‘Unicorns’ – mythical creatures that have become a part of the political reality as policymakers seek to champion the rise of the UK’s billion-dollar technology companies, also known as unicorns.
Philip Hammond described the Bank of England as ‘the original fintech unicorn’ in March this year, while Matt Hancock, Sam Gyimah, and Greg Clark have all made speeches in the past three months celebrating the UK’s position as the leading hub for building billion-dollar businesses in Europe.
It is encouraging to hear the Chancellor and other influential ministers highlighting the growth in globally competitive technology companies in the UK. However, a focus on headline-grabbing unicorns is problematic and risks misrepresenting the opportunity that we have to foster greater numbers of lasting success stories from our technology sector.
Critical to harnessing the potential of emerging technology companies are the funding options available to them. The government has rightly recognised technology investment as a substantial market to address in order to supporting growing businesses – the Patient Capital Review, launched in November 2016, has been a far-reaching and influential analysis of the funding landscape.
At its core, the review sought to understand and begin to address a lack of access to long-term finance for innovative companies. Many venture capital and private equity firms are held to a limited timeframe – often around five to seven years – to deliver returns to their own investors. This means the entrepreneurs they back are often forced to sell or seek new funding at a time dictated not by the needs of the business but the lifetime of a fund.
For businesses that operate in industries where breakthroughs take longer, such as life sciences or healthcare, this is particularly problematic, while in many other technology companies working with investors over a longer period can have a positive impact on the growth or the business. The fact the average age of an acquired high-growth company in the UK is 13.5 years shows the disconnect between the needs of scaling companies and those of investors limited to five-year funds.
By contrast, patient investment vehicles often have deeper pockets and a more pragmatic view on the growth of the business. According to analysis by business intelligence firm Beauhurst, patient investors provided businesses with £9.6m on average compared with £4.8m from ‘non-patient’ investors. To address the fact that UK technology companies access fewer funding rounds than American counterparts, there must be a push to create more patient investment vehicles.
And yet, the pervading influence of the unicorn has meant that we are already at risk of losing sight of the fundamental importance of patient investing. British Patient Capital, a landmark £2.5bn fund borne out of the recommendations of the review, launched in June with a stated objective to enable more firms to reach billion-dollar valuations and emulate the success of American unicorns.
The problem is that patient investing does not go hand-in-hand with building unicorns. Unicorns are associated with a riskier style of building businesses that values tearaway growth – Bird, an electric scooter start-up, in June became the fastest ever business to reach a billion-dollar valuation, achieving the milestone in under a year.
Not only is this an exceptional rate of growth for any business to manage, the valuation offers more of an indication of the apparent potential of the business than any metric of substance. This means that there are plenty of businesses that reach a billion-dollar valuation and still fail – Powa and Ve Interactive being notable examples in the UK. This highlights that unicorns may often be as much a hopeful punt as a meaningful investment.
This is further demonstrated by the fact that lofty valuations do not necessarily translate into output for the wider economy. The government has rightly identified the technology industry as a key driver of GDP growth and job creation – unicorns are no guarantee of this. Supercell, a Finnish gaming company valued over $10bn employs less than 250 people – businesses scaled over a longer period not simply focused on valuation are likely to have a greater economic impact and create more jobs.
The government must, therefore, set aside its eye-catching unicorn ambitions to address the much more critical challenge of enabling greater access to long-term, patient finance. The end objective of creating ever greater numbers of technology companies of global scale remains the same – it is simply a case of refocusing on the problem at hand and how to address it.
To address the shortage of long-term finance in the UK, the government has begun to implement a number of valuable recommendations that arose from the Patient Capital Review. First, the creation of British Patient Capital will have a significant impact on the industry, so long as it does not simply focus on building unicorns.
Second, beneficial plans to increase investment limits for Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme have now been enacted. The two government policy interventions, designed to provide long-term funding to young scaling companies, have had a substantial impact in recent years – VCTs surveyed by the Association of Investment Companies as part of the Patient Capital Review grew turnover at the companies they backed by an average £2.9m per £1m invested.
These funds may not generate the breath-taking returns of a Silicon Valley superstar, but we must remember that solid foundations are far more integral to the future success of the UK’s digital economy than the billion-dollar success stories that are as likely to bust as to boom. Policymakers now ought to consider allowing VCTs to provide a greater number of rounds of funding to scaling technology companies to continue building the sturdy foundations of the digital economy.
The government must double down on its commitment to fostering greater access to patient capital and it must not be distracted by the allure of chasing unicorns.
Stuart Veale is managing partner at the venture capital firm Beringea