Taking on the world
Britain’s tech firms need aggressive policies to break into US and China
Open any good investor presentation from a budding entrepreneur and close to the front, after the ubiquitous mission statement and team pages, there will be a page showing the potential size of the addressable market for the company’s products or services.
Bigger is better. Understanding an addressable market is one of the first pieces of analysis serious investors in the technology sector undertake. It is easy to be overwhelmed by new technology and its prospects, but without an end market of consumers or enterprises to sell to, companies find it hard to attract capital, scale and build a lasting and valuable business.
British entrepreneurs face a quandary. Our domestic market, while sophisticated and sizeable, is dwarfed by the size of the United States, China and the EU, the first two of which attract massive levels of venture capital.
Inside or outside the EU, British companies need a clear and coherent plan to expand beyond our own shores. The alternative is to face a more limited market opportunity, difficulty raising capital and the ever-present threat of larger, better capitalised rivals launching competing products and services in the UK and scoping the rewards.
Historically – and by historically I mean over the last 20 years – British technology entrepreneurs have generally looked first to Europe to expand their market opportunity.
Despite the complexity of multiple languages, differences in regulation and culture, the ability to attract and ingest local talent through the free movement of people gave Europe the edge over the United States or Asia as the first place to expand beyond the UK.
Despite numerous differences, many entrepreneurs report that doing business in Europe is more similar to the UK than doing business in the US.
The EU is a single market for goods and services, but while eliminating tariff barriers and freedom of movement is helpful to business, there remains a lack of common standards across much of the EU in areas important to the technology sector, such as copyright, data format,
licensing and tax. Doing business across many smaller countries is inherently complex. The days of Europe as the first port of expansion are changing, and not just because of Brexit.
There is a now a growing trend of British entrepreneurs looking to the United States as the natural next market, and, on occasion, Asia.
According to Tech Nation, 33pc of Britain’s tech company customers are based outside the UK, making it the second most connected tech ecosystem in the world. Around a quarter of entrepreneurs across the world also report having a relationship with two or more entrepreneurs in London, compared to 33pc for Silicon Valley.
In certain sectors, for example medical technology, the massive trigger represented by FDA approval for a new drug or treatment, and clusters of prospering young businesses in areas such as Boston, are encouraging cross-border collaboration. The path to success for enterprise software companies is well trodden in the United States, with greater access to experienced managers, sales people and technical teams, and customer bases that readily adopt new technology.
Current trends within the venture capital industry are accelerating this movement. Many of the leading Silicon Valley firms are building global funds to pour massive levels of capital into the global winners of the future. This makes good commercial sense.
For example, Sequoia Capital, one of the most successful VCS, recently concluded a $6bn (£4.9bn) global growth fund, dwarfing the size of its domestic US venture. Other leading firms will follow suit. Companies without substantial addressable markets will not be able to attract capital from these leading firms, given
‘The path to success for enterprise software companies is well trodden in the United States’
the range of other investment options they face.
For entrepreneurs, they often have to mould their businesses to the financing that is available. Financing from some of the leading venture capital firms in the United States is sometimes conditioned on the business moving a substantial portion, or all, of its business to a US location, to force an expansion of the addressable market.
I recently spent time with a leading UK university whose spin-out technology had attracted interest from China, but only if the business was transferred to China as part of the financing. Venture capital firms with access to and experience in both the United States and China will fare disproportionately well in the years to come. So what? you might ask. While the UK might generate some of the best ideas in the world, we can still benefit from proven execution capability and give these ideas a better chance of success.
The British Government can also greatly help in expanding addressable markets and maximise the opportunity for our companies.
Reaching common standards across issues as mundane as copyright law, data protection, licensing and intellectual property protection will make a major difference in the pace of growth of many companies.
And, as we enter a new age of Ai-driven innovation, regulatory frameworks will impact the pace and scale at which companies expand, for better or worse.
Britain has an opportunity to be a leader in this field. But more importantly, growing British companies need new laws to allow for the free flow of technically able people and those with experience in the major markets of the United States or China, and aggressive policies to pry open these markets.
The alternative will be many promising companies leaving our shores and some very weak slides at the front of the investor presentation.