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A FLIGHT TO CAPITAL?

Posted on Jul 27, 2015 by Sandy Finlayson  | 0 Comments

 

Those of us who worked through the crazy days of the dot.com boom and bust will remember the astonishing amount of capital which went into dot.com companies, many of which were ill-thought out, went to IPO far too early at grossly inflated values and subsequently crashed with the extraordinary destruction of wealth which followed.

 

However, there is always a silver lining and, as Tom Friedman observed in his great books “The World is Flat” and “Hot, Flat and Crowded”, the world was wired up with an amazing fibre optic infrastructure which enables us all to conduct business anywhere at any time.  That was the lasting legacy of the dot.com era. 

The financial world then moved on to look for interesting new ways of losing money through the crazy debt-fuelled banking boom which followed from 2003 to 2008 and the long, painful financial crash which followed it.  As that has been going on, there has been an explosion of creativity in online business.  This has only been possible because of the foundations and the physical infrastructure which were laid during the original dot.com boom years.

For many of us involved in the technology world, the daily update from www.cbinsights.com has become compulsory reading.  Accompanying Thursday’s newsletter was the first quarterly report on global equity finance (attached as a PDF) which shows the astonishing boom in private equity finance, particularly for businesses which have anything to do with the internet and the disruption of traditional business models.

It happened to coincide with two leading articles in Thursday’s Economist (http://www.economist.com/news/leaders/21659745-silicon-valley-should-be-celebrated-its-insularity-risks-backlash-empire-geeks and http://www.economist.com/news/briefing/21659722-tech-boom-may-get-bumpy-it-will-not-end-repeat-dotcom-crash-fly?fsrc=permar|image2) about this great new technology revolution.  It is analogous to the speed with which the world was connected up with electricity, railways, roads, the telephone and running water and sewerage at the end of the 19th century and the beginning of the 20th century.  These technologies have changed our lives out of all recognition and the current technology boom will inevitably bring profound and lasting change to our lives.

Many questions are now being asked about whether we are witnessing another technology bubble but this time the companies which are succeeding are much more robust, they are spending far longer in the hands of private investors before they reach the Stock Market and they have learned the importance of generating cash and profits.

The Economist also raises issues about the extent to which so many of the new “unicorns” are privately held and therefore free from the harsh light of public scrutiny.  For the privileged few who are involved, this is enabling the creation of virtual monopolies and the accumulation of vast amounts of wealth in the hands of a small powerful elite who are able to exchange ideas and information far from the gaze of regulators and the public markets. 

There is no sign that this extraordinary wave of creativity is going to end any time soon.  For those of us who live in the UK we must celebrate the fact that London is at the heart of technology development in Europe.  While much is being done to roll the success of London out to other regional centres, London still accounts for about 50% by volume and 80% by value of all UK technology financings.   However, more and more capital is now being invested in China, India, Israel and other interesting places.  For example, some of you may have heard an interesting interview on Friday morning’s Today programme with a couple of Kenyan entrepreneurs in Nairobi celebrating the success of Silicon Savannah in anticipation of President Obama’s visit.  President Obama has made it clear that Africa’s future lies in investment and not in aid.

According to CB Insights, China is now attracting much more technology capital than Europe.  We have much to do both to remain competitive and innovative and to retain talent and maintain and increase our rate of investment if we are not going to get left behind in this great global race.

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