Scale-ups suffer from tech-blind markets – Daily Business Magazine

A reluctance by UK investors to support long-term risk is a drag on Scotland’s growth firms, writes IAN RITCHIE

Scotland has earned a reputation as an innovative nation in terms of scientific research and the quality of its universities. It performs strongly in fields like AI, life sciences, photonics, space science, video games, renewable energy, informatics, and fintech. It creates many start-up and spin-out companies. But then it slips into the slow lane, failing to grow them to companies of scale.

Traditionally, long-term growth capital has been sourced by ‘going public’ – selling shares on a regulated public stock market. The trouble is that UK investors in stock markets, both directly and via indirect vehicles such as pension funds, have not been keen to invest in technology. Many are quite risk averse and hold their savings mostly in cash-related vehicles rather than equities.

Memories of the 2000 dotcom crash when many technology share values collapsed and investors in the first wave of internet pioneers lost their shirts still haunt the markets and since then successive governments have struggled to change attitudes.

In fact, equities have always delivered more growth than cash in the longer term. Vanguard, an investment manager, reports that investing £10k in a fund which tracked world equities in 1999 – just before the dotcom crash – would now be worth over £85k, but if it had been kept in cash would be worth a little over £20k – allowing for inflation that would only be a gain of £362, whereas equities would have made a real terms gain of over £34k.

Equities have historically been the primary way societies convert innovation and productivity into wealth. Which is why countries with deep stock markets, strong tech sectors, and broad equity ownership (like the US, or Sweden) tend to generate more long-term wealth growth. In the case of the US most of its current growth is due to its technology sector which at only 6% of its GDP contributes almost 50% of its growth.

In the US about 65% or the population own shares directly or indirectly, with a large number personally investing in, and avidly following the fortunes of, companies like Apple, Microsoft or Nvidia.

By comparison in the UK under 40% of individuals own shares, mostly indirectly via pension funds, which prefer investing in global funds and have been mostly reluctant to invest in UK technology.

As a result, the UK’s stock market model for technology companies is largely broken. I have been chairman of two technology-based companies in recent times with shares quoted on the London Stock Exchange (LSE) junior Alternative Investment Market (AIM).

It has been a miserable experience.

There is little understanding or intelligent coverage about technology in Britain’s public markets. As a result, UK investors prefer their investments to be safe and predictable, whereas technology businesses often need to make strategic changes in response to competition or new opportunities.

In the US, investors are willing to take these risks on companies which predict explosive growth opportunities – such as today’s star AI firms.

In the UK public companies have little freedom to reduce short-term profitability in order to invest in developments that will lead to future growth. If they do they will be punished and their share price will plummet.

So, is there a better way? Agrekko, the Scotland-based temporary power supplier to events such as the Olympics and the Glastonbury Festival was delisted from the public market and bought by private equity in 2021 for $3 billion.

It then significantly invested in restructuring its business and is now likely to be listed (on US-based NASDAQ) at a value around $10–12 billion. The result is that bulk of that increase in value was made of course, not by UK shareholders, but by the US-based private equity company I Squared Capital.

Companies on a regulated market such as AIM are rightly required to always report truthfully, and any statement made by the company is carefully checked by an independent Nominated Advisor, known as a NOMAD.

Unfortunately, individual shareholders and other so-called ‘informed followers’ have no similar constraints and can say pretty much anything they like on social media, whether true or made up.

One common trick is to publish rumours on social media ‘share tip sites’ of business worries upon which the company’s share price will fall, which leads to shareholders buying shares cheaply.

Then a rumour will be spread that new opportunities seem promising, upon which the share price will rise, at which point some shareholders may sell for a tidy profit.

Sometimes it feels as if your company is a chip on a casino board. Added to that, shareholder democracy is poor with most privare investors owning shares via intermediaries.

Is it any surprise that most successful Scottish technology companies end up selling out to a, usually foreign, acquirer, rather than try to grow their business in the glare of the problematic public markets.

It is one big reason why we are not creating companies of scale.

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