Back to the future
Article Date: Feb 10 2009
After '40s austerity came '50s optimism
Innovation will see us through these difficult economic times, writes Simon Cook. As it always has…
To read the newspaper headlines, you would have thought that no one could have survived 2008 without some sort of setback. But, behind the trouble in banking, property, retail, leveraged buy-outs and other sectors, some UK entrepreneurs and their investors were having a bumper year.
On 8 October, the day of the biggest stock market crash in 20 years, one of the most successful global venture exits in years happened quietly as UK web security company, MessageLabs, was sold to Symantec for $695 million (£356 million). And this was not an isolated example of success for the UK’s technology entrepreneurs last year.
AOL alone spent $1 billion acquiring two UK start-ups, teen social network site Bebo and affiliate marketing company Buy.at (one of our investments). Furthermore, Autonomy, which raised venture capital as a start-up only ten years ago, entered the FTSE 100 with a capitalisation over $4 billion, and QXL (now Tradus), which raised its first VC round in 1999, was acquired for $1.9 billion, following a rollercoaster life as a public company after its dotcom IPO. Just five UK technology companies created this $7.5 billion of wealth within ten years. This is a story that should have been on the front page of the newspapers.
Green shoots
In 2009, while credit will remain scarce and the macroeconomic situation will continue to be tough for mature businesses, many investment opportunities will be created by entrepreneurs. Innovation never stops, regardless of recessions. WiFi internet access wasn’t even available in laptops at the time of the dotcom crash in 2001; today many of us use this ubiquitous technology every day without noticing. Just five years ago, we all went to a video store to rent a movie; today half of all the DVDs rented in the UK are through internet company Lovefilm (another of our investments).
In five years’ time, we will all be using new technologies every day. The way we watch television will evolve, with the ability to deliver any video, anywhere, changing the notion of a broadcaster (maybe Google will buy ITV?). The old saying goes that half the money spent on advertising is wasted, but no one knows which half – well, this is changing. With increasingly linked end-to-end digital systems, we will be able to track which adverts are watched through to the point of purchase, revolutionising the advertising industry.
Sky’s the limit
The new open marketplaces for mobile applications such as the App Store for the iPhone offer significant new possibilities for mobile entrepreneurs. Devices such as the UK’s Plastic Logic Reader (an ultra-thin, electronic book) could revolutionise the way we read newspapers and novels. Existing software companies will be challenged by new companies delivering their services via the cloud, enabling much more flexible and low-cost IT systems to be built. Given the costs and environmental impact of travel, we will increasingly use telepresence for meetings and conferences.
We may even see 3D videoconferencing – after all, Sky is already trialling 3D TV. We’ll also see innovation and changes in the way we light and heat our homes, power our cars, and the way we treat disease through new medical devices and diagnostics.
Many of these new companies will come from the UK, given our strong technology leadership in mobiles, cleantech, semiconductors, medical devices, displays and other areas. Venture capital in the UK will increasingly be available to help build these companies; albeit at nothing like the $30 billion-a-year level in the US. Angel investing will also increase as some high net worth individuals lose faith in banks and stock markets and prefer to make more of their own investment decisions, backing entrepreneurs and businesses they understand at a grass-roots level.
'Many innovative companies will come from the UK'
For those entrepreneurs and investors who have been quietly building their businesses over the last few years, we will continue to see the best companies rewarded in 2009. While public listings fell in 2008, global technology M&A will continue as a strong exit route for companies. Small technology companies have always found it hard to secure bank loans, even in the credit boom, and have remained largely unleveraged. This mentality of not borrowing extends to the large technology companies who also remain unleveraged and cash rich – Google, Apple, Intel, Microsoft, Cisco, IBM, Sun, Oracle, Dell and HP are sitting on a total of $140 billion in cash between them. They are all hungry to acquire exciting new products and businesses.
And the government will follow suit. Politicians will move quickly to align themselves with growth and innovation. SMEs and entrepreneurship will be critical to the political agenda as evidenced by the recent interest in a £1 billion UK government VC fund and other initiatives focused on entrepreneurship. As the largest advertiser in the UK, the government could do a lot worse than to counter some of the negative sentiment at the moment by evangelising about some of our recent entrepreneurial success.
We are told we are in the worst economic downturn since World War II. Well, the 1940s were followed by the 1950s with hopeful visions of space travel, robots, flying cars, and amazing new kitchen technology as epitomised by the Jetsons. Maybe the next decade will be as wondrous as the 1950s.
We would like to think so.
Simon Cook is the CEO of venture capital firm DFJ Esprit and has been involved with the UK venture capital industry since 1995. He has been involved with a number of Europe’s most successful technology start-ups. His past successes include Cambridge Silicon Radio, Virata, nCipher and KVS. Previously Cook was a partner with Elderstreet Investments and a director at 3i in Cambridge.
