High-Tech Industry

Abstract

High-tech means differentiation through better technologies. It needs a special culture: Companies have to be able to stop innovation projects whatever the sunk costs are.

There might be new technology, but technological progress itself was nothing new - and over the years it had not destroyed jobs, but created them.

Margaret Thatcher (1925–2013)

The Economist: The high-tech industry: Start me up

Britain has produced too few world-class technology firms. Is that about to change?

© The Economist Newspaper Limited, London (Aug 6th 2011)

MICHAEL LYNCH, chief executive of Autonomy, a Cambridge-based software firm, is showing off Aurasma, its new smartphone application. It recognises objects and then displays related video, commentary and user-created graphics around them, creating an augmented version of what the smartphone “sees”. Mr Lynch hopes Aurasma will quickly capture the lion’s share of a fast-growing market for web-browsing based on visual triggers rather than words. “It’s a platform,” he says, “so it is hard to predict its use.” The more people embrace Aurasma, Mr Lynch reckons, the more businesses and advertisers will make content for it, and the more lucrative it will be for Autonomy.

This sort of virtual cycle—where users flock to a single technology “platform”—is what sets the world’s best technology businesses apart. Very few of the leading outfits are British. Dozens are American. Microsoft’s success rests on the ubiquity of its operating system; Intel is a giant because its personal-computer chips are the industry standard; Google is first choice for web trawlers in part because its results are derived from a greater number of searches than its rivals’; Facebook has become the global hub for social networking.

The digital economy is thriving in Britain, which spends more online per head of population than any other country, says the Boston Consulting Group (BCG). Yet it has few world-renowned firms serving the internet consumer. “In America you’ve had Amazon, Apple and PayPal; now there’s Twitter, Facebook and LinkedIn. The whole chain is US companies,” says Brent Hoberman, who co-founded Lastminute.com, a travel and leisure firm now owned by an American rival.

Only two British firms are both innovative enough to command respect in Silicon Valley, the heart of America’s high-tech industry, and big enough to be in the FTSE index of the 100 largest companies. One is ARM, also based in Cambridge, which designs the microchips that power Apple’s iPhone and other portable devices. The other is Autonomy. Its Aurasma product runs on a version of IDOL, the firm’s pattern-recognition software, which is used by businesses to distil order from vats of formless information—web pages, video, voice messages, e-mails and so on.

Risk and scale

That only a handful of world-class digital firms are British is more than just a matter of wounded national pride. Platform companies that can capture a digital market have benefits for the wider economy. Firms that go quickly from novice to giant create jobs and investment, of course; but they also spur growth in auxiliary trades and among local suppliers. Successful tech firms spawn start-ups, either by example or because staff leave to form other enterprises. This sort of cutting-edge innovation is closely linked to economic growth.

Britain has countless digital firms but few reach a global scale. One reason for that is the limited size of the local market. America’s start-ups have 300m customers on their doorstep; Europe’s market is fragmented by language and local rules, which limits prospects in ventures where Britons have a natural bent, such as retailing. Sharing a language with America can actually be a constraint. There are strong competitors to giants such as Facebook and Google in non-English language countries, says BCG’s Paul Zwillenberg. Aspiring British firms have no language barrier to protect them from American competitors.

Britain has often produced great ideas but failed to turn them into big commercial ventures. That is in part down to a lack of serious commercial ambition; in the case of tech firms, it also reflects a shortage of venture capital and the support network for start-ups that comes with it. Entrepreneurs complain that local investors lack the appetite or the patience to back firms with strong growth potential, instead preferring companies with proven business models. They are envious of Silicon Valley’s ecosystem of established names, serial entrepreneurs, marketing experts and specialist venture capitalists, who complement a first-rate ideas factory at nearby Stanford University.

America’s appetite for riskier ventures reflects past glories as much as native boldness. Successful entrepreneurs are themselves a source of money, as are pension funds hoping for a jackpot-winning stake in the next Google. Enterprises that graduated from start-up to successful listed company in the past create the investor base for the next wave of technology stocks.

This complex is a boon to America but a drain on fledgling industries elsewhere. Promising businesses, many of them British, tend to be bought by American outfits that can offer patient capital, an industry network and access to a big market. ARM is an unusual exception: it became more valuable by not selling out, because its big customers were more comfortable locking into ARM’s chip architecture if it remained a neutral party. But others need the cash and contacts more.

A recent example is Icera, a Bristol-based microchip supplier with a strong management pedigree, good technology and $250m (£152m) of venture capital behind it. Its founders set out to build a billion-dollar company that would vie with Qualcomm, the world’s biggest supplier of mobile-phone chips. But in May the venture was sold for $367m to Nvidia, an America competitor.

