2014 Report. Innovation Economy Outlook UK

Transcription

1 2014 Report Innovation Economy Outlook UK

2 Letter from the CEO W elcome to Innovation Economy Outlook 2014, Silicon Valley Bank s annual study of executives perceptions in the innovation sector. Each year, we take the pulse of these businesses to find out how they re doing, from past performance to future prospects, and the challenges and opportunities they foresee. This year we expanded our survey to include businesses in innovation centres around the world and, in addition to startups, larger businesses with revenues upward of $1 billion USD. I m pleased to offer the most comprehensive look yet at the state of the global innovation economy, with insights reflecting the more than 1,200 survey responses. As the bank of the global innovation economy, we are committed to bringing clients the connections and tailored financial solutions they need to succeed. We also consider ourselves champions for innovation. With studies like this one, we can build a better understanding of what it takes to disrupt an industry or launch a high-growth business. And with that knowledge, we can help create a better environment in which all innovators can thrive. Thanks for taking a look at this year s report. Reading between the statistics, insights and observations, you ll find stories of the phenomenal intelligence, courage and determination it takes to build a successful business. Our prognosis is, in a word, momentum. We see abundant potential in the pace of new business formation, global expansion and availability of capital, and the emergence of new products and solutions that will change the world. Many of the executives surveyed are SVB clients, which should come as no surprise to those of you who know us. SVB is the bank for half of all venture capital-backed technology and life science businesses in the United States, two-thirds of those businesses that went public in 2013 and a majority of the investors who fund them. The make-up of our client base is growing increasingly global and has expanded over the years to serve businesses of all sizes. Greg Becker President and Chief Executive Officer Silicon Valley Bank and SVB Financial Group

3 CONTENTS Introduction Hitting its stride Scaling up Connecting About this report Executive summary 4 Report at a glance 6 The UK innovation economy hits its stride 27 Connecting to the global 34 About Silicon Valley Bank s in review 32 Seizing the opportunity at hand 36 A snapshot of survey : A look ahead 13 Building from the core innovation economy 22 The challenge: Innovation Economy Outlook 2014 respondents Scaling up 15 Managing capital with realistic expectations 20 Growth means jobs

4 If the UK can meet the needs of rapidly growing innovation economy businesses at home and help them tap into global markets, it will reap the benefits of jobs and economic growth.

5 Executive summary H eading into 2014, the UK innovation ecosystem, though young, is vigorous and filled with promise. Three-quarters of the executives surveyed say their business met or beat their 2013 revenue targets. Eight in 10 think business conditions will continue to improve in In 2014, UK executives see opportunities in offering new products, entering new markets and increasing their size and scale. This momentum translates into jobs. Eighty-four percent of this year s respondents plan to grow their workforce in the coming year, outpacing even their peers in the United States. On a variety of fronts 2013 performance, 2014 outlook and 2014 views on the fundraising situation UK executives show they have learnt to manage their businesses and their expectations to reflect the capital available in the UK market. The foundation has been laid for a vibrant UK innovation economy. What then does the future hold? In the following pages, we explore the views of respondents to our annual Innovation Economy Outlook survey, including executives from rapidly growing businesses in the software, hardware, healthcare and cleantech sectors. We also examine the opportunities and obstacles facing businesses in the UK, and compare them to what US businesses are seeing. UK innovation economy executives say their two biggest challenges in 2014 are scaling their operations and recruiting and managing talent. While the vast majority of businesses want to hire, virtually all executives have a difficult time finding people with the skills and experience they need. For the UK economy, the opportunity is clear. If the UK can meet the needs of rapidly growing innovation economy businesses at home and help them tap into global markets, it will reap the benefits of jobs and economic growth. 3

6 HIGHLIGHTS Report at a glance 1 The UK innovation economy hits its stride Optimism follows strong Three-quarters of surveyed UK executives say their business met or beat 2013 revenue targets, and 8 in 10 think business conditions will be even better in Business conditions outlook 2014 VS (UK) Business conditions outlook 40% Much better 39% Somewhat better 2 The challenge: Scaling up Growth will come from the core. Growth is expected to stem from new products, new markets and scaling operations. Capital and talent are essential to take the UK innovation economy to the next level. UK businesses must find the capital and the means to meet their top challenges scaling operations and recruiting and managing talent if the innovation economy is to reach its full potential. 2% About the same Somewhat worse Growth means jobs. More than 8 in 10 surveyed UK executives even more than in the United States expect their business will grow in Young businesses are growing the fastest. At the median, young businesses expect to double in size. Top hiring locations 89% 36% 35% 30% 19% UK businesses have a global perspective on growth. Although UK businesses look first to the UK for 2014 growth, the United States is not far behind. Hiring patterns track these growth aspirations. Overall, UK businesses are more internationally focused than their US peers. UK US Western Europe Eastern Europe Greatest opportunities in % 3 Connecting to the global innovation economy UK US 25% 9% 20% 15% 10% 1% 5% 1% 0% New Scaling Business products or operations conditions markets in existing markets Access to equity M&A 4

