Achieving Maturity – Has U.K. Tech Solved Its “Valley Of Death” Problem?

Every year at around this time, Tech Nation publishes a report intended to capture the progress of Britain’s digital economy. It’s usually a relentlessly upbeat read, painting a picture of increasing activity, growing employment in the sector and rising investment. Generally, the organization – which was set up by the U.K. government to support rapid-growth startups and scale-ups – has not been averse to a certain amount of statistics-backed flag-waving. In particular, recent reports have not been slow to position London as Europe’s preeminent tech hub.  

This year, there has been a change of emphasis. Dive into the document and you’ll certainly find comparisons with mainland Europe. For instance, the report points out that British companies secured a third of the £30.4 billion European total in 2019. London remained a magnet for investor cash, with its digital companies raising £6.8 billion, compared with respective totals of £3.5 and £2.4 billion in Berlin and Paris.  

But according to Tech Nation’s Head of Insights, George Windsor, the goalposts are moving. “We’re now at the stage where we are comparing ourselves with the U.S. and China,” he says. 

So from the perspective of Tech Nation, Britain’s digital economy ambitions are shifting up a gear. In terms of keeping score and measuring progress, the world’s two largest tech economies are seen as increasingly relevant points of comparison. 

But is that justified by the report?  

Continued Expansion 

Well, the first thing that has to be said is that Britain’s digital economy is continuing to expand rapidly. Gross added value (GVA) from the sector grew six times faster than the economy as a whole, with its contribution of £149 billion representing 7.7 of the 2019 total. In terms of jobs, the sector employs 2.9 million people – up 40 percent from 2017.  Investment has also risen. 

All good news for those with an interest in U.K. tech, but beyond the headline figures, it does appear that the sector is moving towards a sustained level of maturity.  

Witness the breakdown of the investment figures. One of the traditional weaknesses of the U.K. science and technology sector was an apparent inability to turn lab research into viable commercial products. British universities would engage in ground-breaking work but the science would often be exploited not here in the U.K. but elsewhere in the world. 

The Valley Of Death

That began to change with the startup boom, but there was still a problem. Innovators would find seed funding relatively easily, but securing the capital needed to scale up could be much more difficult. This created the infamous “valley of death” where businesses would simply run out of cash.   

Tech Nation’s figures suggest that prospects for later stage investment have are continuing to improve, with Series C (and beyond) investments up by 71 percent and Private Equity rising by 51 percent. 

There is something of a virtuous circle here. The growth in later stage investment is benefiting scaling companies. At the same time, the report finds the presence of a growing number of high-value scale-ups is encouraging increased investment.  

In 2019, the U.K. was home to 95 businesses with a value of between $250 and $800 million, the largest community of pre-unicorns in Europe. This has brought investors into the market. As things stand, 81% of capital committed by VCs is going to scaling companies.   

All this is encouraging a sense that the tech sector has come of age and perhaps also fuelling the aspiration to compete with the U.S. and China.  

George Windsor believes there are a number of factors behind the U.K.’s success, as defined in the report. One is government commitment. “The government is spending heavily on R&D,” he says. “And this is coming through in the form of real-world applications.”  

Meanwhile, the investment environment has matured. “There is less volatility than elsewhere in Europe,” he says.  And finally, the U.K. has been working to raise overseas awareness of work being done in the tech sector. “That has led to a massive increase in investment from the U.S. and Asia,” Windsor adds.

  There is also – as alluded to earlier – a greater emphasis on real-world applications. Companies working in areas such as A.I. and Robotics are selling to non-tech firms and playing a part in the digital transformation of the wider economy. Tech Nation Head of Entrepreneur Engagement, Liz Scott, cites the example of Auto Trader, once a traditional publisher of used car information and now very much a technology-led company.

There are challenges “In the past, the focus of VCs has been on London,” Scott acknowledges. “But we are seeing more willingness to look elsewhere in the U.K.”  For its part, Tech Nation has created a Data Commons, providing businesses and VCs with information about each other. 

Skill shortages are also a potential challenge, with Brexit threatening to stem the flow of European workers. A new visa scheme is coming into play, making it easier for non-Europeans to apply to work in tech sector jobs. It remains to be seen what effect this will have over the longer term.    

Ultimately, nothing can be taken for granted Who knows what impact Brexit and sudden shocks, as exemplified by the Corona virus, will have on the progress of U.K. tech. But for the moment at least, rising investment on Series C and beyond suggests that Britain’s scaling businesses are in a stronger than ever position to raise the funds they need.