Backsliding Attitudes Toward Loss-Making, High-Growth Businesses Hinder Success
Apart from Silicon Valley and New York, the United Kingdom is one of the main capitals of technological innovation. Its startup ecosystem is worth £105 billion, according to a global report from StartupGenome advisers.
London’s access to talent, capital and investors is enviable, but the country as a whole lags behind some of its European counterparts on other metrics. Our number of start-ups per capita is only the ninth highest in Europe according to last year’s data. We are far behind countries like Estonia, Iceland and Ireland in terms of comparative entrepreneurial activity. The UK also lags behind Sweden and Estonia in terms of cumulative capital invested per capita.
Although we have made tremendous progress over the past two decades, the most important tech giants are still rooted in the United States. It may be time to embrace a new way of thinking about startup growth.
Whether it’s stereotypical British caution or other factors, our collective aversion to short-term losses prevents us from building great tech companies.
Global findings from the University of Florida show that most new companies entering the market are not profitable during their initial public offering (IPO). Since the 1980s, unprofitable IPOs have grown from around 20% to 80% of the total number each year, indicating that the way investors evaluate potential investments has moved beyond balance sheets. But popular opinion remains that loss shouldn’t be part of a start-up’s initial strategy.
It’s time for a more open attitude, which means a change in our traditional investment models that lean towards capital preservation and low risk. The most valuable global companies are now software companies, unbound by geographic constraints to growth.
Of course, that’s not to say that all loss-making companies are worth it. It is critical to assess underlying metrics such as Annual Recurring Revenue (ARR) and Net Dollar Retention (NDR). However, taking a longer-term view of growth will give UK businesses a place at the top alongside those shaping our digital world.
Redefining our vision of growth will also help promote a more equitable distribution of capital between the different regions of the country. The number of funding rounds raised in London in 2021 (through September) was 31 times that of Oxford, according to Dealroom. London’s position as a technological innovator is a huge boon to our economy, but these are still missed opportunities. Encouraging a better balance of venture capital investment across regions and sectors of the economy would also promote a more equal distribution of talent and technology skills. This would give confidence to potential investors and entrepreneurs.
The rest of the nation is beginning to see some of the cascading effects of our technological success. Nine of the 29 UK companies that achieved “unicorn” status last year are based outside London and the South East.
But to continue to grow this revolution, we need to abandon our loss aversion bias and put more faith in world-class tech entrepreneurial talent across the UK.
The high growth consecutive businesses of the future are here to be built. We just have to give them the tools to grow.