7 Overall, UK innovation economy businesses are more internationally focused than their US peers. 5

8 CHAPTER 1 Silicon Valley Bank s Innovation Economy Outlook 2014 UK Report The UK innovation economy hits its stride 9 A vibrant innovation economy starts with entrepreneurs people with ideas and the passion to turn those ideas into breakout businesses. In turn, those entrepreneurs benefit from the resources available in a vibrant innovation economy talent, capital and a supportive business environment. This ecosystem provides what entrepreneurs need for success. F ive years ago, in the midst of a financial downturn, the outlook for the UK innovation economy was uncertain. A January 2009 survey of 80 UK-based venture capitalists found two-thirds believed the fundraising environment was more difficult than it had been for a decade or longer. Three-quarters of respondents thought venture investments would decrease, and half thought the drop would be significant. Eighty-eight percent said it was difficult or impossible to raise B and C rounds for their businesses a particularly dire view, since they also believed that over half of their portfolio businesses could not survive the coming year without raising new equity capital : A L O O K AHEAD In the words of Jeremy Hand, chairman of the British Private Equity & Venture Capital Association, Survival prospects for many early-stage businesses and investments [were] extremely uncertain, as the venture capital market in the UK, in contrast to the US, [had] not achieved the critical mass necessary to fund an appropriate proportion of the most promising and innovative businesses through all stages of their development. 2 Today, the picture is remarkably different. During 2013, the UK reaffirmed its standing as the European destination of choice in the global market for venture capital, with 1.2 billion flowing into UK businesses, up 13 percent from More important is that the overall ecosystem has moved from fragile to firm IN REVIEW 13 BUILDING FROM THE CORE 15 MANAGING CAPITAL WITH REALISTIC EXPECTATIONS 20 GROWTH MEANS JOBS CONTINUED ON 7 1 British Private Equity & Venture Capital Association, BVCA/Populus: Venture Capital Outlook Survey 2009, 2 British Private Equity & Venture Capital Association, Benchmarking UK Venture Capital to the US and Israel: What lessons can be learned? 6

9 CHAPTER 1 The UK innovation economy hits its stride CONTINUED FROM 6 In the following report, we explore the views of respondents to our annual Innovation Economy Outlook survey: executives from rapidly growing businesses in the software, hardware, healthcare and cleantech sectors. We compare the opportunities and obstacles facing businesses in the UK, and look at how those compare with the United States. In 2014, UK executives see opportunities in offering new products, entering new markets and increasing their size and scale. This momentum translates into jobs. Eightyfour percent of this year s survey respondents plan to grow their workforce in the coming year, outpacing even their peers in the United States. On a variety of fronts 2013 performance, 2014 outlook and 2014 views on the fundraising situation UK executives show they have learnt to manage their businesses and their expectations to reflect the capital available in the UK market. From the start-up phase, UK executives focus relentlessly on the bottom line and use the resources available to them, for as long as possible. This helps them manage their need for external capital and helps reduce their vulnerability to external shocks. In addition, it lets them increase the probability that they will be able to raise capital when they need to by creating traction in the form of clients and/or revenue. The crucial issue in 2014 and beyond is growth. While there are plenty of younger businesses at the front end of the innovation pipeline, start-ups are finding it difficult to move through it and achieve scale. 7

10 CHAPTER 1 The UK innovation economy hits its stride UK venture capital investments: , ,604 1, , ,152 1, , , , AMOUNT INVESTED MILLIONS OF POUNDS NUMBER OF DEALS Source: British Private Equity & Venture Capital Association 8

11 2013 in review The innovation economy businesses in this year s survey performed well in Seventy-seven percent of executives say they met or beat their revenue targets. This is an even stronger showing than in the US survey, where 65 percent report meeting or exceeding targets. M ost of the businesses that beat targets did so by between 1 and 20 percent, with 40 percent of businesses even exceeding that performance. That compares with 33 percent of US executives who beat targets by more than 20 percent. At the median, UK executives beat targets by 20 percent, compared with 15 percent among US executives. Strong performance by UK innovation economy businesses in 2013 partly reflects the fact that UK businesses generally had a good year. We also think it reflects the fact that UK entrepreneurs are realistic or even conservative in forecasting future performance. In fact, we think that the common UK executive approach to goal setting may account for the differences between the UK and US results. CONTINUED ON 10 Meeting and beating revenue targets 2013 UK US 54% 60% 60 % 44% 50% 50 % 35% 40% 40 % 30% 30 % 23% 23% 21% 20% 20 % 10% 10 % 0% 0% Revenues were above target Revenues were roughly on target Revenues were below target 9

12 CHAPTER in review CONTINUED FROM 9 Conservatism appears to be a healthy strategy. UK executives and investors understand the need to manage growth with limited private capital. They also remember the sobering lessons of the 2009 financial downturn. As a result, they tend to raise seed capital and then focus on generating revenue and reaching profitability. This approach may also have a cultural component. The UK ecosystem tends to echo the swings in the US innovation economy. Optimism (and, when it comes, pessimism) tends to take hold first in the United States and then radiate outward, with the highs in the UK never quite as high and the lows never quite as low as those in the United States. Annual venture capital investment by geographic focus $60 $50 $ (ALL SECTORS) $30 US Europe Asia Others $20 $10 $ AMOUNT INVESTED (BILLIONS OF DOLLARS) Source: Dow Jones VentureSource 10

