Technology entrepreneur and mentor John O’Connell gives his views…

Tech start-ups are rather like puppies or babies. Everyone loves them for the promise and potential they hold. We’re eager to nurture them, hold their hand and encourage them on their first steps.

But in the UK it’s a different story once these companies reach adolescence. By the time a business has matured enough to go out into the world and become a global player, the significant investment and support needed to achieve this is often not available.

At the start of last year, there were a record 5.2 million UK private businesses, yet only 0.1% of these employ over 250 people and, even in the technology industry, very few indeed go on to reach a $1 billion valuation. This is despite this country’s active angel investment network.

Impact on UK economy

This absence of UK global champions is having an impact on the country’s economy. Investor Sherry Coutu is the author of the recently-published Scale-Up Report on UK Economic Growth directed at the government. She puts it bluntly: “Competitive advantage doesn’t go to the nations that focus on creating companies, it goes to nations that focus on scaling companies.”

In the report, Coutu lists a number of reasons why many UK businesses don’t fulfil their full potential – not least, skills and talent shortages and lack of leadership experience. However, it’s also clear that raising finance for growth is a major problem. Figures from research group Venturesome show that the average investment received by European start-ups at a ‘later stage’ – following three smaller rounds of funding – is just below $8 million compared to the $15 million on average received by US tech groups.

But, there is usually another factor linked with the question of further funding; the temptation to – or even the need to – sell before the company reaches its optimum value. I speak from experience. If I hadn’t floated my company Staffware on AIM in 1996 with just £4 million revenue and 40 staff, I would have been in this position myself. However, this enabled me to take out some cash from the company, without having to sell. As a result, I grew it tenfold over the next eight years to 400 staff, before it was acquired by Tibco in 2004.

For four years now the Entrepreneurs’ Forum, part of the livery company, the Worshipful Company of Information Technologists, has presented a series of Enterprise Awards to recognise and reward success and innovation in the industry. One of the noticeable consequences of this event is that award-winners tend to attract buyers for their companies shortly after. For example, former panellists at the 2011 inaugural awards, Stuart Clark of Impendium Ltd, Aidan Cooney of Opta Sports Data and Duane Jackson of KashFlow all went on to sell their businesses in multi-million pound deals. I can’t help but wonder if they would have sold if their personal finances had better reflected their success at the time.

A coincidence maybe – but after presenting Vin Murria, the founder of Advanced Computer Software Group, with the first ever WCIT award to the CEO of a publicly listed company, her business too agreed to a £725m takeover.

If this small sample reflects the tech industry as a whole, it’s clear that successful companies sell like hot cakes, often to US firms wanting to short circuit the research and development process and quickly expand their portfolios. In some ways this is good for those involved – but for every company such as those I’ve mentioned who get a good deal, there are others who can get their fingers burnt by selling too early on in the company’s growth cycle.  And while exiting early may make sense on an individual basis, it does lead to this lack of UK-founded global champions.

So why are these tech company founders often reluctant to stay put and go on to conquer world markets? As I see it, behind all the stats and business talk, there’s a very human story. Simply they are weary of working every hour possible and the lifestyle challenges this presents.

For most in this position, it’s not that they have had enough and want to give up. Growing a successful business takes vision, phenomenal stamina and a certain personality. Many get the bug and go through the whole process again, building another enterprise from scratch for a second or third time.

It’s just that there are mortgages and school fees to pay or other family demands to meet. Often their backers have kept them cash-starved, believing that complacency will kill any entrepreneurial drive. But after years of hard work, these founders are ready for some small rewards.

Long and daunting road

The way ahead probably looks daunting, especially with the need to secure further funding. As mentioned, the backers are not always forthcoming. The other alternative – stock market flotation via AIM-listing – could ease the pressure, but regulations and governance demands make the process expensive in itself.

Consequently, they sense a ceiling coming down on their ambitions and when they are first approached by a buyer, it’s all too easy to sell.

The tech sector is particularly susceptible as the internet, cloud and other advances have brought down the cost of setting up a business in the first place.  As a result, many bright young entrepreneurs don’t need to have solid backing – but because of their lack of infrastructure and other baggage are able to outpace larger corporates in their innovation and development, making them highly attractive to buyers.

So what can be done to encourage these founders to stop bailing out too soon? Investors certainly have a role to play in this – those looking at supporting mid-tier companies should recognise the need for some liquidity at an earlier stage. Frankly there’s a difference between keeping an entrepreneur hungry and making them starve.

In her report, Couta has a list of recommendations to the government too. One of the most important moves, she says, would be to free up data so that stakeholders in the economy can identify ‘scale-ups’. She also lists leadership training and support and of course improving the finance available to prevent companies turning to the US or Asia.  However, I would also ask the government to make it easier for businesses to raise funding through entering the public market, particularly through AIM – and to help make it easier to allow founders a partial exit at this stage, without them completely losing control.

The government should also review the rules of the Enterprise Investment Scheme (EIS) to ensure that business founders, including the founding financiers, are allowed to extract cash without disqualifying the business from the scheme’s tax benefits.

Couta claims that “a boost of just one per cent to our scale-up population should drive an additional 238,000 jobs and £38 billion to GVA within three years”. The Chancellor says that this government wants nothing less than to make the UK the technology centre of Europe. Creating global champions could do this – and create jobs that boost the economy at the same time.