Why tech scale-ups are key to turbocharging the UK economy
2020 pitched the world into uncertainty. For the UK, the global pandemic came hot on the heels of Brexit, compounding the confusion and unpredictability faced by both employees and businesses, and inevitably impacting the UK economy. This perfect storm led to a steep drop in economic output — in December 2020 output remained 10% below pre-pandemic levels.
Avoiding Covid-19 meant a push towards self-isolation and remote working, underlining the value of communicating via video screen and heightening the need for technology to keep businesses and social links alive. Yet whilst the economic landscape was shifting, this increased reliance on digital has spawned a new generation of tech start-ups and scaleups in the UK and beyond, boosted by increased demand from businesses changing the way they work and consumers changing the way they live.
Digital transformation advanced much faster than 2019 predictions. According to an October 2020 McKinsey Global Survey of executives, companies have accelerated the digitisation of their customer and supply-chain interactions, and of their internal operations, by three to four years.
Now, with vaccination rollouts and the end of social isolation, it’s clear that the UK economy is getting a lift. The National Institute of Economic and Social Research (NIESR) has forecast the UK economy will grow by 6.8% in 2021, an upward revision of 1.1 percentage points since May. What’s more, it will be followed by a 5.3% expansion in 2022, Niesr said, though this was before recent supply-chain issues and petrol shortages began to bite.
There is no doubt that technology is increasingly central to the UK’s economic growth — from healthtech and fintech to edtech and the war on climate change — and tech scaleups are well-positioned to help deliver it.
The power of tech scaleups
Scaleups are characterised by their spectacular growth and expansion, and can transform industries with new business models and fresh perspectives. Facebook, Google and Uber are good examples of scaleups who challenged the way people live, and interact, innovating to tap into evolving needs and behaviours.
Successful UK-based scaleups include SaaS company, Apperio, which enables in-house lawyers to analyse legal spend using an online platform showing a real-time view of every law firm, matter, task and billable hour. It has formed partnerships with 17 of the UK’s top 100 law firms.
FUTRLI is another case in point — a SaaS provider of prediction technology and accounting advisory software designed to help small businesses make more money. The company has raised a total of $5.2M in funding over two rounds, and has supported over 2,000 accounting firms and 70,000 small businesses in over 140 countries.
Scaleups tend to have an international focus, which can potentially attract significant investment. Despite trying and uncertain conditions, UK tech VC investment hit a record high of $15 billion in 2020, ranking third in the world, while 63% of investment into UK tech came from overseas, up from 50% in 2016 (ScaleUp Insitute).
Tech has grown in importance to the UK economy, and scaleups are key to realising its potential. UK tech pioneers are needed to innovate, and in turn to create employment and enhance lives.
The ScaleUp Institute’s 2020 report revealed that these high growth companies remain the most innovative and international of the UK’s SMEs. In 2018 they contributed £1trillion to the UK economy — accounting for 50% of the total contribution by all UK SMEs. They are 54% more productive than their peers.
Health tech transaction volume has seen a particular rise since the pandemic, with Hampleton Partners’ Health Tech M&A Market Report showing 131 transactions recorded in the first half of 2020. This upward trend, after a significant dip in 2016 and 2017, returns the sector to the peak levels it saw five years ago.
For example, concern over respiratory illnesses as a result of Covid-19 saw Airehealth’s June 2020 acquisition of BreathResearch, a healthcare firm that detects fluctuations in respiratory health. The merger saw AireHealth add BreathResearch's IP, research and patents, which includes work on machine learning analytics for respiratory condition tracking.
Addressing the challenges
But while scaleups hold the key to turbocharging the UK’s economic recovery, it isn’t straightforward. The challenges facing these fast growth companies are well documented, outlined by the ScaleUp Institute (SUI) as access to: finance, talent, leadership capacity, markets and infrastructure.
A strong M&A strategy can play a pivotal role here, allowing scaleups to benefit from timely investment and an established infrastructure, as well as tapping into management expertise and access to international markets.
Some companies will be well-suited to a merger with, or acquisition by, 'strategic' buyers (as opposed to ‘financial’ buyers) — larger organisations who lack the cutting-edge technological innovation and talent needed to help them evolve and adapt quickly to survive in a competitive marketplace. Such a partnership can allow the scaleup to realise accelerated growth, obtain funding, and access international distribution and markets.
An experienced M&A advisor will have extensive contacts within specialist market sectors, an understanding of buying companies’ strategic aims and be able to articulate the vision of future success that bringing the two companies together could bring.
For example, Hampleton used its strategic understanding of AI, automotive technology and financial markets to advise Bright Box HK Limited, the vendor of turn-key connected car platform Remoto, on its acquisition by the leading insurer, Zurich Insurance Group.
The acquisition helped Zurich to expand its focus on mobility through tailored services, enhanced by digital interactions with car drivers and closer collaboration with car dealerships, NSCs and OEMs. The alliance also enabled both companies to drive further innovation of the Remoto platform.
As for the UK government, in recognition of the role scaleups can play in strengthening the economy, the March 2021 budget included a number of measures to address key challenges and help companies realise their potential. To meet the skills shortage, a points-based visa route — including a fast track scheme for tech scaleups — has been introduced, simplifying the process for tech talent to enter the UK.
A Listings Review has also been designed to encourage tech giants (both UK-based and overseas) to IPO in the UK. Consultations have been launched regarding R&D tax reliefs too, while the launch of a £375m Future Fund: Breakthrough will see the government take equity stakes in fast-growing tech companies, matching venture capital finance.
As Gerard Grech, Chief Executive of Tech Nation says in the company’s 2021 report, “The UK’s tech success is the result of foresight, drive and dynamism. The strong and growing tech ecosystem we have nurtured over the years is delivering stellar results. I believe that this is just the beginning of what the UK can achieve.”
Tech scaleups are by their nature, innovative, growing and agile, poised to pivot to meet emerging needs and demands. They are key to re-invigorating the UK economy by driving innovation and creating jobs.
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