Opinion

Silicon Valley’s "sub-prime unicorns" have shown UK businesses what not to do

5 min read

23 November 2015

Having seen the UK tech sector’s paced growth for almost a decade, George Mathew, president and COO of Alteryx, warns that Britain may be in danger of too closely following America’s lead, creating "sub-prime unicorns".

High-growth businesses are critical for the health of any economy, and technology companies undoubtedly lead the pack when it comes to speed of growth. The worldwide tech sector is booming, and the UK has a significant share of the pie.

It’s common to use the volume of venture capital generated as a bellwether of success, and in this respect the UK leads Europe. UK tech firms secured a staggering $2.2bn in funding during the first nine months of 2015 according to London & Partners, beating the $2.1bn raised during the whole of 2014 – a record-breaking year.

This trend can be seen on the international stage as well. Looking at the very top end of the spectrum, the number of IPOs worldwide has undoubtedly slowed. However, the volume of venture capital being funnelled into late-stage technology companies continues to rise. According to PwC, 19 startups around the globe joined the ranks of the “Unicorns” – businesses valued at $1bn or more – during the third quarter of 2015 alone.

The scale of investment is encouraging for UK tech companies of all sizes, but we have to pause and consider an important question: Does it threaten to steer us off course when it comes to building sustainable long-term businesses?

Over in the US, many entrepreneurs are seemingly obsessed with building “unicorns”. Ever-larger valuations feed a “growth-first” mentality that is increasingly antagonistic with long-term business health. Recent backlash in Silicon Valley against some of these colossal valuations is understandable, with notable investors suggesting there are “sub-prime unicorns” out there – companies without the substance to justify their valuations.

The trend over on the West Coast seems to have been to do anything necessary to reach the hallowed $1bn valuation. More and more companies have raced towards that point on the horizon, without thinking past it or giving due thought to the capabilities and assets they sacrifice along the way. Becoming a unicorn has become the end-goal, rather than a milestone on the company’s full journey. 

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This worrying pattern means founders and directors may make deals and compromises which ultimately hamstring them, preventing them from leading their companies towards long-term business success, post-unicorn valuation. Without careful planning and a more sustainable view of business growth, companies run the risk of defeating themselves with their own short-term success. Impressive acceleration towards the billion dollar mark should be followed by equally-impressive business momentum after it’s been reached.

London is already the European capital of tech unicorns, with 13 of the continent’s 40 calling the city home. It therefore comes as no surprise that 75 per cent of the UK’s VC funding so far this year has gone to London-based businesses. The city is leading an impressive charge, with investment in local technology companies increasing by a factor of ten in the last five years. London has even become the global FinTech capital, employing 44,000 people within the sector – more than any other city in the world.

All of this momentum is fantastic for the UK economy, but the lessons from across the pond must be learned if this success is to continue. Consistent growth in the UK tech sector for the last ten years shouldn’t lull companies into forgetting that business success relies on long-term planning. Despite short-term benefits, zero-cost capital and unrealistic valuations can be devastating to a business in the long run, particularly when the small print is examined.

Venture capital will continue to be the critical accelerant in developing successful companies, particularly at times when these businesses have vast reserves of unrealised potential. However, this funding needs to be channelled into developing the business itself for ongoing, self-perpetuating growth. Potential must be fulfilled on a lasting basis to justify the faith of both investors and employees, otherwise valuations really are just ephemeral numbers.

George Mathew is president and COO of Alteryx.