The pessimists were wrong about Brexit, it hasn’t damaged the economy – yet. Growth may be slowing a bit now, but it might well have slowed anyway. Inflation is a bit higher than expected but probably would have risen anyway and employment is still very strong. What does the channel think?
In the wake of the UK’s decision to leave the EU much has been said but very little has happened so is it time to take stock.
The key issue for firms in our comms and IT channel has to be the state of business confidence across business in general for it is confidence, stability and certainty that oils the wheels of commerce and keeps us all gainfully employed.
As Hamish McRae of the Independent wrote on the first anniversary of the vote to leave, “From an economic perspective, we have learnt two things in the past year: one is that the sky did not fall in; the other is that the disruption to the economy is potentially damaging, and politicians on both sides can increase that damage if they are stupid.”
When you look beyond the hyperbole reported in the mainstream media it is clear that we need to think long term in respect of what may happen to our economy rather than at the latest spat between politicians spewing out their own agendas. We also have to remember, hard though this is for some, that the UK is but a part of a global economy that is subject to many factors that are entirely beyond our control.
If we take a wider view of the funding required by firms to invest in growth for example then the most recent global indicators are that overall venture capital money is getting harder to source.
Lawrence Wintermeyer, CEO of Innovate Finance, commented in a June interview with CNBC at the FundForum International in Berlin that ‘The tidal wave of VC money that flowed into global financial technology (fintech) investments during 2016 has already shown signs of receding’.
Some observers are saying that if the brakes are being touched globally it seems to them that they are being jammed on in the UK.
It was reported in recent times that one UK firm looking for a £3 million PE investment to facilitate their growth plans gave up after six months of trying and relocated to the US where they got their funding in six days.
Is it true that the UK is a reluctant investor in technology firms and that cautious investors want to see success first before they put their hands in their pocket for a sure bet?
Campbell Williams, Founder and Director at Sunfish Advisory, that advise companies in the tech sector on how to grow and to create equity value, told us; “Without knowing the exact circumstances of the case, it’s tempting to blame their UK advisors for looking in the wrong place as this doesn’t sound at all like a PE-scale fundraise to me. I suspect that it’s more likely that the size and nature of the fundraise fell between a couple of camps.
Quite possibly, the company was a little bit established, and past the more startup stage that might attract an angel investor, but nowhere near as large or established enough for private equity to get interested. Presumably they were also significantly pre-profit, which does not appeal to PE, and even EBITDA of £1m would have allowed them to debt fund the investment, which must not have been an option. One might even speculate that they aren’t even cash-flow positive, and were looking for working capital as much as anything else, which is hardly PE territory either.
Assuming a second- or third-round of funding, and “only” £3m, that’s firmly in venture capital territory not private equity. Generally speaking, PE invests in the three Ms - Management, Market and Model. In other words, they want a broad and experienced management team that has delivered PE returns in the past; that team would be looking to exploit a growing and/or lucrative market; and they would have an established model for executing in that market and integrating companies to deliver revenue and cost synergies. Typically, PE transactions are more in the tens or hundreds of millions range, with money-multiple returns of more like 2-3x.
By contrast, venture capitalists are backing three Ps - Person, Product and Pertinence. It will typically be an individual (or a small company with a dominant founder/owner) with a vision for a new or transformative product offering with pertinence being all-important - is the time right, is the product relevant for the market of today and the consumer of tomorrow? If all three are in place, a VC investment takes place. These investments are much riskier as it doesn’t offer the established foundations of a proven PE investment; therefore, the monies are often more in the single digit millions but with the expectation of double-digit, 10x or more, returns to mitigate the risk factors.
When you assess the VC model versus the PE one, it is easy to see where this company could have been unsuccessful. It is clearly a VC fund-raise and that’s a play that is much more established in tech in the US than in the UK. Rather sadly, this is why we see so much more tech start-ups becoming global successes from the US than the UK, despite their only having a 5x population advantage. PE is more of a “sure thing” play and whilst there’s a significant overhang of capital to deploy in PE, they’re typically not going to scale down to £3m size investments where they don’t understand the scaling and exiting approach the way they do in larger companies.
In the US, of course, there’s plenty of money in VC-land and arguably a higher risk profile. £3m is a far smaller ‘bet’ for a well-established Silicon Valley VC than for any UK equivalent. They know that the right play can deliver 100x returns or more. So in the UK, it behoves the company looking for funding to make sure their message is polished, robust and can stand up to a high level of scrutiny as it’s usually harder to get a British investor to loosen the purse strings than an American one.”
Paul Burn, Head of Category Sales at Nimans commented, “I wouldn’t say the UK is a reluctant investor in technology firms although as a nation I think we are known as being cautious and a little conservative at times.
From a reseller’s perspective it depends on the mindset of the owner. Generally at the beginning of any technology there’s the chance to make the most money but it also carries the biggest risks. Early adopters are prevalent but it comes down to individual views. Across our customer base we have resellers at all ends of the spectrum. Take hosted for example; there were some who got in first and made considerable amounts of money but they experienced lots of pain too. Whilst others like to wait and see for something to become established before jumping in.
“Plenty exist of both types and I would describe Nimans as being somewhere in the middle. We are not bleeding edge and we don’t sit around either.
