Where have all the UK tech ‘unicorns’ gone?
Last year only six UK companies became a unicorn, the title handed out to private start-up firms that are valued at more than a billion dollars.
Achieving the $1bn (£790m) valuation brings prestige and status to a start-up firm, but does have its downside.
Vishal Marria is the founder of Quantexa, one of those British firms to make the billion dollar mark in the UK in 2023.
The London-based tech company, which uses AI to interpret data and help financial firms manage risk, completed a funding round in April, taking the company’s valuation up to £1.42bn.
Mr Marria likens the pressure of running a unicorn company to a football player moving club for a record-breaking fee.
“If I allowed the pressure of valuations to get to me, I wouldn’t be able to perform as CEO of this business, just as a footballer wouldn’t be able to perform if they let a price tag get to their head,” he says.
For better or worse, fewer UK tech bosses are experiencing that kind of pressure.
In 2021 36 unicorns were formed in the UK, and in 2022 there were 20, according to Dealroom, which tracks the start-up sector.
Looking further afield, last year in the US 44 unicorns were created. But the UK leads the way in Europe – Germany formed just four unicorns in 2023.
The recent slowdown can be blamed on reduced financing from venture capital (VC) firms, which in turn means that fledgling tech companies have seen their valuations scaled back, according to a report from Tech Nation, which provides services for start-ups.
Matthew Scullion is the co-founder of Matillion, a Manchester-based data firm, which became in unicorn in 2021.
He says rising interest rates have made life more difficult for VC companies that finance start-up firms.
“Interest rates have shot up to quash inflation. That has made VC proportionately less attractive compared to simply investing cash into bonds, for example. So less capital flows into private, venture-backed companies, driving down price and therefore valuations,” he says.
Mr Scullion adds that demand for technology products has ebbed since the pandemic, particularly the demand from tech companies themselves.
“When [the tech companies] had lots of cheap VC cash they could, and did, spend heavily with each other and that’s now cooled significantly,” he says.
But it’s not just the wider economic picture that has held back the UK tech sector.
UK investors are not geared up to invest in latter funding rounds because of a lack of capital and expertise, says David Moore, the chief executive at Pragmatic Semiconductor, a Cambridge-based manufacturer of computer chips.
He says that is particularly the case with “deep tech” companies, which develop more complex technologies or products.
“A lot of the deep tech investments are more capital intensive with a longer time to return, and so investors may be more inclined to go with things that may look easier,” he says.
“The US has historically had a broader pool of capital and greater pools of expertise than the UK,” he adds.
The greater capital and expertise have often meant that companies may even move abroad if they cannot get the necessary funding.
However, Hannah Seal, partner at VC firm Index Ventures, says the UK continues to be attractive for founders and talent.
“The UK is one of only three countries in the world to have built a tech industry worth more than $1 trillion – clearly the result of world-class talent, determined investors, and successive governments that have prioritised tech as a lever of economic growth,” she says.
Mr Marria, Mr Scullion and Mr Moore all believe the UK has unique strengths compared to other countries, including its universities and a strong financial services sector.
But there is a cultural difference to the US which is something they believe requires changing.
“In the UK we are less ambitious and much more risk averse. Investors invest more modest cheques, and they do so with structure in their investments designed to protect their downside,” says Mr Scullion.
“In general, they actively encourage minimising risk, rather than going all out to try and win. UK founders therefore are also less aggressive, ambitious, and sophisticated in their use of the high-growth playbook,” he adds.
Mr Marria agrees: “How do we change the culture of [just] creating companies, to creating mega scale up companies?
“How do you take a £100m business and make it a £500m business? I don’t think the UK suffers from new innovation or new companies, but I do see supporting scale as a challenge and it will take time to change,” he says.
Cultural change is slow, so in the meantime Mr Marria says founders can do three things to boost their chances of making it big.
The first is to have a vision that is documented and communicated regularly to the company’s employees, partners, clients and investors.
Secondly, the technology should not be a solution looking for a problem. Instead it should be a solution that has come from understanding a problem in depth.
Finally, he believes it is key to have the agility within the business to overcome challenges that are out of an entrepreneurs’ control, such as Brexit and the pandemic.
Beyond those ingredients, he advises entrepreneurs to “own the process” of raising funds rather than falling foul of investors that are trying to own the process.
“You need to be prepared to walk away if the terms aren’t correct, you need to know your numbers, vision, product and competition inside out – and you need firm dates so you talk to as many potential investors within a set timeframe.” he says.
Mr Moore is confident that Pragmatic will one day join the unicorn club.
“Our goals are to be a unicorn, and ultimately to be listed as a public company. We’re at the half unicorn stage now and we’re well on our way,” he says.
