M&A deals reveal early-stage potential

This article is part of
The Guide: Investing in Technology

M&A deals reveal early-stage potential

In 2005 there was only one billion-dollar technology company in Europe, but by 2016 there were 37. This growth – highlighted in a recent report by Atomico, a venture firm created by Skype founder Niklas Zennström – is only one indicator that European technology businesses are starting to deliver. 

There are several reasons to suggest that the UK technology sector in particular has now come into its own. One is the fact that it is now cheaper than ever to start a technology firm due to the reduced infrastructure cost of servers, so companies can now be built from anywhere in the world, rather than being the preserve of Silicon Valley.

Another is the availability of talent that gives the UK a particularly strong competitive advantage in technology. Four of the top-10 computer science universities in Europe – Oxford, Imperial, University College London and Edinburgh – are located in the UK. 

In addition, there has been a marked increase in available capital in the UK to support companies through the stages of growth. Several large funds – the £150m vehicle from Accelerated Digital Ventures is a great example – have launched in the UK in the past 12 months. More recently Japanese software giant SoftBank announced it would base its $100bn (£80bn) Vision fund in the heart of London. 

This is great news for UK funds that focus specifically on early-stage technology firms. It should also be good news for investors looking to generate attractive returns from the UK technology sector. 

Many early-stage investors typically spend a significant amount of time assessing the quality and expertise of management teams. As well as a deep understanding of the technology, strong leadership, an understanding of their market and the ability to attract an exceptional team are priorities. 

Particular emphasis is placed on management assessment, given that strong leadership can often be the difference between success and failure in any venture. A good example of how this translates in practice is social media specialist Miappi. The business is building a software application that helps companies maximise the value from their customer’s social media content by displaying it on their own properties, such as websites or advertising screens.

In 2014 the product was nascent with just a few early customers, and so time had to be spent getting to know the team and understanding the problem they were trying to solve. The founders had previously worked together in another technology business, which they had successfully exited giving investors’ confidence that they could successfully execute as a group. Two years on and Miappi has customers from around the world: it generated £445,000 of revenue in 2016, and is forecasting £3m in 2017. 

It is encouraging to see that in 2017 the UK is producing numerous firms in diverse sectors and using a variety of businesses models. Over the past two years a number of high-quality e-commerce marketplaces, licensed technologies and hardware companies have gained traction and are generating attractive revenues. Despite this volume, funds invest in fewer than 5 per cent of these firms, so the bar to gain funding is still extremely high.