Should the UK seek more inward investment from Google? Or should we bemoan the fact that companies like Google acquire all our best start-ups before they can get to scale?
It is a serious question. We seem to want it both ways. We want Google to invest in London’s Tech City but we want Tech City to become a serious competitor to Google. Is that rational? While we have a vibrant start-up culture and generate many innovative ideas, almost all our successful companies go on to be acquired by the large US companies that we seek to emulate, making the US companies even stronger. What is to be done about this?
Actually we should rejoice. While the perception is that innovation comes from large companies, this is not the case. In the latest Wall Street Journal Innovation Awards, something in the region of 85% of the winners were small and medium-sized enterprises (SMEs). It is almost always in the start-ups that the innovation occurs – the large companies are just the brand and the delivery vehicle for turning the ideas into products. And the large companies are not where all the jobs are. In the UK nearly 60% of employment resides with SMEs. Even if the profits flow to the large companies, they have multinational shareholders to whom these profits are eventually passed.
Acquisition also helps the start-up culture. It is generally the easiest way for the founders to exit a business and get a good return on their money. This allows them to invest elsewhere, creates a culture of winners and enhances the track record of a country. For some ideas, such as Android, the branding that came from the Google acquisition was critical in giving it the credibility needed for it to be built into major handset brands.
Of course, acquisition by a large UK company would be even better, but there are few of these in the technology space and we have to accept inward investment instead.
That is not to say that a UK start-up can never grow large – companies like ARM are doing very well – but that we should not see this as the measure of success in maintaining our position as one of the world’s leading sources of innovation.
How does this affect the latest attempt by government and others to build the Tech City innovation hub? It is worth reminding ourselves of the objectives for promoting and investing in the cluster. Some of the founders were looking for a vibrant home for start-up businesses where ideas could be exchanged, experts readily recruited and venture funding would be on hand – all the classic benefits of a cluster. The government talks of innovation and of inward investment, indeed UK Trade & Investment is tasked specifically with bringing foreign companies to Tech City. We have seen the results of this with Google, Cisco and others taking office space or otherwise investing in the cluster.
Growing small companies that get acquired by large overseas players fits the bill perfectly. The UK gets the benefit of innovation and high-tech jobs and then the money and presence of the best businesses in the world.
Growth is rapid because of the speed with which the large companies can assimilate the concept and turn them into products. This means it is unlikely Tech City will spawn the next Google – although we can hope – but we should not berate ourselves over this. Rather, we should be proud that the UK is the source of many of the ideas that power the world’s dominant companies.