Valuation or value?
The UK tech industry has a valuation obsession. But is this the foundation for economic recovery or the latest example of the emperor's new clothes?
This summer the UK became the first European nation to reach a milestone of 100 tech unicorns – the term given for privately held startups valued at over $1 billion. According to Tech Nation, the fintech firm Tractable, which builds digital tools, was the 100th startup to reach a $1 billion valuation.
Venture capital investments in UK startups also tripled at $18 billion during the first half of 2021 – quite a leap from 2017, when there were just 44 tech unicorns in Britain: a 127% increase over four years. Since the pandemic began, 30 more UK unicorns have been added, while the fintech sector accounts for the lion’s share of startups generally, at 34%.
These latest figures show the UK’s tech scene is booming. We’re investing heavily in world-class digital infrastructure and skills to back talent across the country and bring about a golden age of UK tech.
Some of the biggest unicorns in the UK include analytics firm Market (worth $41.3 billion) and payment platform Worldpay [JR1] ($39.1 billion) – and there’s no shortage of other promising would-be unicorns to watch, including the likes of Zobi, which uses AI to map out a customer’s home, Hopin, a London-based virtual events platform, and Karakuri, which makes robotic tools for preparing and serving food.
“These latest figures show the UK’s tech scene is booming,” said a delighted Digital Secretary Oliver Dowden. “We’re investing heavily in world-class digital infrastructure and skills to back talent across the country and bring about a golden age of UK tech.”
Given that investors rarely used to bankroll companies that hadn’t yet made a profit, this is all quite a turnaround. So what’s changed, from five or six years ago?
Gold Rush?
Dan Lyons is an author, journalist and screenwriter, with a particular field of expertise in tech. Formerly technology editor at Newsweek, he then became marketing director at Hubspot and wrote about his experience in the best-selling Disrupted: My Misadventure in the Start-Up Bubble. He also wrote for the HBO series Silicon Valley, as well as creating the viral blog ‘The Secret Diary of Steve Jobs’, aka ‘Fake Steve Jobs’. He sees the current UK’s tech rush as echoing a similar phenomenon in Silicon Valley.
“Back in the old days,” he explains, “startups used to try to get money from venture capitalists, and those funds were fairly small. You had a few guys who had retired young from some big company, and now they wanted to dabble. The standard was, you could not take a company public unless you had several quarters of profitability, sustained profitability, and substantial growth. And it wasn’t a law, but no one would buy shares in a company that didn’t make money. But that flipped around. So now there’s so much money that venture capitalists have to convince companies to take their money. And so venture capital firms have had to come up with creative ways to make themselves more appealing to startup founders – especially a hot startup that can pick and choose where they get their money.”
As Lyons explains, so much money is rushed into venture or chasing returns that it automatically inflates the valuation of everything. “Venture capital has now become an industry unto itself. We’re printing all this money and asset values get inflated.”
Back To The Future
It was during the mid-1990s when Netscape, the first big company “to go public while losing money, showed it could be done and people would buy it… that opened the floodgates, and ever since, companies have been able to go public without making a profit. It’s amazing, right? It defies the laws of physics.”
It’s now got to the stage, Lyons says, where dotcom founders are becoming billionaires – despite their companies “never making a single dime”, or companies whose market valuation is “some insane amount that has no relationship to its business. Stock prices have become unhinged: whatever the business does doesn’t really affect the stock prices. The two are not related any more… but again, it doesn’t matter because the people who are buying stock in the public markets don’t care.”
“Tech has become fetishised, and it’s sexy, and people believe it’s going to change everything,” says Lyons. “And this is partially true: it is transformative. But [when founders] become billionaires, they really do start to believe they are the smartest person about everything. I followed many on Twitter, during the whole COVID thing. They’re still convinced they know more than any doctor. Look at Elon Musk – he’s the world’s expert on everything. It does do something to their brains.”
