Jun 2017

Everyone’s gone surfing – a less risky wave

Written by Paul Maher

Everyone’s gone surfing – a less risky wave

I visit the US West Coast regularly to meet clients and prospects. There are few places, except perhaps these days China, India and Israel, where tech is taken so seriously. Even a brief visit reveals a lot about the state of the software industry, which many have believed for some time is ‘Eating the world’.

This recent California trip took in a lot. From an Open Source conference to lunch meetings with leading tech investors, from very open discussions with senior marketing folks at privately held billion dollar companies to trash talk from wannabe VC-funded hopefuls, plus one legendary vlogger. A rollercoaster 500 miles in four days and worth every minute of jet lag for the insights we returned with.

Tech bubbling along nicely

Economists and academics have puzzled for decades about the secret sauce of the Bay Area’s tech success. Now on the peninsula with the smarts, despite the perfect mix of climate to attract the world’s top minds, change is afoot. Some, including, it seems, the President, believe it is high time for a rebalancing of the US economy away from its reliance on tech firms. This comes at a time when West-Coast based Apple, Alphabet, Microsoft, Amazon and Facebook, currently make up the five of the ten largest companies on the planet.
The fact is, many other parts of the world are hungry for high-paying tech jobs, troublesome cash piles and can stomach lower tax receipts in order to build up their credibility as a tech hub. There were clear signs during our visit that famously bullish US tech investors are nervous. My colleague and I noted the front page of the Wall Street Journal proclaiming “Once flush startups struggle to stay alive”. It is also notable that according to KPMG’s Venture Pulse, at the start of the year saw “The Americas saw a decline in total deal volume”.
Were this unthinkable move away from tech actually happen the lofty valuations enjoyed by many tech firms would be threatened. So would the premiums they pay to acquire hard-charging startups, their employees’ generous bonuses and salaries. Ultimately, the Golden State’s tax take would suffer – less eating the world, more a case of tough medicine and economic indigestion.
New investors, a calmer future?
The game though may not be over though, merely entering a new phase. Interestingly the same KPMG report sees ‘Corporate venture capital participation rise as a percent of overall deals’. If this continues, the ‘Old Guard’ might just replace the VCs as the main owners of the next draft of tech hotshots.
Few major corporations are still led by their original tech founders, most of whom have long-since exited successfully. Ironically many of those founders left for career as VC advisors and now may be competing for scale-up deal flow with the teams they left behind post-IPO.
What corporations offer is a less exciting form of funding in exchange for the much-needed innovation they need to avoid being disrupted.Often they also bring the much-needed business savvy needed to calm down the crazy pre-profit, or even pre-revenue valuations which is causing many to claim tech is overdue a value creation. For example, they are unlikely to buy shares in a startup whose highly-tech juicer has been dubbed a $400 paperweight.
Europe’s path to tech prosperity
In Europe, the UK too is under pressure from other European countries happy to offer homes for the growing Fintech cluster which London currently enjoys. Here though, there is less reliance on VC and more on good old fashioned bootstrapping and the much-maligned, but perfectly viable trade sale, as witnessed by the recent Fairsail acquisition by Sage.
Positive Marketing has from its inception worked with the best of the best from the West (coast). Our first client was a VC-backed Silicon Valley IT management firm expanding into Europe. Our most recent client though is a UK-founded cloud services company looking to reach out to the US. You could say we span the two.
California is still a dreamy place for tech firms to exist, its networks of funders and academia are second to none. However, it is certainly no longer the only great place for startups to flourish. The UK for instance is seeing hubs from Edinburgh to Brighton, Nottingham to Manchester and beyond.
So, the investors may be more traditional, the location may be closer to home and the race is on in earnest to see if anywhere on earth can rival the cradle of the industry eating the world. If Europe is to learn anything from the cooling off in US start-ups, it is to focus on the basics of tech, revenue and people. It’s time to zip up and see who can stay on their board long. The next wave is always building. This is what we really learnt from our surfing US cousins this year.

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