Yet there are good reasons to hope that Britain can produce global champions. Icera may now have American owners but it is part of a mature microchip cluster in Bristol. Most of its engineers will stay there; the firm has a viable product and patents; it will spawn other start-ups. Britain’s techies are adamant that they match, even surpass, their American rivals in computer science. Its engineers are good at lean hardware designs—perhaps because money to develop ideas is scarce. This brand of frugal innovation is also found in British medical-technology start-ups, says Anne Glover of Amadeus, a venture-capital firm. It suits the demands of the mobile internet where efficiency is prized.

There is growing belief, too, that the next big thing in software will come from outside America. It was once mandatory for a would-be tech mogul to seek his fortune in Silicon Valley. “To network, to find out what’s going on, to meet other entrepreneurs and venture-capital people, you had to be there,” says Niklas Zennström, who heads Atomico, a London-based investment firm. Today’s entrepreneurs read the same blogs and tweets, and have access to a virtual community of peers, wherever they are. And America’s importance as a market is dwindling: new start-ups must look to conquer emerging economies, such as Brazil, China, and India.

These currents create an opportunity for Britain, particularly its capital city. “London has an advantage, because it’s the world’s number-one melting pot,” says Mr Zennström, who co-founded Skype, the internet-telephone company, shortly after he moved to the city in 2002. The broad outlook needed to build global companies is natural for many London entrepreneurs. It is a draw for venture capitalists, too. “We’ve been in London for 11 years and we’ve never been more bullish,” says Kevin Comolli of Accel Partners, a global venture-capital firm that backed Facebook, among others. Some 30% of its European capital (including Israel) is staked on British-based firms such as Wonga, an online provider of short-term consumer loans.

Many British-based tech entrepreneurs come from abroad. Wonga’s boss, Errol Damelin, is South African; Mr Zennström is Swedish. The headquarters of Badoo, a site that brings together users for casual social encounters, is in Soho, even though its founder, Andrey Andreev, is Russian, and much of the firm’s early growth was in southern Europe and Latin America. London’s appeal is as much social as commercial. “Entrepreneurs like the buzz and being in the thick of it,” says Lloyd Price, Badoo’s marketing director.

There are plenty of home-grown outfits, too, many of them based around the Old Street junction, a gateway to London’s financial district. The mix of businesses in Silicon Roundabout (as it has been dubbed) fits the area’s status as a creative-arts hub. Many specialise in making content that sits atop the web’s existing platforms—they are as much publishing outfits as tech firms. The cluster has been championed by ministers, including David Cameron. The government hopes its cheerleading will attract investment and research to the area, helping to build a “Tech City” that stretches east to the Olympic games site.

Some tech folk are sniffy. Media start-ups with global ambitions, such as Badoo, settle in Soho, not Shoreditch, they say. Unlike the older “Silicon Fen”, around Cambridge, the London cluster has no university at its heart and (as one Bristol-based chipmaker snips) not much silicon either. But the spontaneous emergence of this group of start-ups is evidence of a vibrant entrepreneurial spirit. It is encouraging, says Jeff Skinner of London Business School, how young Londoners vie for bragging rights about their start-ups.

Could more be done to support newcomers and turn them into global leaders? Up to a point, by stimulating the flows of cash and entrepreneurs. There are too few funds to help start-ups: Cambridge Enterprises, run by the university, is a rarity. It has offices around the university, including in a new centre for entrepreneurship set up by Hermann Hauser, a Silicon Fen bigwig. Its three funds help enterprises that are too embryonic to interest venture capitalists. The outfit aims to cover costs and maintain its £8m of capital. All applicants are offered a face-to-face meeting and some initial guidance, says Bradley Hardiman, one of its investment managers. One in ten that apply gets some money; four out of five of the ventures it has supported since 1995 are still in business or have returned their initial investment.

Exile on Old Street

The government is discussing tax proposals intended to encourage more investment in early-stage ventures. But for firms to become serious players requires far bigger sums than those plans involve. Fewer smallish firms would sell out before making it big if more capital were available at the crucial growth stage, says Mike Reid of Frog Capital. A capital-gains system that encouraged successful entrepreneurs to reinvest their windfalls would also help.

As for the human capital, requiring students in relevant disciplines to write business plans would help to encourage an entrepreneurial mindset; not enough computer-science courses do so. And the supply of foreign as well as indigenous entrepreneurs could be improved. A more flexible immigration policy might produce more of them, as well as admitting more executives with the sort of digital commercial nous that is currently scarce.

But government policy can only do so much. What would help most is a few extravagant successes—to lure more venture capital to Britain’s technology industry and to broaden its managerial talent. That in turn requires the ambition to become a platform company, and not just a local variant of a business model invented somewhere else. “You have to think of it as a global firm from day one,” says Tudor Brown, one of the founders of ARM and now its president. If Britain is to have a global presence in technology, its entrepreneurs have to look beyond their local market.