As a broadline distributor it’s our job to give a huge number of customers access to the latest technologies. We tend to monitor trends right at the beginning and then get involved as early as it’s viable. We advise and lead customers on the journey because we are at the front end of that process, working closely with a good mix of suppliers to build up a vision of what’s coming down the line. We also have a good opportunity to shape things which is important too. We aren’t just followers and work closely with suppliers about how to bring technology to market and share and develop ideas.”
Recent examples of where UK firms have achieved investment success and where they are likely to fail.
“Overall,” says Burn, “there’s plenty of investment in UK technology – involving companies at various stages of the adoption process. Here at Nimans we are investing and growing too as a major warehouse expansion takes shape. We are investing in the latest logistics technology and adding significant floor space. Appetite for growth is common across our channel.”
More Indicators
Sometimes I feel that political commentators of all colours have a point, so I was intrigued when I saw that Westmonster.com wrote a headline that read: “Business confidence has surged to an 18-month high, ‘but why is it always ‘despite’ rather than ‘because of’ Brexit?”
The Lloyds Bank Business in Britain report shows that the confidence index – a gauge of expected sales, orders and profits of some 1,500 firms over the coming six months – rose to 24% in May from 14% in January.
But, says Westmonster, this shouldn’t be a surprise, considering UK factories reported their highest order levels for nearly 30 years.
Data shows 6 in 10 big business leaders are either ‘optimistic’ or ‘very optimistic’ about the Brexit economy, there are now a record number of billionaires (134 to be precise) and tourism is absolutely booming – bringing in £45.3billion in 2016.
‘Even’ The Independent now admits negative predictions about what would happen to Britain’s economy after Brexit were way overblown.
The powerhouses behind Westmonster tell you a lot. It is co-owned by Michael Heaver, a former press adviser to Nigel Farage and the BBC also says that Arron Banks, the millionaire whose donations to the Leave campaign helped secure Brexit, owns 50% of the website along with Heaver.
So, having digested that then consider the June report from news agency Reuters who also noted British factory orders hit their highest level in almost 30 years, according to a monthly Confederation of British Industry survey.
The CBI said its factory order book balance jumped to +16 in June, its highest level since 1988. Economists taking part in a Reuters poll had expected a weaker reading of +7 compared with +9 in May.
Export order growth was its strongest in 22 years, the CBI said, helped by the fall in the value of the pound that was triggered by last year’s Brexit vote.
The strong performance by manufacturers will be noted by the BoE, where three members of the eight-strong Monetary Policy Committee had previously voted to raise rates, citing among other factors a pick-up in exports and investment which could help to offset a squeeze in spending for domestic consumers.
The MPC’s five other members backed keeping rates on hold but then the BoE’s chief economist, Andy Haldane, said he was likely to vote for a rate hike too later this year, as long as the economic data justified it.
BoE Governor Mark Carney followed this up by saying he wanted to see how Britain’s economy coped with uncertainties about Brexit in the coming months before considering a rate hike.
Philip Shaw, an economist with Investec, said the CBI survey could provide marginal support for the case for a rate hike.
“But while it’s reassuring to see some evidence of a strengthening of exports, one should remember that manufacturing still only accounts for about 10 percent of the economy,” he said, adding that the much bigger services sector was slowing due to the squeeze on consumer spending power.
The CBI survey showed factory output in the past three months slowed back to a level last seen in January while expectations for the next three months remained strong.
“Nevertheless, with cost pressures remaining elevated, it’s no surprise to see that manufacturers continue to have high expectations for the prices they plan to charge,” Rain Newton-Smith, the CBI’s chief economist, said.
Meanwhile, Britain’s inflation rate has risen to its highest level in nearly four years, pushed up in part by the fall in the value of the pound since the Brexit vote.
The London Factor
The UK’s technology sector drew more investment than that of any other European country in 2016, according to data from London & Partners whose research also showed London remains a leading hub for tech investment, attracting significantly more money than any other major European city last year.
Measuring activity across private equity and venture capital deals, more than £6.7 billion was invested into UK tech firms in 2016, with London accounting for more than a third of the total.
The research also shows that the UK remains attractive to investors despite the vote to leave the EU, with UK tech firms receiving more venture capital investment than any European country post-referendum. UK tech firms have also looked attractive to deal-makers with a sharp rise in merger and acquisition (M&A) activity during 2016, with British companies seeing more investment than any other European country after the 23rd June.
Since the EU referendum vote, a number of the world’s leading technology companies have demonstrated their long-term commitment to investing in London with Google putting forward a £1 billion investment plan for a new headquarters in King’s Cross, Facebook announcing an additional 500 jobs for London and Apple revealing its plans for new headquarters in Battersea. Early this year Snap Inc., the company behind messaging app Snapchat, also announced it has established its international Headquarters in London.
Eileen Burbidge, Partner at London venture capital firm, Passion Capital, added: “The UK is undeniably a leading destination for investors, entrepreneurs and businesses alike. The UK continues to lead the way in the development of cutting edge technologies and areas such as big data, cybersecurity and ecommerce, are creating exciting opportunities for investors from all over the world. Recent investments announced by the likes of Facebook and Google further demonstrates the strength of London’s tech sector and shows that London is still very much open for business and investment.”
Ed Says…
The UK has strengths in cutting edge technologies, with adtech, e-commerce and big data firms attracting increasing amounts of investment in 2016. Artificial Intelligence companies also benefitted from a sharp rise in venture capital investment in 2016. Presently, despite naysayers, that investment appears to remain strong.