Is the UK in danger of squandering its IT talent?

One of the dangers of the government's Tech City project was illustrated recently with the news that TweetDeck, one of the leading companies in east London's Silicon Roundabout tech cluster, was negotiating its sale to US-based UberMedia for $30m (£19m).

One of the dangers of the government's Tech City project was illustrated recently with the news that TweetDeck, one of the leading companies in east London's Silicon Roundabout tech cluster, was negotiating its sale to US-based UberMedia for $30m (£19m).

This came hard on the heels of the sale of Saffron Digital, a specialist mobile multimedia content management and delivery supplier to HTC, the Taiwanese smartphone company, for £30m. HTC, a leading supplier of Android-based smartphones, plans to use Saffron Digital's software to enhance its mobile video capabilities.

While these acquisitions are no doubt welcomed by the investors and managers at the firms, as a business model they are catastrophic for UK plc because the bulk of their future earnings will leave the country.

Prime minister David Cameron has been talking up the possibility of turning east London into a UK Silicon Valley. Its proximity to the City for finance and to a ready market (7.9 million Londoners, of which a third are aged between 15 and 35 and perhaps two-thirds were born elsewhere, according to official statistics) make it an attractive market and a potentially attractive labour pool.

Cisco, the US communications equipment maker, said it would set aside $500m to help Cameron fulfil that dream. Hermann Hauser, co-founder of Amadeus Capital Partners and the entrepreneur behind Acorn Computers, software house Autonomy and chip designer ARM, welcomed Cisco's investment. He said it was "quite wonderful" that an American company was prepared to invest in a British high tech cluster.

Hauser is author of a report, accepted in full by the government, that recommended setting up a series of high-tech development clusters that he calls Maxwell Centres. The government has earmarked £200m for them, but is still evaluating location proposals.

Hauser says development happens in clusters. "We've got to support people where they cluster (naturally)," he says.

Britons traditionally come up with bright ideas and breakthroughs that other countries then make money from, he says. He hopes the Maxwell Centres will help to keep that earning potential in Britain.

Peter Rowell, executive chairman of Regent Partners, a specialist in finance services for technology companies, told the Intellect Regent conference that tech firms and European private equity firms were sitting on more than $550bn in cash (see table). This money would have to find a home soon, or shareholders would be asking for a distribution, he said.

But it is hard to prise open those wallets. Speaking at the same conference, Hauser said US venture capitalists' appetite for new ventures had waned from $10bn to $3.8bn in a year, and that deal activity was ebbing. "The picture in Europe is even worse," he said.

Accountants Grant Thornton's latest Technology Index, which tracks 132 UK mid-market listed technology-related companies, has seen company valuations grow more slowly than the main FTSE index by 4.2% to 6.3%, while the FTSE 250 rose by 9.8%.

It says the computer hardware sector values dropped by an average of 11.5% and fixed line telecoms firms had an average decline of 0.8%. Internet companies averaged an 11.4% increase, while the semiconductor sector rose 7.6% overall.

Grant Thornton's technology corporate finance partner Wendy Hart says the trick is differentiation. "Companies that represent new technologies and delivery mechanisms and have intellectual property (IP), a specialist capability or a niche customer base as USP (unique sales proposition) have performed strongly in the last quarter," she says.

Meanwhile, the government's main tech funding body, the Technology Strategy Board (TSB) has launched a £5.8m competition to find companies that want to improve or create sustainable "new value chains and networks, and show where value is to be created from information, content and services".

The two-stage competition opens on 14 March with a deadline of 20 April 2011. Selected applicants will be invited to submit a full application by 6 July 2011.

The TSB also sponsored a trade visit to Silicon Valley by 19 UK "web economy" companies. Previous visits had raised $60m in funding.

Getting development money is one thing, and very welcome. But it is only a partial solution. Access to markets and to sales dollars is even more important. One of Hauser's most successful protégés, ARM, cannot make money making the chips it designs. Instead it licenses the designs to others to make and sell. In so doing, last year silicon factories shipped more chips designed by ARM than Intel, Hauser said. ARM makes a fraction of what the chips sell for, but it is the UK's most successful Silicon Valley-type firm.

Where a company has managed to gain early direct access to sales dollars, like Hauser's other successful protégé, Autonomy, it can dominate the global market. Autonomy software derives information from unstructured text. Its early start in the market meant it retained most of its market share once competitive products emerged, and it was able to buy out most of them, Hauser says.

This is a trick that Israeli high-tech companies have learned, especially those in IT and network security. Small, fast, cheap development aimed at "failing fast" means less money tied up in "bet the business" projects. It also improves the odds that the end product or service gets on a trajectory that catches the demand wave early enough to capture the market.

But that's not the way UK plc has done things in the past. All too often brilliant "amateurs", such as Sir Tim Berners-Lee, who designed the World Wide Web, have gifted their discoveries (as did Berners-Lee) or sold too soon, which may prove to be the case with Tweetdeck. Or the government has spent tens of millions on bespoke products for the military or government, with little opportunity for commercial exploitation.

What UK's tech entrepreneurs need most is not money but a high quality global sales force and a high speed distribution network. Earning royalties is wonderful, but only the few who invent the intellectual property benefit. Most then retire and UK plc loses the chance to build a sustainable ecosystem and managerial talent pool.

If the government is serious about building UK plc 2.0, it will not allow its entrepreneurs to sell out too soon, Instead it will help them to ride the demand wave all the way to the beach, and then return to show others how to do it.

Cash hoard
Company Pile ($bn)
Apple 59
Microsoft 53
Cisco 39
China Mobile 39
Google 34
Oracle 25
Intel 21
IBM 20
Samsung 19
Sony 17
Dell 14
HP 11
European private equity 200
Source: Regent Partners

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