The UK technology investment landscape and what investors look for

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While the majority of investment in the technology space unsurprisingly happens in the US, the UK is holding its own. ITProPortal talks to Nazo Moosa, senior strategic partner, Europe, Paladin Capital, about how UK tech is fairing against the rest of the world, where it’s heading and what organisations can do to appeal to the investor community.

What’s the current state of tech investment at a global level? 

We continue to be at the peak of an economic cycle that began in 2008/2009.  Many of the general metrics that the market monitor such as level of M&A activity, venture capital fund raising etc. has surpassed the 2007 peak. 

At Paladin Capital we make the distinction between those technologies that are ‘nice to have’ and those technologies that are of ‘absolute need’. Cyber security investing fits into the latter category so we believe that regardless of the peaks and valleys of general technology investing, cyber investing will remain strong as growth in this sector seems to know no peak.

How does the UK compare against other countries?

When we look at technology we have to separate out the US from the rest of the world as it is truly exceptional relative to other countries.  68 per cent or over two thirds of all venture capital investments globally were in the US from 2006-2013 (according to World Economic Forum data).  Europe as a whole makes up just 15 per cent of the global total so we are a small fraction of the global market. 

That said, other numbers tell a different story. For example, the UK has the fourth largest per capita venture capital spend.  Also, those numbers say little about the innovation that goes on in any given country.  The UK has some of the strongest research institutions and universities globally and punches well above its weight in pure raw research and innovation.

Why do you think the UK is so strong on cyber-security? 

The concentration of capital is even more extreme when it comes to cybersecurity where the UK makes up just four per cent of the overall venture capital globally compared to 80 per cent in the US.  That said, we are in third place after Israel and far ahead of all other European countries. 

The success of the UK in cybersecurity has some historical basis including Britain’s excellence in espionage and the country’s continued investment in defence.  London’s central role in global finance and the ability of Britain’s cities to attract global talent contribute to the country’s success in cybersecurity.

However the continuing close working relationship that UK government agencies have with their US counterparts should never be underestimated.

Because cyber threats are global, these relationships with US agencies such as the National Security Agency and US Cyber Command allow an interchange of ideas, technologies and actions that further the leadership of the UK in cyber. Paladin recognised the strategic importance of these relationships when it opened its offices in the UK in 2015 and began to immediately invest in UK cyber companies.

What role is the UK government playing in helping bring investment to the cybersecurity space? 

There is a misguided belief that innovation happens in a vacuum.  The British cybersecurity sector relies heavily on the support of government.  Recent measures such as the broader Industrial Policy announced by the current government and the efforts of the prior government in setting up the innovation infrastructure in cybersecurity have been impactful in creating a thriving cybersecurity startup ecosystem across the various regions of the UK. 

Specific initiatives include cybersecurity centres of excellence at various universities such as Warwick, cyber-focused incubators and accelerators such as Cylon and the facilitation of the cooperation between government agencies and the commercial sector to provide capital and mentorship to start-ups. 

What impact do you think Brexit will have on the level of investment in the UK’s cybersecurity space? 

As with all things Brexit related, no one has the answers.  Business does not thrive in uncertainty.  That said, cybersecurity - like fintech - is one of the industries where this country has a distinct advantage.  We can do more to ensure that Britain can become a global leader in this important and strategic technology segment.  For example, there is still a dearth of commercial funding for companies as they spin out of the incubators and look for seed stage capital to meet the commercial milestones that the venture funds require.  Paladin invests in this seed/A stage space.  Government can also do more to provide access to the most promising companies to government contracts and knowledge.  

As an investor, what do you look for in a potential investment? 

As a financial investor of course we look to make strong returns.  That can take different forms depending on the level and type of risk an investor is willing to embrace. At Paladin Capital, we have been investing in cybersecurity for nearly two decades.  We are one of the few funds with a strong presence both in the US and the UK and Europe. 

We first and foremost look for entrepreneurs with a drive and desire to have an impact.  Drive is a necessary but not sufficient criteria of course.   We also like certain themes.  We like companies that are leveraging some of the strengths of our universities and research labs – notably in machine learning and AI – to solve complex problems.  We also believe that organisations to think differently about the management and monetisation of data.  Recent EU regulation around location of data storage, data retention or right to be forgotten and other privacy related matters is having an impact on all organisations large and small.

What should organisations do to make themselves appealing the investment community? 

One answer is ‘nothing’ – do what you are doing and if it is meaningful then investors will see the value. A more practical answer for start-ups is to make sure that you have clearly articulated answers to the key questions such as what real problem are you solving?  What is the real not theoretical size of such a market?  How are you and how will you remain differentiated?  The answer also differs for different stages of a company.  

What’s the most common mistake that organisations make when trying to attract investment? 

Entrepreneurs sometimes spend too much time fundraising because they will try to cover the market rather than prioritising the best suited investors for their company.  They also do not do enough research to find the right fit with an investor.  This is a long term relationship and just as the investor will diligence the management team, the entrepreneur should reference not only the fund but the individual who will make the investment and will serve on the board.

What do you think is the next ‘big’ area that will attract tech investment? 

We are living through a period of accelerated innovation which is transforming not just IT but every sector, from new food sources in food and agriculture to satellite and space opportunities in transport and travel.    We believe that cyber security in which security technology is overlaid on top of legacy systems has to evolve as new digital platforms are created and adopted to run critical infrastructure.

This means that digital risk management will emerge to the forefront of cyber investing driven by investments in cyber enablement and monitoring and management. This all leads to cyber security but with more complex and real-time cyber threats, our hunt for innovation must also evolve.

In IT and cybersecurity, blockchain is a transformative technology so we have made an investment in a British company, Elliptic.  AI is probably the horizontal technology that will have the most meaningful impact.  Cybersecurity has been at the forefront of adopting machine learning and AI to protect our digital infrastructure.  Unfortunately, the adoption of AI is now being adopted by more nefarious actors.

Nazo Moosa, senior strategic partner, Europe, Paladin Capital
Image source: Shutterstock/violetkaipa