UKJan 30 2017

M&A deals reveal early-stage potential

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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. 

It is encouraging to see that in 2017 the UK is producing numerous firms in diverse sectors and using a variety of businesses models.

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. 

Another growing trend in the sector is companies innovating within traditional industries, such as recruitment and real estate. One example is Hackajob, which helps firms assess and recruit technical candidates such as software engineers and developers. Although only founded in 2015, the firm has already helped recruit candidates for the likes of Argos, Capital One, Apple and Giffgaff.

A strategy that involves investing at the very early stage – carrying a higher degree of risk than investment in more established businesses – is commensurate with potentially generating higher returns. But the balance of risk and return is undoubtedly made more attractive with the enterprise investment scheme, which provides tax incentives to investors. 

Liquidity is an area that has traditionally been weaker in the UK, but it has been good to see more activity in the exit markets in recent years, with incumbents – particularly US technology giants – buying European and UK technology firms. Since 2014 there has been an average of one acquisition of a European technology company per month from the top-five US giants: Facebook, Google, Microsoft, Amazon and Apple.  

With more growth capital now available in Europe, tax-incentivised schemes for investment, increasingly active merger and acquisition markets, and most importantly innovative companies of real substance being built, now is a great time to invest in the UK technology sector. 

Francesca Warner is an associate at Downing Ventures

 

Technology Trends: Five key themes for 2017

Alex Kerry, head of Winterflood Business Services, highlights five technology trends that adviser platforms, wealth managers and financial advisers need to consider:

“What can be disrupted will be disrupted. This is the universal law of innovation and is a concept the financial services industry will have to embrace as technology rapidly transforms the saving and investing landscape. In the past decade the industry has undergone profound regulatory change, and there has been a realisation that it needs to reconsider the way it engages with investors in a way that delivers more clarity on products and services. Consumers also need to believe their wants and needs are being addressed.”

1. Improving customer experience

“When we consider customer experience it is important all segments of the market are represented. While millennials are seen as the first technology-savvy generation, we must not forget about the underserved Generation X. Like millennials, Generation X prefers mobile and digital interaction and is comfortable transacting online. These people will increasingly also look to interact with financial advisers in this way. Research suggests the real key to engaging the Generation X audience and new investors is through enhanced customer experiences. We have already seen the emergence of groundbreaking digital investment solutions such as Wealthify, Scalable Capital and Moo.la, but the revolution is only just beginning.”

2. Portable data

“Poor access to financial data impedes a consumer’s ability to make informed decisions. It also makes the process of providing advice more laborious as advisers need to spend large amounts of time compiling data from pension providers and other institutions. The Treasury has announced the pensions dashboard prototype will be ready by spring 2017, with an official projected launch in 2019. However, we believe the industry will begin to bring its own data capture solutions to the table.

“Another exciting development is the integration of spending habits data into individual saving plans. This is vital in achieving dynamic saving flight plans for long-term saving.”

3. Growth of best-of-breed solutions

“Much of the industry is run on old technology still requiring manual entry, which ultimately increases costs for clients. Collaboration with cutting-edge technology providers will allow wealth managers and new platforms to drive greater efficiencies and deliver cheaper solutions to clients, while creating seamless straight-through processes. Adopting a best-of-breed approach and creating a fully automated service allows advisers and wealth managers to stay at the forefront of platform innovation. It also allows firms to concentrate on the front-end client experience and investment strategy.”

4. Rise of fractional shares

“DFMs [discretionary fund managers] are increasingly selecting ETFs [exchange-traded funds] for use in model portfolios, since aggregated trading can help with the trading costs, particularly when it comes to rebalancing. DFMs are increasingly putting pressure on platforms to provide fractional dealing to ensure more efficient trading.

“Plug-and-play solutions around fractional shares enable platforms, DFMs and advisers to fully invest in ETFs and ensure these instruments can be used effectively through model portfolios. Robo-advisers will also be a key beneficiary of fractional dealing for ETFs, given this market’s objective for stress-free, cost-effective investing for broad audiences. This is revolutionary for cost-conscious investors, meaning clients with £1,000 are treated the same as those with £1m.”

5. Ongoing education is vital

“Education on how to use these solutions is crucial, not just for Generation X consumers. It is pleasing to see that many of the new entrants into the market are offering tools to help educate, nurture and encourage new investors. Larger players in the market are increasingly starting to dedicate more resources to education for the end consumer.”