There’s no arguing that the UK has an abundance of tech talent. From DeepMind to Wayve, there’s a proliferation of innovation coming out of Silicon Fen, London and elsewhere in the country. Microsoft’s recent decision to open an AI hub in London is further evidence. The ostensible ‘problem’ is that we can’t manage to retain said talent, seduced by more favourable market conditions overseas – namely the US.
Take Arm, for instance. The British chip designer chose to list on the Nasdaq when it went public last year, enticed by the higher valuations, better trading volumes and greater access to capital provided by the US public market. We’ve seen it time and again, resulting in UK-listed equities now accounting for just 3.72% of the MSCI World Index (US-listed companies total 72.08%).
Those who have chosen to IPO in the UK have only served as cautionary tales. Cambridge-based cybersecurity company Darktrace, for example, had been flailing on the LSE since it listed in 2021. Its undervaluation compared to its global peers acted as a catalyst for shareholders to accept a cash acquisition of $5.32bn from American private equity firm Thoma Bravo in April. To put things into perspective, it floated – as a very sought-after entity – in the UK at 250p a share, while the agreed offer valued shares at around 620p (a 148% increase).
While such decisions have been widely deemed as a snubbing of the UK and, according to Tech London Advocates founder Russ Shaw, “a significant blow to the UK tech sector”, I see them as successes. The old adage rings true here: if you can’t beat them, join them. Attempting to compete with the long-established US public markets – NYSE and Nasdaq- would be futile and believing it necessary to do so simply for reasons of national pride and reputation is a parochial outlook.
So, let’s instead reap the benefits of American capital and expertise flowing into the UK, along with increased growth potential. Following Arm’s US IPO, its stock soared 118% in the first half of 2024, making it the second-best performer among semiconductor stocks behind Nvidia.
But Arm CEO Rene Haas has promised to keep its material IP and headquarters in Cambridge and even further the company’s UK presence with a new site in Bristol. As long as other UK tech talent pledges to do the same, why should we be troubled by where they list or if an overseas PE house acquires them (it’s worth noting that these firms’ funds will have UK investors generating returns)?
Private market inroads
If we do want to compete, however, the area in which we can truly make inroads is in private markets. Our tech sector is in a strong position: we have ample talent, excellent computer science universities and more local role-model entrepreneurs than ever before. To exploit that, it’s paramount that we foster access to capital on a private level.
While there is plenty of early-stage capital in the UK, we are still lacking substantial funding at the scaleup stage, at which point companies are generally not yet mature enough to attract overseas funding.
Mid-sized tech companies require more initiatives like the British Business Bank’s Future Fund: Breakthrough programme, to which the government’s Mansion House Reforms recently allocated £50m of funding, which supports established UK businesses in their growth. Increasing capital at this point of scale affords companies the chance to advance enough that they eventually become more attractive to international players and thus secure overseas funding themselves.
Another priority area should be modern distribution models such as product-led growth (PLG). This means software companies, for example, provide limited access that allows potential customers to use their product free of charge.
Not only does this render sales conversion easier, but it’s also a great way for UK companies to access US customers remotely early on in their growth, securing revenues in the US before putting boots on the ground there. On average, PLG companies at IPO stage have a revenue growth rate of 60%.
Ultimately, if we can let go of our outdated proprietary obsession with the public market and instead strengthen private growth in these ways, the UK’s tech companies stand a chance of catching up with US tech behemoths.
Richard Anton is co-founder and general partner at Oxx.
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