaq in Europe – Nasdaq subsequently took it over) and the reason was you couldn’t list on LSE without three years of profits. Well imagine how much of the US tech industry that would leave out. That rule got changed. Up until last year there were technical details about free float which meant it was very difficult to get tech business floated."
But the question is how will UK tech firms break through the glass ceiling more regularly.
Exit plans, market realities – how VCs and investors think
The UK investment scene, says Dr Lynch, needs change.
"What you’re seeing now because of the previous success is great UK companies that get to £100m in valuation and the VCs think, ‘well, I can sell it now and I’ll have £100m over this amount of time’, or ‘I can heads down and get it to £700m or £800m and take it to Nasdaq.’ What you’ll hear people say is the VCs don’t have any long term aspirations, or they’re not brave enough. It’s not that. It is just that they are rational. It is a better decision for them to do that [sell at £100m]. So what you have to do is make it a better decision for them to hold on."
And this will take time and effort to move the exit plan timeframe.
"If we can fix the capital markets here then you’ll see more companies doing the ARM, Autonomy, type stuff and that’s what will get things going. The great thing about Autonomy is that many [former staff and management] are doing something and most of them are doing it in the UK. So we’re actually going to see a whole series of companies coming up from people who were trained in that experience. And that’s the trick that Silicon Valley has been doing for years. Now we’re seeing these companies make it.
Dr Lynch believes that this virtuous circle of growth, float and or acquisition creates the right environment for people to establish second or third ventures to build on their experience.
Is the access to capital markets available in London?
"Funding is there in the early stages. And the nearer you get to the capital markets point it dries up because there is no exit. So if you fix that, then rather for those firms being sold at $100m, they get sold at $3bn, then that makes it a great decision to go into them when they are $300m, which makes it a great idea to go into them when they are $30m and it all trickles down. Whereas, if the best you can do is £100m…..the most important pressure is at this end of the pipe and that will fix everything down the line."
"If you’ve got a really good idea then I don’t think there is a funding problem in the UK. There are good, smart people in the UK and you can get it funded. In the US you can have a really bad idea and still get it funded." (laughs)
But, says Mr Lynch, in funding terms the UK doesn’t have to compete with Silicon Valley. It appears there is more money sloshing around the valley but he says "the US venture capital return as a sector is 4.6% and nearly all of that is in ten firms so there is lots of money going into things that don’t work."
The more important point is can we make tech companies in the UK that are very successful for customers and investors? His answer is yes because we have seen things go all the way through the pipeline.
So his message is there are lots of people running up and down fixing the pipeline but ‘we’re’ not there yet.’
"And on one hand that’s great. The message now at all levels is now we’re going to up the bar, we want to see 10 software companies in the FTSE100. The expectation should be that we should have a good list of real multi-billion pound software firms."
Part II Tomorrow:
VCs are overvaluing their assets
How to properly grow your tech business
Is there a fintech bubble?
Unicorns falling from the sky