Beauhurst recently published a report analysing five years of equity investment into startups and high-growth companies in the North East of England. Henry Whorwood leads on Beauhurst’s consultancy and bespoke research. Here he shares his thoughts on the Northern tech funding landscape.
The Northern Powerhouse? The Midlands Engine? For all the talk, is the enthusiasm – and government support – having an impact?
No one expects Newcastle to directly rival London as UK tech capital; nor for the Midlands to become the new Silicon Valley, or even the new Silicon Fen for that matter. But there’s no reason why tech can’t play as prominent a part of Northern economies, as it does in London.
The success stories are there. Companies like The Hut Group, headquartered in Northwich in Cheshire, are posting 9-digit turnover figures that are growing year-on-year. But these stories are few and far between. Why aren’t there more successful tech companies in the Northern Powerhouse?
As ever, when talking about growing companies, the key issue is funding and its relative availability. The Northern Powerhouse is home to 13 percent of the UK’s fast growing tech businesses, but the area received only 7 percent (£775 million) of the total UK equity investment into tech companies between 2011 and 2015. Are the government-backed investment funds not having an impact?
The top three tech investors in terms of number of deals in London were Seedrs, Crowdcube, and Index Ventures. The top 3 in the Northern Powerhouse were the North West Fund for Biomedical, the North East Accelerator Fund and the North East Proof of Concept Fund. These government-backed funds were the most active investors in terms of deal numbers in the last five years, but were eclipsed by VC and private equity funds in terms of the amount of money committed.
Who’s to blame: investors or entrepreneurs?
Of all the funds that have invested into the Northern Powerhouse, 41 percent were venture capital or private equity (in the rest of the UK it was 46 percent). So private investors are willing to invest in the region, and willing to make large investments, they’re just not doing it often enough. The question is why not? Is it overly-cautious investors or a dearth of ambitious businesses?
If you want to blame the investors, they might have a reasonable defence: of all tech companies in the UK that received equity investment in 2011 to 2015, 6 percent have died. In the Northern Powerhouse, that figure rises to 11 percent.
Rather than accusing the investors of being snobby about the north, it might be more accurate to think of them as being greedy. A much higher proportion of the technology businesses in London are software-based than they are in the Northern Powerhouse. Given the ability of software businesses to scale and to do it quickly, they present a more attractive prospect to investors than an IP-intensive hardware company. A biomedical company can spend years in product development before even generating any revenue. This often clashes with the exit targets of a VC fund.
So what’s the fix?
Some of the more prominent, non-governmental investors in the north are the likes of the IP Group and the Woodford funds – it’s fairly safe to say that more funds like those, deploying patient capital into the sectors that are already flourishing in the North, can only be a good thing. For the North to truly compete with London, however, private money needs to have more of an impact in the region.
Tech North is formulating a co-investment fund to boost investment into technology businesses in the region, which could have a big impact on the sector. A dedicated software fund in the region could also make a real difference. Truly scalable software businesses are drawn to London because of the talent and ready capital that is available.
The lower cost of living and available housing stock outside of London already has the potential to draw the talent, but the businesses themselves need to see the investment capital as being available too. Could a couple of new funds push high-growth business in the region to the next level?
Image credit: Frankieleon / Flickr