In the future, most companies will likely need to be a technology company at the core – and the events of 2020 mean ‘the future’ is now. As such, companies that do not embrace technology effectively will be left behind.
To offer just one illustration of the pace of change, a recent McKinsey study found the average lifespan of an S&P500 company fell from 61 years in 1958 to under 18 years by 2017. It went on to predict that, by 2027, 75% of the companies in the S&P500 will be replaced.
A technology-centric economy leads to enormous potential for young tech businesses to offer substantial returns to their investors while generating innovation, jobs and wealth for the UK economy, spearheading its post-Covid-19 recovery.
Nowhere has the pace of digital transformation been more evident than in the meteoric success of business-to-business (B2B) software. Software, already on a decades-long growth trajectory, is dominating business spending and this is only set to increase. It is no surprise that seven of the largest 10 companies in the world by market capitalisation are software companies.
Young, unlisted businesses operating in areas of B2B software have demonstrated resilient growth throughout the pandemic crisis because they are able to deliver high returns on limited invested capital. Typically, they provide solutions to significant, previously unsolved problems and the most successful are able to build a ‘moat’ of differentiation that separates them from competitors.
These companies are able to lock in multi-year contracts with blue chip customers and often operate in ‘mission-critical’ areas of business offering services that cannot be switched off – for example, cybersecurity, remote working or banking services – even during a global health crisis and economic downturn. These businesses show the potential to be global category leaders in emerging disciplines, delivering solutions that are in high demand and rapidly transcend borders.
UK companies are making waves in areas including addressing the UK government’s ‘Grand Challenges’ in AI and data, clean growth, the ageing society and the future of mobility – and businesses in these spaces are gaining traction around the world. Not everyone, however, can set up a digital business and be an instant success.
Entrepreneurial spirit
When backing an early-stage private company on a mission to change the world, a high-quality management team is vital. Investors should look for passionate entrepreneurs with the motivation, capability and experience to solve a key global problem.
An ability to lead a team to deliver against ambitious business objectives, during what is likely to be a period of rapid and transformative growth for the company, is essential. Critical to this ability is a self-awareness and willingness to learn from colleagues, advisers, partners and investors and to work collaboratively to achieve success. Happily, the scale of the opportunity in tech is attracting more and more of the best and brightest.
University IP
Great teams need great ideas and the UK’s world-leading universities arguably produce more original thinking than many countries in the world. A significant number of the private companies we have invested in ourselves have leveraged ground-breaking academic research from the world’s best universities.
One example is Grapeshot, based on the original research in search technology of Dr Martin Porter of Cambridge University – which provided the ‘context’ feed into the programmatic display of advertising to increase relevance and brand safety – acquired by Oracle in 2018.
Another example is Process Systems Enterprise, built on the original research of the founding CEO Professor Costas Pantelides of Imperial College and his colleagues – which provided ‘digital twins’ for the process industries, including life science, oil and gas and renewable energy sectors – acquired by Siemens in 2019.
Innovation-led recovery
Small and growing businesses account for a significant proportion of the wealth and jobs created in the economy, and enterprise investment scheme (EIS) and venture capital trust (VCT) managers are supporting exactly the types of companies that are best positioned to drive the UK’s economic recovery post COVID-19.
VCTs provide the financial and human infrastructure to transform ideas into real businesses and help them achieve scale. It is in these young companies that truly remarkably innovation takes place. A few examples from our own portfolio include:
* Quantexa, which uses advanced artificial intelligence to help its banking, insurance and government customers detect financial crime;
* Egress, which provides ‘human layer security’ ensuring data security for email, file transfer and collaboration environments – a vital tool in cybersecurity defences;
* Speechmatics, which is the world’s most accurate speech recognition engine across different languages, contexts and deployment models. This is vital technology as voice becomes the key human-to-machine interface; and
* Proveca, which focuses on the re-engineering of existing generic medicines to make them appropriate for use by young people. The company is developing and commercialising medicines for children in the fields of cardiology, neurology and pain management.
Democratising growth investing
As the From Survive to Thrive report sponsored by BGF concluded, the UK does fairly well at ‘start-up’ level but less well at ‘scale up’. The start-up funding ecosystem comprises the successful EIS, VCT and Enterprise Capital Fund programmes. The structure of VCTs – some £4.5bn of main market listed investment trusts with patient capital – is a critical pillar of the UK’s successful start-up funding ecosystem.
Given the small initial investment requirement, VCTs are also a means of democratising access to participation in the growth of exceptional private companies for investors at an entry point where they can meaningfully benefit from the return potential of these truly innovative businesses and support the innovation desperately needed to solve the challenges facing society.
It will be the start-ups – the essential precursor to ‘scale-ups’ – which deliver the growth that will be the foundational platform for an economic resurgence in the UK.
Robert Whitby-Smith is a partner at Albion Capital
