With UK tech companies on the growth fast-track, Ashfords LLP's Chris Dyson examines whether these businesses can become the next global titans of tech.
Titans of Tech, a recent report by the technology investment bank GP Bullhound, has investigated Europe’s flagship tech companies.
There are now 57 European tech businesses worth $1 billion or more, including three companies worth over $10 billion – Supercell, Zalando and Spotify.
But do any of these have the potential to become a $50 billion business, like US titans Facebook and Uber, or Baidu in China?
The report identifies two factors that have been critical in enabling US and Chinese businesses to scale more rapidly than those in Europe.
The first is the size of the market: the diversity of languages, legal systems and consumer habits in Europe compares unfavourably with the vast single markets in China and the US.
A second factor is the availability of capital: the five largest tech companies in the US and Asia have, on average, raised five times as much as their five largest European counterparts.
But these factors can be overcome. European companies often expand by buying companies already active in target markets. Spotify, Delivery Hero and Zalando, for example, have so far made an average of 12 acquisitions – more than double the average of the US and Chinese $50 billion companies.
Additionally, investment rounds in European companies are increasing. The five largest rounds so far this year have raised a total of $2.1 billion, including five rounds of over $350 million, whereas in 2013 no rounds raised were over $350 million.
European tech companies are also experiencing growth in revenue and profitability. In a sample of 12 EU companies, revenue rose from $265 million last year to $454 million. And 72 per cent of the billion-dollar European companies for which profitability is known are profitable, compared with 60 per cent last year.
GP Bullhound has found no shortage of European entrepreneurs with the talent, drive and ambition to scale their businesses to the next level. European founders are often mobile: almost a third of them started their business outside their home country, and 39 per cent of founding teams have members of different nationalities.
The UK – and especially London – has benefited from this mobility. While 21 per cent of European founders are British, over a third are based in the UK, including 60% of the expatriate founders, and the UK boasts 22 of the 57 billion-dollar European tech companies.
So are there any European companies with the potential to become $50 billion dollar titans? The report identifies five companies to watch. The first is Spotify, the Swedish music streaming service, which GP Bullhound describe as standing ‘head and shoulders above the rest’. Ranked in second place is online fashion retail platform Farfetch, started in London by the Portuguese entrepreneur José Neves. Then there is Swedish payment services provider Klarna, followed by video games companies Supercell (Finland) and Unity (Denmark).
How does the UK rank in relation to other European countries in this field? By some measures, the UK is the outstanding performer. Of the 50 companies based in countries with more than two companies worth over $1 billion, 22 are British, way ahead of Sweden and Germany, the next highest, with 7 companies each.
But the gap may be narrowing. Germany is rising fast, with its seven companies worth $1 billion in 2017 up from just one in 2014; the cumulative valuation of German billion-dollar companies has risen fourfold in the same period. And, as already mentioned, of the five European companies thought to have titan potential, four are Scandinavian and only one is British.
The advantages of the UK as a base for tech companies include the English language, its flexible labour market, and the fact that, having become a significant tech hub, London acts to some extent as a magnet to entrepreneurs in the field. While those factors are unlikely to change, there is potential for other countries to close the gap: Berlin is already considered to be a significant tech hub, and reforms proposed by Emmanuel Macron are designed to make France a more attractive destination for tech founders.
What of Brexit? The government has recently confirmed that freedom of movement will end in March 2019, but its white paper on EU migration post-Brexit has not yet been published. The end of free movement will mean that EU citizens will not be able to come to the UK as easily as they do now, but it is expected that some provision will be made to enable at least those entrepreneurs with some track record of success to relocate to the UK. Further, Brexit will not prevent UK companies from establishing or acquiring EU subsidiaries.
Bearing in mind that the UK’s one potential tech titan, Farfetch, was started by a Portuguese founder, the benefits of European connections for the UK tech sector are not to be underestimated. While we do not yet know exactly what the nature of the future relationship between the UK and the EU will be, the growth in the UK’s tech sector seems likely to continue. We may yet see the rise of a UK tech titan.