Britain’s tech sector still believes in opportunity in adversity

The writer is founder of Sifted, an FT-backed media company covering European start-ups

If the strongest businesses are built during the toughest times then Britain’s tech sector’s prospects look promising. The economy appears to be rapidly sliding into recession as inflation and interest rates rise. Private market valuations for tech companies are now chasing public market share prices lower. And Britain’s prime minister has never uttered a truer word than when he said: “fuck business”.

By enforcing a hard Brexit, Boris Johnson’s government succeeded in imposing sanctions on its own country. Not only has Britain extracted itself from the world’s largest single market but it may now be ejected from the EU’s €95bn Horizon scientific research programme, too. As one leading technologist told a government minister at a Founders Forum event last week, Brexit has resulted in the biggest loss of sovereignty since the Norman conquest of 1066. With the world rapidly coalescing into three technological blocs (the US, China and the EU), Britain now stands in soggy isolation.

Yet, in spite of the return of tougher times, the mood of last week’s London Tech Week was defiantly upbeat. Given its performance over the past decade, the sector has much to be upbeat about. As a recent Tech Nation report highlighted, the number of start-up unicorns valued at more than $1bn increased during that period from 12 to 123 (although quite a few may lose their spiral horns in the latest downturn). The number of tech sector employees rose from 2.2mn to just under 5mn. A word cloud summary of London Tech Week might have generated the phrase: opportunity in adversity.

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For the moment, London remains the venture capital hub of Europe, although it is being challenged by Paris. Britain’s “golden triangle” of universities, spanning London, Oxford and Cambridge, is one of the most vibrant ideas factories in the world. Big US tech companies have also been doubling down on the UK with Google’s “landscraper” headquarters, longer than the Shard is tall, being built alongside London’s King’s Cross station. “The UK has a great opportunity. The talent in science and technology is extraordinary,” Kent Walker, Google’s president of global affairs, told me on a recent visit.

Some venture capitalists are even trying to reimagine and rebrand the entrepreneurial geography of Europe for a post-Brexit world. In the same way that the concentration of entrepreneurial, academic and financial expertise in California’s Palo Alto powered the rise of Silicon Valley, so London and Paris are two poles of a decentralised “New Palo Alto”, according to Saul Klein, co-founder of the VC firm LocalGlobe. His own offices nestle close to Google DeepMind, which says it employs 700 researchers with PhDs focusing on artificial intelligence, the gleaming Francis Crick Institute, which conducts biomedical research, and University College London.

Jump on a train (at least when they are running) and within four hours you can reach several other tech hotspots, including Bristol, Manchester and Paris. You can also find a thriving life sciences cluster around Leuven in Belgium and a deep tech cluster around Eindhoven in the Netherlands.

Seven of Europe’s 10 most valuable tech start-ups have emerged from this New Palo Alto, according to Dealroom. Collectively, this European cluster ranks third in the world, after California and China, in terms of new enterprise value created.

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But in spite of the progress the UK tech sector has made over the past decade, it still has a long way to go. One “big miss” has been the collective failure to invest enough in intangible capital, according to Jonathan Haskel and Stian Westlake, authors of Restarting the Future.

Over the past 15 years, intangible capital investment in the UK grew at just 2.3 per cent a year compared with 4.4 per cent in the US, contributing to a big divergence in economic performance. Take a modern company such as Apple and its tangible assets account for just 2 per cent of its stock market value. But British financiers remain in thrall to the “tyranny of collateral”, preferring to lend against tangible assets, such as buildings, plant and machinery, rather than invest in intangible assets, like software, brand and design. “We have an 18th-century financial sector that is not fit for purpose,” concludes Westlake.

The answers are to invest more in education, research and innovation, to widen access to VC-style risk capital and to tweak the rules to favour equity over debt financing. But that will require a big change in the collective mindset. With luck, tough times might just trigger this much-needed rethinking.