Technology fans can expect another exciting year for technological breakthroughs and advancement in 2017 and the space remains a hotspot for investors. In 2016 we saw Elon Musk’s SpaceX launch and land the world’s first reuseable rocket; cars started to park themselves; and Amazon (AMZN:NDQ) gave us Alexa, an in-home talking, music-playing, encyclopaedic assistant. The next 12 months will see increasingly smarter stuff plus the acceleration of trends already disrupting consumers, businesses and governments.
But what do technology experts think about 2016 and the coming 12 months. The technology team at Alma PR has produced its 'The state of the UK Tech Sector' report, pulling together the collective thoughts of 24 technology industry experts from the City - fund managers, equity analysts and journalists, including those of this author - around a number of key questions.
Below is a brief outline of the findings, but you can download the report in full for free here, courtesy of Alma PR:
Introduction
As should also be expected in a competitive, functioning market, there was a wide range of disparate views, particularly regarding sub-sectors, where one individual’s ‘must have’ is another’s ‘avoid at all cost’. There was general consensus though on the key issues, threats and opportunities.
Heading into 2017, it is evident that while 2016 was a year of extraordinary political upheaval and a greater outflow from the UK of tech businesses than inflow, there remains much to be optimistic about within the UK tech sector.
Question 1 - Review of 2016:
What have been the most encouraging/ disappointing trends in the UK tech landscape in 2016?
Rather than a focus on new technologies breaking through, the main highlights for 2016 have centred around two areas which have been common in the tech world for some time. Cloud appears to have come of age and been accepted universally, albeit with varying degrees of adoption. As one individual states: “Purists would argue for 100% Cloud but a sensible reality has been reached with a mix of cloud and on-premise.”
The most stated disappointment of the year is the reduction in the number of quality listed technology businesses, summarised by one individual: “the biggest shame is that, with one exception, there has been no great new blood coming to the market”. Clearly dominated by Softbank’s takeover of ARM Holdings, there is a common thread that the UK market is a net seller and that there has been a lack of good businesses coming to market to replace those lost, with Blue Prism often quoted as the notable exception.
Question 2 - Looking ahead to 2017:
What are the major trends that you expect to see coming through 2017?
As one would expect, there is much greater disparity when trying to read the future than with judging the past, particularly when trying to spot sub-sectors of note. Cyber Security divides opinion evenly with as many believing it represents “the biggest opportunity” as feeling it “is a ridiculously overhyped subsector”.
Perhaps this can be explained by one individual’s view that it is “a very interesting space and well backed. The issue in this space is that there is an awful lot of rubbish around but not enough people who are technically qualified enough to tell us if it’s rubbish or not.” Similarly the Internet of Things (“IoT”) continues to polarise opinion, with comments ranging from “presents a world of opportunities” to “it’s been so overhyped over the last year. There is nothing out there.”
Question 3 - Environment:
What are the most pressing concerns facing UK tech businesses at the moment?
Brexit provides the most common theme for environmental concerns facing UK tech, on a number of strands. The current weakness of sterling is viewed both as “of course a positive for most” given that it makes our exports cheaper but also provides a significant threat, not just because it is viewed as “putting virtually every UK tech firm on the sale block.”
As one individual surmised “There are a lot of reasons why a tech business would want to be in the UK - R&D tax credits, English language, relatively low corporation tax, tax rebates for IP, digital economy and the infrastructure available.”
Question 4 - Small-mid cap:
What are the key challenges for small-mid cap tech companies?
Funding and a lack of liquidity dominate the key challenges faced by UK technology according to the majority of our respondents with recruitment another often commented concern.
However, not everybody agrees, “There is always the sense that there is not enough funding in the UK, but good companies will always get funded.”
Question 5 - Major success:
With ARM having gone, can the UK create another global tech leader and what are the hurdles preventing this?
The $30 billion question. The re-assuring aspect of the feedback is that the large majority of our respondents believe that we have all the necessary individual ingredients in the UK to create another global tech leader such as ARM, whilst the sad news is that very few believe it will actually happen. In short, that it was “a fabulous anomaly in the UK”.
On the plus side, “the UK seems to punch well above its weight in ‘creative’ activities” and “we do have the skills, ideas and most of the other bits required to build proper global champions”. So if we have the foundations, where do things start to go wrong? According to some, the answer once again is funding related.
“We don’t have funds that are prepared to invest hundreds of millions to return 10’s of billions”, or appetite for risk to invest ahead of the curve, with one citing that in the US “They’re prepared to twist on 19”.
Question 6 - Investment decisions:
What would you say are the three most important elements of a tech business’ investment case?
The tech sector may change at an incredible pace but one thing remains the same. When companies are being assessed, the key determining factor is still the quality of the management team. Out of the 24 individuals interviewed, 18 cited management as one of the three most important elements of a company’s investment case.
Whilst strategy, products and market opportunity also feature very strongly, none come close to the focus placed on the leadership team, to the point where “even if the company isn’t very good, a good CEO will do something.”
For more information, download for free the complete 'The state of the UK Tech Sector' report which includes loads of fascinating notes from the contributing experts on each individual question.
