April 4, 2011 5:10 pm

The right time to draw up expansion plans

For years, the UK has reproached itself with failing to turn its strength in innovation into commercial success. The picture is changing, though.

“We are still badly lagging behind the US, but I would say we are ahead of continental Europe,” says Hermann Hauser, one of the country’s best-known technology investors. “Compared with where we were 10 years ago, we have made phenomenal progress.”

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The biggest improvement, he says, has been in developing managerial talent. In 1997, when he co-founded Amadeus Capital Partners, the Cambridge-based venture capital pioneer, most of the start-ups it financed were led by first-time entrepreneurs. Now 70 per cent of the chief executives are repeat entrepreneurs.

The coalition government has given the sector a boost by pledging £200m for a series of university-linked technology and innovation centres (Tics) to assist the growth of science-based businesses, recommended by Mr Hauser in a report to the previous Labour government.

George Osborne, the chancellor, gave the technology sector further impetus in his Budget last month with a more generous Enterprise Investment Scheme to encourage angel investors and a doubling of entrepreneurs’ relief from capital gains tax to £10m. Bigger research and development tax credits will benefit small companies, and the “Start-Up Britain” campaign, launched by some of the country’s most successful entrepreneurs, aims to help people grow businesses.

The innovation centres please Mr Hauser, although he is irritated that ministers have spurned his proposal to call them “Clerk Maxwell centres” in honour of James Clerk Maxwell, the Scottish physicist. “It’s bloody stupid to call them Tics,” he says. The first centre, based partly at Rotherham, Yorkshire, will be devoted to high-value manufacturing. Mr Hauser is keen to see them extended to new areas such as regenerative medicine and plastic electronics.

The UK has a number of expanding high-tech clusters. Cambridge’s “Silicon Fen” has grown over 30 years into 1,400 companies employing 43,000 people. London has a burgeoning internet and social media sector, some of it in the so-called “Silicon Roundabout” area of Old Street and Shoreditch. Other clusters include semiconductors in Bristol and Bath, bioscience around Manchester, and software and biotech in Edinburgh.

Cambridge used to be accused of not having a billion-dollar company. Now, says Mr Hauser, it has spawned nine that at some point have achieved that valuation, including its first $10bn company, Arm Holdings, the microchip designer. Others include Autonomy, GlobespanVirata, Solexa, Chiroscience and Domino Printing, some of which have been acquired or merged.

Weaknesses remain in the UK’s technology ecosystem, such as a shortage of venture capital for early-stage companies and a tendency to sell out to US rivals too soon. But the Budget has bolstered morale.

“We are starting to see some changes that will really help the angel investing community,” says Brent Hoberman, who co-founded Lastminute.com, the travel website, in the dotcom boom. “We’ve still got an economic climate that is not easy. But the government has used the levers it has got to what will hopefully be good effect.”

A big challenge, Mr Hoberman says, will be to build large-scale businesses across Europe. Too many do not expand beyond national borders. He urges the European Commission to tackle barriers such as restrictive labour laws, and suggests Brussels should provide matching funds for companies that spend money on translation.

Too many UK entrepreneurs copy US business models, he says, which limits their global potential. Mr Hoberman praises two recent ventures he chairs, Mydeco.com and Made.com, for having innovative models. Mydeco.com customers can use a three-dimensional room planner to see how a sofa or fabric would look in their homes.

At Made.com, customers can vote for items of furniture they want to see constructed at a deep discount in China.

In spite of the obstacles, Mr Hoberman says the UK can create sizeable businesses, although these are often domestic, such as Ocado, MoneySupermarket, Rightmove and Auto Trader, or benefit from circumstances, such as PartyGaming and Betfair taking advantage of restrictive gaming laws in the US.

Moo.com, a Shoreditch-based start-up that prints customised business cards and other stationery using photos from the internet, was globally focused from day one: 70 per cent of its revenues are non-UK.

