The Great UK Tech Innovation Selloff…
The UK’s rich history of innovation, across many industry sectors, seldom transfers to continued development and ongoing commercial success. The trend continues with UK tech companies, always keen to open operations in the United States (US) to tap into the growth opportunity in the biggest tech market in the world. Additionally, the US benefits from significant funding opportunities and a more supportive regulatory environment. Over 3,000 UK tech firms have been acquired by foreign buyers since 1990. However, this loss of intellectual property (IP) and innovation comes at a cost to the UK economy, estimated to be between 2.5%-4% of GDP. An open conversation needs to be had about why this trend continues and what we can do about it.
Magnetic Pull
It seems every UK tech business must at some point establish a presence in the US, to take advantage of the larger market and friendlier investor base. Here are some key reasons why a UK tech company might enter the US before considering a trade sale or stock listing (IPO):
- Proximity to Investors
Being physically closer to the largest pool of tech investors can facilitate new opportunities through better relationships and communications. US investors are often more familiar with the tech industry and may offer more favourable valuations.
- Market Visibility
Establishing a headquarters or a major office in the US can increase a company’s visibility in the American market, which is beneficial for business operations and market perception.
- Talent Acquisition
The US tech sector is a magnet for global talent. Relocating can help attract top-tier employees who prefer to work in major tech hubs such as Silicon Valley.
- Regulatory Environment
The US regulatory environment is well known for being aligned with tech companies’ needs, offering a framework that supports rapid scaling and innovation.
The above points represent some of the favourable conditions the UK economy is trying to compete with to promote tech startup independence and UK sovereignty.
Does Tech Sovereignty Matter?
One might argue that if there is a way for UK tech to flourish and grow, even via the mechanism of foreign ownership, surely that is a good thing? If the funding and regulatory options don’t exist to create more successful tech businesses in the UK, then surely it can only be positive that others are prepared to take up the challenge and financial risk? This is a hard argument to counter, and perhaps there isn’t a yes or no answer, but it’s certainly a worthy debate and one we should be having.
However, I am of the belief that selling off UK IP and innovation doesn’t represent a sustainable, long-term strategy. It relies upon an ever-increasing supply of startups to replenish the tech firms we lose, which is a precarious strategy at best. Perhaps it’s unrealistic to think this trend can be reversed, as it’s so entrenched, and the US is the magnetic epicentre of the industry. The real question might be: how can we at least begin to stem the flow, so the UK can keep a bit more of its IP and nurture a growing base of successful and significant tech firms?
Why is it Always About the Exit?
I sometimes wonder if there is a psychological problem in the UK regarding tech startups and their founders, with an unhelpful bias towards the exit strategy. While an exit can be a life-changing financial event, its usually the cumulation of many years of hard work and a winning business strategy that results in success. Those who focus on the exit as their only strategic hope, because they are motivated by money rather than committed to delivering their mission, are far less to see one. Running a tech firm at any stage of its development is hard work, and more success means bigger problems. It’s no wonder that founders and early-stage investors are always looking for a quick return, so they are always open to offers from acquirers with access to significant resources.
Lead Us Not into Temptation
Founders who focus on creating the best business they possibly can, following a well-researched and thought-out growth strategy, are most likely to attract new investment rounds and be an acquisition target. The best companies are run by leaders who plan and think long-term, with little or no inclination to exit until and unless they are presented with an offer at the right time and right price. For as long as acquirers are happy to write big cheques, however, it will be hard for founders to resist the potential of a life-changing payday.
After all, what other way can you potentially obtain multi-generational wealth in a single transaction, especially when the alternative is to continue for years with a relentless uphill battle for survival? Founders need to have a strong determination not to accept such offers, but this grit, dedication and commitment to a long-term vision are not enough on their own. What they require is a more favourable environment, with conditions that support independent businesses to continue to develop and grow. Only then might founders feel like they have an alternative choice to the gilt-edged exit scenario. Sometimes, a foreign investor is the only way to secure the necessary funding needed to scale the business.
How to Strengthen the UK Tech Industry
To help mitigate the trend of IP surrender to foreign entities and strengthen the UK tech industry, several core strategies may be necessary, some of which are already in play.
However, the momentum behind the direction of IP flow will be hard to reverse:
- Incentives for Retention
The UK government could offer incentives, such as tax breaks and grants, to encourage startups to remain independent and continue to scale while under domestic ownership.
- Investment in More Innovation Hubs
Establish more innovation hubs outside London, providing funding for research and development to help nurture homegrown talent and technologies.
- Regulatory Frameworks
Implementing regulatory frameworks that protect key technologies from foreign takeovers can ensure that critical IP remains under UK control.
- Encourage Domestic Investment
Promoting domestic investment in tech startups through venture capital and private equity can provide the necessary financial backing for companies to grow independently.
- Reward Career Entrepreneurs
Repeat entrepreneurs often reinvest some of their personal wealth in new startups. To support this, the UK must have low capital gains obligations, so entrepreneurs continue to reinvest their time and money in new ventures.
- More Attractive UK IPO
The UK government’s initiatives to reform and ease financial regulations could enhance the London Stock Exchange’s competitiveness. While this may influence future decisions, the UK still lags far behind the attractiveness of the Nasdaq or the New York Stock Exchange.
Economic Challenge
The great UK tech innovation selloff to foreign investors through stock listings, private equity and trade acquisitions poses a significant challenge to the UK’s long-term tech industry prospects. While these exits provide short-term financial returns, at least for founders and major shareholders, the loss of IP and innovative capabilities hinders the UK’s ability to compete globally. By implementing policies that encourage the retention and development of homegrown IP, the UK can at least begin to offer a real alternative. The UK continues to lag far behind the US, although funding infrastructure has improved in recent years. It will still take decades for the UK to be considered a real alternative to the inevitable and magnetic pull of the US tech powerhouse.
You may want to read: “Why the Great UK Tech Innovation Selloff Must Stop.”
