Way back in 1999/2000 when many of today’s budding young tech entrepreneurs were still in primary school, some of us will recall there was a bit of a tech investment bubble going on.
Heady days for sure, with seemingly everyone involved in a frenzied search for the next big thing – and there were lots of candidates. Profit was for wimps and jam was definitely a thing of the future.
Then it all crashed. There was a sudden realisation that the infrastructure was not there which meant the customers were not there. Low cost broadband for consumers was still some way off at that point and actually profit is always very important no matter what sort of business you are in.
That level of investment did not come back even in the boom time of 2006 to 2007 prior to the much bigger crash in 2008.
A2Z Business Brokers recently attended a seminar run by Ascendant Corporate Finance where they gave a quarterly snapshot on the state of tech investment in the UK and Ireland. It was very revealing in many ways, but the most startling thing was the total quantity of current tech investment.
It seems the last couple of years have seen a return to the heavy speculative investment last seen at the turn of the century. There are lots of new ideas about and surprisingly enough, lots of investors too.
This seems to fly in the face of the prevailing message in the news media that that the economy is not taking off through a lack of investment. In the tech sector investment is not only enough, it is now approaching record levels.
In quarter 3 of 2016 £737m was invested in 163 companies bringing the total for the year to date to £1,682m invested in 460 companies. To put that in perspective £2,592m was invested in 534 companies in 2015, so 2016 looks like it will deliver similar figures.
Interestingly enough the Brexit vote has not had a significant impact, but with most deals taking six to nine months it may still be too early to call the real effect this will have over the next few years.
Some Tech is More Equal Than Others
Tech is not a homogeneous sector and some areas are more popular with investors than others. Ascendant split their results into 4 main areas:
- Internet Services
- Clean Tech
Internet service means unsurprisingly services delivered over the internet. These can be as diverse as an e-commerce website or an information supplier for other businesses.
Software means discrete stand alone software – as opposed to software delivered as a service.
Clean Tech is anything to do with the environment including renewable energy, recycling, etc.
Internet Services have taken 62% of the investment in the last quarter, and almost 56% of all investment to date.
Software has taken just 23% of the investment in the last quarter and 27% of the year to date.
This has left Clean Tech with just under 5% in the last quarter and just under 6% for the year to date.
The others picked up the rest.
You can see there is quite disparity between the Internet Services and the software. This may be for several reasons, but three key drivers are undoubtedly:
- scalability – how easy is it to build compound growth
- speed of growth
- total return on investment and speed of exit
Internet services have a strong advantage in each one of these areas. Scalability is usually a key component of the model, with software as a service (SaaS) a strong winner over conventional software in terms of licensing, lock-in and repeatable income. You can see that even Microsoft has moved significantly in this direction in recent years – exactly for this reason.
To grow an internet service business is much easier than a software one as you are just selling a login. There are no problems with distribution, or compatibility and even service requirements are massively reduced as you have total control over the full operation. To give some indication of how fast this is, investors are expecting growth rates in excess of 25% per month for internet service businesses and a mere 100% per year for software businesses.
In line with the highly ambitious rates of growth, the returns being sought are also high with investors looking to have in excess of ten times the investment returned on a short lead time of 3 to 4 years.
Why is this?
The reason this new market exists is quite straightforward. Basically all of the technology and infrastructure is now in place to make all of the ambitious plans possible. In fact we now have mobile technology and infrastructure available to us that was only available in science fiction back in 2000. Unlike in 2000, jam can happen today – lots of jam and really quickly.
One surprising insight from the Ascendant seminar, was in terms of the way in which many of the investment decisions are made these days. There are so many good ideas coming forward that investors can make relative decisions rather than absolute ones. So one business might receive funding because they are based just around the corner from the investor. Another very good business might not get funding because the investor is looking at one that gives a slightly better return, slightly faster – they will therefore have to go elsewhere.
Will this bubble burst I hear you asking?
Well it might, but equally it may also just deflate. There are signs that Brexit may provide some head winds.
However, as infrastructure continues to improve and users gain more technology and become ever more sophisticated in how they use it, there is also still a strong fair wind blowing behind the tech sector and tech investment.