When Digital Minister, Chris Philp this week spoke an event celebrating the innovation economy in England’s West Midlands, he had a good news story to tell. “Our tech industry has gone from strength to strength, overtaking the rest of Europe and entering the history books as the third country ever to reach this milestone,” he said.
The milestone in question was a $1 trillion valuation for the U.K.’s startup and scaleup ecosystem as measured in figures compiled by market analyst, Dealroom and analysed by the Digital Economy Council.
Gerard Grech, Chief Executive of Tech Nation – one of the agencies charged with nurturing Britain’s innovation economy – was equally pleased. “This is a watershed moment for UK tech. The industry has gone through difficult global challenges and come out stronger than ever,” he said.
How significant is this? Certainly, it’s a big number. But it’s also something of an arbitrary figure. Investment in tech startups and scaleups has been growing rapidly in recent years and the $1 trillion figure simply marks a point on a continuum. Something to celebrate, yes, but you could argue that the real story lies behind the headline figures. What really matters, perhaps, is not a collective valuation but the impact of the tech sector on the U.K. economy as a whole.
A Sudden Surge
So what does the latest data tell us about that? Well, according to the figures, the U.K. tech sector was worth $446 billion in 2018 and growing steadily. But in 2020 there was a step change, with the ecosystem doubling in value to more than $9 billion, paving the way for a further push above the trillion mark.
Dealroom CEO Yoram Wijbgaarde says the figures track the growing importance of tech across the economy as a whole. “The startup economy has gone from a small group of people centred on London and mainly working on apps to a major industry,” he says.
He sees the valuation as a sign of success. “On one hand, the $1 trillion valuation is a symbolic or arbitrary number but it is also significant,” he says. “It’s similar to a company achieving unicorn status. You can then say is a successful startup.”
So the milestone figure is a marker of success.
But are there perhaps some warning signs in the figures. The sharpest growth was between 2020 and 2021, probably driven, at least in part, by Covid, which acted as a catalyst for digital transformation.
But things have moved on since then. In the wake of the pandemic, the world is facing supply chain shortages, inflation, an energy crisis and latterly, the downward economic drag of a war in Ukraine. So have we moved past the “clear bright morning” stage. Is investment cooling? Well, yes and no.
“There was a correction in the public markets at the beginning of the year,” says Wijngaarde. “People have felt that the market was overheated and that more investor discipline would be good. The job market is also overheated with tech salaries rising..”
However, Wijngaarde stresses that market corrections aside, it is the long-term outlook that is important. As he points out, just about every sector is driven by technology. “In the long-term I am bullish,” he says.
That bullishness was shared by government minister Chris Philps who cited projections suggesting the sector would create another 52,000 jobs by 2025.
Long Term Perspective
Wijngaarde also stresses the need for a long-term perspective when assessing the growth trajectory of individual companies. In measuring the value of the tech economy, Dealroom has included businesses that have been around since the 1990s, a decade that represented the real start of the information age, he asserts. Thus when Dealroom cites British Decacorns ( characterized by valuations of over $10 billion) it references businesses that have been around for some time. These include well established businesses, such as WorldPay and ARM – which may not fit the conventional view of a startup or scaleup.
“If you exclude older companies, you are excluding a lot of data,” he says. In particular, he points out that many of the tech giants of today were formed in the 80s or 90s. Thus, it makes sense to assess the health of the tech sector over decades rather than years.
Through that prism, it’s a good sign that Dealroom and the Digital Economy Council have identified 13 tech decacorns with around the same number of businesses currently valued between $5-$10 billion and perhaps reading to step up a league.
So tech remains a good news story. Investor cash is still flowing, despite the current economic concerns. $6 billion has been raised in 2022, so far. The caveat is that valuations correlate with but do not guarantee success, especially among inherently riskier early-stage businesses.
But turbulent weather lies ahead and in addition to global difficulties, the U.K. is still dealing with self-imposed problems such as a downturn in trade post-Brexit. It will be interesting to see how macro and national economic factors affect investment in the months and years to come.