Out-Law Analysis | 22 Jun 2016 | 12:47 pm | 3 min. read
Uncertainty over whether the UK will remain a member of the EU has caused a slowdown in venture capital (VC) funding into the London technology market from North America.
Companies are also struggling to find enough skilled people to help drive innovation in their business.
Overcoming those two issues are the biggest challenges London's technology scale-ups – businesses that grow their turnover or number of employees by more than 20% on average each year over a three year period, where they start the period with more than 10 employees – face in developing into major global companies.
VC funding for US-based technology companies has traditionally been on a far larger scale than that which has been available to technology businesses based in Europe, helping Silicon Valley SMEs invest in the infrastructure, people and other resources required to expand domestically in the US and into international markets.
However, in recent years there have been signs of a shift in North American investors' appetite to support emerging technology companies based in London.
The city's reputation as the world's leading financial centre coupled with the increasing digitisation of financial services and the creation of 'Tech City' in the UK capital has spawned a new wave of innovative tech start-ups, many with a focus on new financial technologies in areas such as payments.
The combination of these companies' innovations and the fact their base in London offers a gateway into the European market has spurred interest from VCs in North America as they have become less geographically sensitive and see the potential in London-based innovators.
However, the growth in US-based VC funding in London's tech sector has stalled in the last six months as investors await the outcome of the UK's referendum on EU membership. Addressing the funding challenge, whatever the result of the vote, will influence whether London's technology market will mature to produce the next generation of technology giants we are used to seeing emerge from the US predominantly.
A further limiting factor that will need to be overcome is the existing digital skills crisis which is impacting London tech companies.
The UK parliament's Science and Technology Committee earlier this month said that a lack of digital skills is costing the UK economy £63 billion a year. The report highlighted a crisis businesses across many sectors are having to deal with at a time when they are seeking to harness the potential of big data analytics, cloud-based software and other digital technologies.
As chief executive of Tech City UK, Gerard Grech, said at an event during London Technology Week this week, "the right tech talent is vital to developing our future tech ecosystem". It is therefore vital for the success of London's technology market that immigration rules do not hinder companies' ability to attract app developers, coders and data analysts from across the world and make up the shortage in digital skills that currently exists in the UK.
Businesses in many sectors are looking to make strategic acquisitions of smaller technology companies as a quick way of recruiting people skilled in areas such as data science and coding.
This practice of acqui-hiring is growing because companies see value in instilling a culture of innovation within their workforce and view recruiting talent from nimble tech companies as a way to deliver a step-change in mindsets and practices because those people are more used to creating ideas and experimenting with technology than existing staff.
Acqui-hiring will remain popular whilst there is a digital skills shortage in the UK.
A true European digital single market with more harmonised rules would make it easier and cheaper for companies to expand and achieve the kind of profit margins major tech companies in the US enjoy. Each national market within Europe is small in relative terms to places such as the US, and operations are often governed by conflicting regulation.
Competition regulators in Europe must take a long term view of what is best for consumers too, and define markets on a broader basis than by national borders when assessing whether sufficient competition would survive consolidation between companies. In telecommunications, for example, a single European market would offer network operators and providers the ability to operate at the scale they need to fund investment in the next generation of broadband infrastructure businesses and consumers would benefit from.
Andrew McMillan is a corporate law expert at Pinsent Masons, the law firm behind Out-Law.com, who specialises in work in the technology sector.