There is little doubt that the US is best at producing unicorns. But, as Rathbones investment director David Kness points out – relative to its size – the UK does OK.
For a country that accounts for only 0.87% of the global population, it is responsible for 4% of the world’s unicorns.
“China and India may beat us, but their citizens make up 17.8% and 17.7% of the world’s population respectively. The US is another animal: it has 50% of the world’s unicorns and just 4.25% of its population.”
He adds: “Fintech is the largest class of unicorns, and this helps explain why the UK has been so successful in creating them. London has long been acknowledged as the financial capital of Europe and now dominates the fintech space, with all 14 of the UK’s fintech unicorns based there.”
They include Monzo, Revolut (both banking services) and Rapyd (another payments company). In fact, three out of four UK unicorns are based in London.
US predominance
So, why does the US have such a leading position in producing unicorns? A key reason is market size.
And, as Kness points out, the US also has much higher levels of spending on basic research and R&D. Silicon Valley grew up because it was at the nexus of public and private R&D from the US military, Stanford University and private companies; such as Bell Labs and Hewlett-Packard.
Large funding rounds are challenging in the UK, since there is less late-stage capital available. In 2019, Europe as a whole invested $35bn in venture capital, while the US invested $116.7bn. This, Kness says, has tempted some UK businesses to relocate to the US.
Silicon Valley also illustrates how the power of networking and specialisation across a specific business sector can accelerate growth.
In the UK, these are limited to two major sectors: finance (financial services and fintech) and pharmaceuticals.
Do we need unicorns?
Levels of VC funding aside – one question remains: do we really need unicorns?
“UK and European businesses that do not grow to be unicorns are not failures — in fact, they go bankrupt no more frequently than businesses in the US. Many are increasing sales and profits and creating jobs. Some are being acquired, especially by American companies,” Knees says.
He insists the ingredients we need to build successful new businesses are in place across the UK. Excellent universities produce new ideas and highly skilled workers. “Business incubators, based in universities and elsewhere, provide structured support and mentoring. We have a strong network of VCs to help with funding.”
Tancredi Cordero, chief executive of Kuros Associates believes having unicorns is generally positive for an economy.
“It signals to both domestic and international companies that it is possible to scale up within the boundaries of that specific country or to use it as a global platform.”
He adds: “Unicorns generally create more jobs than smaller start-ups and bring about innovation or cheaper goods and services for a broader scale of customers. What a country should actually aim for is not the unicorn in itself, it’s the ecosystem that unicorns create around themselves.”
Kness describes how the UK government was so concerned about the difficulty of getting investment into start-ups that, in 2017, it commissioned the Patient Capital Review. The goal was to identify barriers to access to long-term finance for growing firms. Experts said the amount of money available for investment needed to at least double, from £3bn to £6bn a year.
Five years down the line, does the UK government still need to be proactive to help these companies grow?
“Yes”, is Cordero’s emphatic response. “The UK government must do more if it wants to keep the UK an attractive destination for global innovators and for domestic ones not to relocate to Florida, Texas, Silicon Valley or Israel, all regions that already offer well geared platforms for ambitious entrepreneurs,” he says.
He adds that Europe is lagging the US too – probably due to its more pronounced bureaucratic ecosystem. Albeit, he says, hubs like Amsterdam are attracting quite a few start-ups and the UK shouldn’t lose sight of this.
Unicorn valuation
So, is an obsession with the $1bn unicorn valuation healthy?
Shane Gallwey, head of ventures at Guinness Ventures, says the concept of a ‘unicorn’ makes a good headline but the $1bn marker is only one measure of success.
“The size of the UK market is such that businesses will often need to expand overseas to reach this scale. So, we are growing unicorns in the UK, but many get taken over along the way because of their initial success.
“One of our investee companies, ContentCal, was snapped up by Adobe at the end of last year. The sale of ContentCal to a US tech giant is not failure by any measure, it is the next phase in the lifecycle of a vibrant, hugely successful UK company.”
Gallwey adds: “Good investors aren’t searching for mythical creatures to add to a trophy wall, we are looking to support the growth of thoroughbreds that will go on to thrive in the real world.”
Cordero’s view is that everything in life has a dream or target threshold. So, it is understandable that even start-ups set one for themselves.
“I believe that $1bn could be an appropriate one for the past decade, probably the 2020s will be more like $5bn unicorns.”
That said, would the UK be better served if it supported the growth of lots more successful companies worth £50m to £500m rather than searching for unicorns?
“That’s exactly how the support should work,” says Cordero. “It’s pointless to purely aid the winners, we need to focus on those who are still at the beginning of their marathon. That way healthy businesses will thrive and run on their own legs.”
He adds: “At the same time we don’t want to punish success by overtaxing, we should learn from what happened in Silicon Valley, and incentivise successful businesses to bring back profit home to the UK and not to keep them in Ireland or Luxembourg.”
