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Which technology investment?

Despite Brexit uncertainty, levels of investment into the UK’s technology sector remain strong. But which technologies are attracting investment?

At a time when Brexit dominates the political and economic landscape, it’s reassuring to note that the UK’s technology sector remains extremely competitive, and continues to attract venture capital investment.

In 2017, for example, British technology businesses attracted $7.8billion of funding, almost double that of the previous year and, according to research from Dealroom and Tech Nation, the UK’s venture capital investment remains significantly higher than in either Germany or France.

A report by accountants EY, found there was a 22 per cent increase in digital investment into the UK last year, helping to offset a decline in investment into other sectors such as financial services and logistics, due to worries over Brexit.

However, while the UK saw an increase it compared poorly with the rest of the European Union - where investment in digital projects jumped by 33 per cent.

The decision by the EU’s investment fund, the European Investment Fund (EIF), to close down funding to UK start-ups certainly hasn’t helped, having in previous years accounted for a third of all the investment in UK-based venture capital funds.

Commenting, Steve Varley, EY’s UK chairman, said: “At a time when investor sentiment towards the UK as an attractive destination is weakening, opportunity arises in the shape of digital.” But he also warned that, ”An urgent digital drive is needed with a renewed focus on digital skills, infrastructure, and investment in research and development that will help to shape the UK as an attractive environment, and help maintain its competitiveness post-Brexit.”

While the UK may have a vibrant and growing tech scene, funding for start-ups remains a challenge.

The big issue for UK start-ups has always been, and remains, ‘scale up cash’ to help businesses grow. Investors either lack the necessary scale to support these businesses or are taking too short-term a view.

When it comes to raising finance to support start-ups, what approach should entrepreneurs take, if they are looking to engage with investors?

According to those who have worked in or with start-ups, the most important thing is to look at other competitors in your chosen market.

Crucially, look at what they’ve done and are doing, and then copy the most obvious processes – key, is to invest your time in what makes you or your product better. That will include talking to the market and finding out whether your product or service is useful or not.

Another important step is to test the market. It’s not always expensive to get good insights into what the market wants or needs, but those findings could prove crucial as to whether investors will want to back a business.

As one start-up said, as part of the research for this article, when you are setting up a start-up you should, “Do what you love and do what you find stimulating, you’ll be able to make a reasonable living out of it.”

When it comes to what investors take account of, top of their list appears to be the issue of trust. If an investor decides to put money into a business, that decision will be determined by the team that makes up the start-up.

Traction, or proof of potential success, is also a key requirement. For many investors the strength of your business is not how you would spend any investment, but how much progress you can make without investors and whether your team has the experience to deliver.

One of the biggest challenges, when it comes to investing in technology, is that there are so many different areas to actually invest in.

While there are numerous sources of funding for technology companies in the UK – from venture capitalists (VCs) to the UK Government’s own National Productivity Investment Fund that’s looking to help commercialise research - and the launch of UK Research and Innovation (UKRI), brings a more focused effort to better integrate research with innovation, the number of tech trends is growing rapidly.

Among those attracting most of the investment are companies involved in technologies such as: machine learning, voice, cyber-security, virtual and augmented reality, cloud computing and data and blockchain.

There is also growing demand for more flexible consumption, or ‘pay as you go’ models, which are becoming more important. This is being driven by the growing connectivity of devices and the Internet of Things (IoT), which is enabling more devices and products to become suitable for ‘as a service’ consumption.

Investor opportunities

One of the technologies deemed to provide investors with real opportunities is deep learning, which uses neural networks to self-teach machines that many see as the most important artificial intelligence (AI) technology.

Over the past twelve months, the drive to develop AI application specific chips has intensified, with companies investing heavily in AI research and development.

Among those sectors that are expected to benefit most from AI are healthcare, science and education, according to a report from PricewaterhouseCoopers.

Another key technology is voice, which is expected to start to replace touchscreens and keyboards as the digital user interface of choice. A growing number of manufacturers have introduced a range of ‘conversational’ machines and apps, and by 2020 it is expected that 50 per cent of online search will be conducted by voice, compared to 20 per cent recorded in 2017.

“At a time when investor sentiment towards the UK as an attractive destination is weakening, opportunity rises in the shape of digital.”
Steve Varley

But for voice to be adopted, speech recognition platforms will need to be able to reach 99 per cent accuracy and that seems some way off - Google admits to a 4.9 per cent failure rate in speech recognition.

Cyber security is another area where investments are being made and there is a significant move, within the industry, from passive detection of attacks towards a much more pro-active hunting of threats actors using intelligence. As a result. both AI and unified threat management are seen as key technology trends.

Last month, for example, the government opened a cyber innovation centre in London. The London Office for Rapid Cybersecurity Advancement (LORCA), is intended to help innovative start-ups in the cybersecurity space to grow their businesses.

Commenting, the centre’s director, Lydia Ragoonan said,”We’ll be working with industry to understand their needs and with investors who can help to develop the solutions scale at pace.”

Risks are growing at a time when new tech cycles such as the IoT provide hackers with an increased ‘attack surface’. In response, facial and voice recognition, as well as biometric access technologies could start to take off, as could behavioural analytics.

Investment in augmented reality (AR) is expected to become more disruptive as Microsoft, Apple, Google, Sony, Samsung and Facebook all look to improve their virtual reality (VR) and AR software. VR suffers from a lack of content and as such, is unlikely to meet investor expectations, at least in the short to medium term.

One of the most exciting areas, in terms of development and investment, is in blockchain - a shared, digitised, decentralised ledger - that allows transactions to be recorded, verified electronically and encrypted over a distributed server network.

This year has seen many blockchain technology platforms move from the development phase to pilot phase across a variety of sectors, including the banking, media and industrial sectors.

Many parts of the global supply chain are, over time, expected to start using blockchain technology, for such things as retail payments, money transfer services, consumer lending, crowd funding and real estate transactions.

Figures for investment in the UK’s digital and tech businesses are holding up and as the economy continues to change, so there will be many new businesses and sectors appearing that weren’t there before.

Author
Neil Tyler

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