Backwards attitudes towards loss-making, high growth companies are stunting success
Outside of Silicon Valley and New York, the UK is one of the leading capitals for tech innovation. Its start-up ecosystem is worth an impressive £105bn, according to a global report from advisers StartupGenome.
London’s access to talent, capital, and investors is enviable, but the country as a whole lags behind some of its European counterparts on other metrics. Our number of start-ups per capita is only the ninth highest in Europe according to data from last year. We’re well behind the likes of Estonia, Iceland, and Ireland in terms of comparative entrepreneurial activity. The UK also trails behind Sweden and Estonia in cumulative capital invested per capita.
Although we’ve made huge strides forward in the last two decades, the most consequential tech giants are still rooted in the US. Perhaps it’s time to adopt a new way of thinking about start-up growth.
Whether it’s the stereotypical British cautiousness or other factors, our collective aversion to short-term loss holds us back from creating big name tech companies.
Global findings from the University of Florida show that most new companies coming to market are unprofitable going into their initial public offering (IPO). Since the 1980s, unprofitable IPOs have risen from around 20 per cent to 80 per cent of the total number each year, indicating that the way investors assess potential investments has shifted beyond balance sheets. But the popular view here remains that loss-making shouldn’t feature in a start-up’s early strategy.
It’s time we adopt a more open-minded attitude, which means a shift in our traditional investment models that lean towards capital preservation and low risk. The most valuable global businesses are now software companies at their core, unbound by geographical constraints to growth.
Of course, this isn’t to say that all loss-making companies are worth the gamble. It’s essential to assess underlying metrics like Annual Recurring Revenue (ARR) and Net Dollar Retention (NDR). Taking a longer-term view of growth, however, will give UK businesses a seat at the top table alongside those shaping our digital world.
Resetting the way we view growth will also help foster a more equitable distribution of capital across different regions of the country. The number of funding rounds raised in London in 2021 (up to September) was 31 times greater than Oxford, according to Dealroom. London’s position as a tech innovator is a huge boon to our economy, but these are still missed opportunities. Encouraging a greater balance of venture capital investment across all regions and areas of the economy would promote a more even distribution of technology talent and skills, too. This would instil confidence in investors and would-be entrepreneurs alike.
The rest of the nation is starting to see some of the waterfall effects of our tech success. Nine of the 29 British companies that achieved “unicorn” status last year are based outside of London and the South East.
But to continue to grow this revolution, we need to shed our loss aversion bias and put more faith in the world-class tech entrepreneurial talent across the breadth of the UK.
The high-growth consequential companies of the future are here to be built. We just need to give them the tools to grow.