“The scene is booming,” says Richard Moross, its founder. “These are real businesses with real revenues and profits, raising huge amounts of money. E-commerce is a real thing – it wasn’t 10 years ago in the boom and bust.”

Moo, relaunched in 2006 after an initial version flopped, has doubled revenues every year and has been profitable since 2009. Mr Moross expects to expand its staff from 65 to 100 and launch several products this year. “London has all the raw materials to build very strong, global businesses,” he says. “It’s strong in the creative field, in banking, in design – in lots of core disciplines.”

The expanded research and development tax credit will help Moo, and Mr Moross welcomes the reduction in corporation tax and increase in entrepreneurs’ relief. He believes this should be widened to early employees of start-ups as well as founders, and would like to see all taxable gains from selling a business funnelled back into EIS investments.

Molecular cell biology, where the potential world market for therapies is huge, offers big opportunities. A bright prospect is Cambridge-based Horizon Discovery, which specialises in genetic tests for use in personalised medicines, using a human cell model that identifies which patients are likely to respond to which drugs.

Created with seed funding from local serial entrepreneurs in March 2008, it has already grown to 70 employees and is aiming for an initial public offering in 2013 or 2014, by when it could be worth up to £150m. “We want to build a proper company. We don’t want to build a little company that then gets sold to a US company,” says Darrin Disley, executive chairman. It has already turned down offers.

Mr Disley believes the UK should adopt a wider variety of entrepreneurial models. Horizon is unusual because it was an “orphan” project using research from US universities, adopted in Cambridge after the company’s scientific founders returned home to Europe. Using technology that had already had 10 years of development, it was able to bring in venture capital backers when its commercial prospects were already good, thus avoiding pressure to sell quickly.

A good exit for investors will also be crucial to whether Bristol’s semiconductor design cluster can grow. “It depends whether the current wave of companies can successfully go public or be sold at good values,” says Stan Boland, chief executive and co-founder of Icera, which manufactures a novel family of chips, smaller and cheaper than those of rivals, for use in mobile broadband devices such as dongles.

By the end of this year, Icera plans to sell the technology into smartphones, a much bigger market. At some point it could be in line for an IPO.

But, says Mr Boland, the climate remains difficult for semiconductor companies in Europe, which get squeezed between established US companies and agile Asian ones.

“Relative to the capabilities that we have in Europe, the execution in creating global chip companies in our space is beyond pathetic,” he says. “It’s a national disaster.”

The climate may be improving, but there is some way to go.

The end of red tape? Business waits to see results

If there is one area in which many businesses are reserving judgment, it is the coalition government’s promise to reduce red tape. The sentiments sound fine, they say, but they await evidence of their practical impact.

The plan for growth, published alongside the Budget, promised to scrap £350m-worth of regulations, including the Equality Act’s dual discrimination rules, which would have allowed an employee to bring two discrimination claims simultaneously, such as age and gender.

The Department for Business, Innovation and Skills said most of the savings would go to small and medium-sized companies, largely from scrapping the extension of the “time off to train” regulation to smaller businesses. George Osborne, the chancellor, also pledged a moratorium on new domestic regulations applying to companies employing fewer than 10 staff, and on all UK start-ups for three years from April 1. That comes on top of the “one-in, one-out” policy whereby every new non-European regulation is to be offset by killing off ones of equal cost.

Some of the wider changes, such as reform of planning rules, will matter greatly if they succeed in removing obstacles to development. But, says Miles Templeman, director-general of the Institute of Directors: “The scale of deregulation in areas that really matter to business in general, such as employment law, is still very limited.”

Iain McGeoch, chairman of M&Co, the fashion retailer, is among many who think the scrapping of default retirement at 65, phased in from this month, will be “particularly damaging”.

“There are a lot of individuals whose physical or mental capacity – I am 65, so I can say this – is going to diminish, and they won’t want to recognise it and want to carry on,” he says. “Their departure from a lifetime’s work in a company is not going to be as pleasant as it would have been previously.”

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