As the pandemic continues to wreak havoc across the UK economy, one plucky industry has continued its upward march unabashed.
In an understated but significant milestone last month, the British tech sector welcomed its 100th unicorn — a private company valued at $1bn or more — becoming the first country in Europe to do so.
The achievement, which is the culmination of a decade of steady growth, comes as the government also looks to shake up the regulatory environment for larger tech companies and attract big-ticket listings in London.
But while the outlook is bullish for the British tech sector it’s not all plain sailing, and industry bosses have warned a number of regulatory, structural and cultural challenges still remain.
City A.M. spoke to top industry figures about the state of the British tech ecosystem and how it might change over the next decade.
The ‘critical’ phase
With Brexit uncertainties largely settled and an end to the pandemic in sight, the sentiment among tech bosses is predominantly positive.
What’s more, industry leaders were united in their support of this year’s Budget, saying chancellor Rishi Sunak was “backing tech in a big way” through a string of reforms and spending plans.
And while the UK still lags behind the behemoths of China and the US, experts are hopeful that Britain can carve out a place as the world’s third tech ecosystem, building on its strong position in sub-sectors such as fintech and health tech.
This does not, however, mean there’s room for complacency. “The UK is well positioned and I think the next three to five years are going to be critical for us to either get it right or screw it up,” says Russ Shaw, founder of Tech London Advocates.
As British tech startups continue to flourish, so too does foreign investment, with the amount of venture capital flowing into the sector rising from £1.2bn in 2010 to £11.3bn last year.
But while support from overseas is booming, major questions remain over the appetite among investors in the City.
Dom Hallas, executive director at Coadec, says early investment into British startups has declined over the last five years in terms of the number of deals done and warns of a “foie gras effect”, where capital is funnelled away from new companies and towards established players.
But this uncertainty escalates into larger companies, too, with concerns that the Square Mile simply isn’t ready for tech listings.
Perhaps most concerning was Deliveroo’s disastrous debut, when a string of institutional investors raised questions over the firm’s path to profitability and balked at its dual-class share structure — a method frequently used by US tech rivals.
For Hallas, this is a key structural issue that needs to be addressed to enable upcoming tech companies to flourish and ensure the UK doesn’t lose out to the US, where blank-cheque listings have attracted British tech firms such as Alex Chesterman’s Cazoo.
“In the long term there are questions about how long you can continue to be the preeminent financial services hub if you don’t have a set of investors around the ecosystem that believe in the preeminent sector of the economy going forward,” he says.
Janine Hirt, chief executive of Innovate Finance, cites the recent Hill Review of listings and the fintech-focused Kalifa Review as key steps forward for updating the City for the digital age.
“I do think we have a great opportunity in the UK being outside the EU and having some of that independence to be able to make the types of decisions that create an environment that is conducive to growth and is attractive for scale-ups and entrepreneurs to start up a company, build and scale, and list here as well,” she says.
Worries over the London IPO market have been calmed in part by the successful debut of payments giant Wise, which was valued at £8bn in the capital’s first ever direct listing — and its largest ever tech float.
But Shaw warns against the temptation to chase the “next Google”, arguing instead that London can build up its reputation as a destination for tech floats through a string of smaller deals.
“We have a pipeline of very good companies that have been built here,” he says. “Not all of them will want to float here… but we can create a good story that says from early stage startup all the way through to successful exit, this is a good place to do it.”
But winning over investors is not the only key to Britain’s success, as the sector is also facing a crackdown by regulators.
At the forefront of this is the Competition and Markets Authority (CMA), which has been explicit in its intention of curbing the power of Big Tech, while the government has established a new Digital Markets Unit within the watchdog to oversee new online harms laws.
Hallas warns this more aggressive approach could be “potentially hugely damaging” and says the CMA’s new policy is “akin to throwing darts at a board”.
While the government has described its new approach to regulation as “unashamedly pro-competition”, the crackdown on major tech players such as Amazon, Facebook and Google has sparked concerns about a knock-on effect for smaller British players.
“The implications aren’t just at the top of the market and when as regulators you intentionally focus on the actions of five companies, what you’re doing is constraining those five companies instead of lifting everyone else up,” says Hallas.
“The starting point should be instead of thinking about how to bash Big Tech you think about how to support the ecosystem, and that’s not the same thing.”
Innovate Finance’s Hirt adds that the UK is “at an inflection point” for regulation as there is a “renewed focus on both protecting the consumer but also ensuring competition can thrive, and I think that’s a fine balance”.
Bridging the skills gap
The future of UK tech will not, however, be entirely dictated from above — and for many in the industry the key challenges are structural and cultural.
While recent visa reforms have made it easier for the sector to attract talent from abroad, concerns have repeatedly been raised about the so-called digital skills gap in the UK — an issue that has come even more to the fore during the pandemic.
The industry has also come under criticism for a lack of diversity and the pervading gender stereotypes.
Joysy John, chief executive of recently-launched coding school 01 Founders, says her organisation is “trying to solve the diversity in tech challenge”, adding: “There are a lot of people who have the talent but don’t have the opportunity.”
For UK tech leaders, then, the path to continued success is contingent on a combination of cultural shifts and regulatory nous over the next decade. And while London is the heart of this thriving industry, it’s clear tech could be a major weapon in Britain’s armoury as it emerges as a new player in the post-Brexit era.
“It’s very important that we build on the leadership we’ve always had on a soft power basis,” says Hirt. “The world looks to the UK as a leader in innovation, technology and financial services and fintech is in many ways a culmination of that.”