Fallout
One of the main problems caused by this focus on uber-fast growth, as ScaleUp Capital’s CEO Simon Philips notes for Maddyness.com, is that the UK’s obsession with unicorns is “holding us back from investing in and scaling the other 99% of small tech businesses which are often overlooked by investors who are all chasing the next Revolut, Cazoo or Deliveroo”. So while the UK may be a great place for startups (ranked third in the world, in fact), it’s only 13th for scale-up, “which suggests a lot of worthwhile startups are stumbling at the crucial point where they need to scale”.
There is an evident skills gap too: founders may know their product and market, but some 83% of them are scaling for the first time, according to research by Crunchbase. “The most acute skills gap lies in sales and marketing,” says Philips. “It is one thing for a founder or CEO to drive sales through passion. It is quite another thing for an experienced sales team to drive scale.”
It is one thing for a founder or CEO to drive sales through passion. It is quite another thing for an experienced sales team to drive scale.
Forbes recently advised: “Don’t Try To Become A Unicorn… When you position yourself as a unicorn, you’re locking yourself into a trajectory that requires raising large amounts of capital, growing very rapidly, and satisfying an ever-growing array of benchmarks and metrics issued by investors who are only interested in your potential for delivering an enormous return on their investment.”
The backlash is getting louder though. Back in the summer, when the 100th unicorn was announced, financier Greg Carter wrote in TechRound, arguing that it was time to “Kill The IPO Obsession… personally, I implore every founder to think twice,” he says. “In my opinion, becoming a public company isn’t the best move for every growing startup. In fact, I’m convinced it’s a terrible idea for any company with a valuation below $1 billion, and it’s often also terrible for larger companies.”
He also thinks IPOs “kill culture… employee morale becomes tethered to the share price, which often has nothing to do with your team’s actual performance. Almost inevitably, the big bang of an IPO is followed by an exodus of long-serving staff, taking a mass of vested stock options and internal knowledge along with them.”
Back in 2015, tech journalist Ben Rossi was already warning why the UK should avoid America’s obsession with unicorns. “Ever-larger valuations fuel a ‘growth-first’ mentality that is increasingly at odds with long-term business health,” he wrote for Information Age. “Without careful planning and a more sustainable view of business growth, companies run the risk of defeating themselves with their own short-term success… the lessons from across the pond must be learned.”
Hubble Bubble
And at some point, the bubble will surely burst. “I’ve been saying for years, this is going to burst,” says Lyons. “The question is, will the air leak out of the bubble slowly? Or will it be something bigger?” Some already think it has: earlier this year The Economist reported that tech investors had been “spooked” by implied threats to clamp down on startup M&A by UK competition regulators. Meanwhile, according to a Guardian report, almost one in four UK workers are planning a job change in what’s been dubbed ‘The Great Resignation’ – with young people and CEOs leading the walkouts. Factors such as burnout, the pandemic and a reminder that life is too short were the chief drivers – and in the case of tech, some often impossible working conditions.
Lyons, for one, isn’t surprised. He delights in telling hair-raising, bleakly hilarious stories of the time he worked for one appalling startup, where “the office vibe was frat house meets cult compound” and to be sacked was to have ‘graduated’. “I think this great resignation is the sort of first labour action of the digital age because it’s like a decentralised strike,” he says. “If you’re running a [startup] at a loss, and trying to chase profits, it creates no incentive to treat people well.” The tech industry, he says, is filled with “precariat, who either get in a job that bounced every 18 months or can’t get a job at all,” amid an era in which “antidepressant usage is up 400% and suicide rates highest in 30 years”.
He’s not entirely pessimistic: “I actually think techies can make the world a better place but it’s not by making Snapchat, it’s by creating a company that hires ten people and pays them really, really well, so that they can have a good life and a good career and have a family and have kids and save for retirement. And I do think there are some amazing opportunities. I feel like this century is going to be the most amazing century ever for AI. I won’t live to see it, but my kids can be a part of that. I like to be optimistic, long term.”