13 40 % 2014: A look ahead UK executives are uniformly upbeat. The vast majority say business conditions in 2014 will be even better than in % 2013 VS A lthough that expectation is down slightly from a year ago, fewer UK executives express outright pessimism than a year ago. Rather, they expect the coming year to be about the same. Considering other survey results, these expectations may simply reflect the strength of the overall economic situation in % 19% Executives in the UK share an upbeat mood with their counterparts in the United States where 82 percent of respondents expect business conditions to improve in And in both places, executives at young software businesses (those with less than $25 million USD in revenue) are even more optimistic, with 85 percent projecting improvement. 43 % 2% 4% 11% UK business conditions outlook Much better Somewhat better About the same Somewhat worse Much worse 2012 VS % 11

14 Executives at young software businesses (those with less than $25 million USD in revenue) are even more optimistic, with 85 percent projecting improvement. 12

15 Building from the core Across the board, executives are looking within for growth in the coming year by selling new products, entering new markets and scaling operations. T hey are not hoping to grow by acquiring other businesses or riding the wave of improving business conditions. Plans to build from the core may not be surprising for young businesses in the innovation economy, but it is a sign of strength and another indicator of the firm roots of the UK innovation ecosystem. Thirty-seven percent of UK respondents see offering new products or entering new markets as their greatest opportunity. Scaling operations, at 30 percent, follows. All other opportunities trail by a large margin. The views of UK respondents largely echo those of their US counterparts. Greatest opportunities in % 40% 35% 30% 30% UK US 25% 20% 15% 10% 5% 0% New products or markets Scaling operations Business conditions in existing markets Access to equity M&A 13

16 UK executives are uniformly upbeat. The vast majority say business conditions in 2014 will be even better than in

17 Managing capital with realistic expectations Although UK venture investing has rebounded to the levels we saw before the financial downturn, global venture capital will continue to flow disproportionately to the United States because the United States is a much larger market, and US-focused funds have performed better overall. H istorically, a smaller pool of venture capital for start-ups has been one of the challenges facing the UK innovation economy. This is not likely to change. Even so, capital is a positive sign for the UK innovation economy, because executives have learned how to manage their businesses using the resources that are available to them. Entrepreneurs' responses to this year's survey reveal ways that they deal with the reality they face. Depending on whom you talk to, access to capital is either an opportunity or a challenge. Nine percent of the executives in the UK survey and 21 percent of early-stage, pre-revenue businesses see access to equity as an opportunity. An equity infusion gives growing businesses the cash they need to develop products, hire employees and extend market reach, making it a powerful growth driver for businesses that can raise money successfully and use it effectively. CONTINUED ON 17 15

18 CHAPTER 1 Managing capital with realistic expectations Type of capital raised One source of strength for the UK innovation economy is an increasingly vibrant group of angel investors private individuals, many of whom have been part of successful innovation economy businesses, who invest in very earlystage start-ups. Source of funding in % 70% 60% 61% 41% 50% 40% 30% 20% Next source of capital Looking forward, entrepreneurs plan to reduce reliance on angel funding and government grants while increasing use of other funding types. 10% 0% Venture capital Angel investor Private equity Corporate investor Government grant Crowdfunding Other Venture capital Angel investor Bank debt Private equity Corporate investor Crowdfunding IPO Government grant Merger Other 6% 2% 1% 1% 5% 16

19 CHAPTER 1 Managing capital with realistic expectations CONTINUED FROM 15 While 15 percent of UK executives say access to equity is their top challenge, this is less than in the United States, where 21 percent call access to equity their top challenge. Executives at early-stage, pre-revenue businesses are driving the difference in views. Executives at pre-revenue US companies are twice as likely to say access to equity is their top challenge, suggesting intense competition in the United States for early-stage funding, as well as the appetite for capital among US entrepreneurs looking to reach scale quickly in a large market. Looking at those businesses that raised capital in 2013, or those that tried and failed, offers a more sanguine view of UK entrepreneurs. In both cases, UK executives report better outcomes than their US counterparts. Fifty-one percent of UK respondents successfully raised equity capital in 2013, slightly more than in the United States. While this pattern played out among both prerevenue and revenue-generating businesses, the difference was somewhat larger for pre-revenue businesses. In a similar vein, only 6 percent of UK respondents say they tried unsuccessfully to raise capital, compared with 13 percent in the US survey. Of the businesses that successfully raised capital in 2013, UK businesses at both pre-revenue and revenuegenerating stages were much more likely to look internationally than their US peers. Twenty-one percent of UK executives say they raised capital internationally, compared with just 8 percent in the United States. UK entrepreneurs also appear to manage with less debt. Only 14 percent of UK respondents, compared with 24 percent of US respondents, say their business obtained a loan or credit financing in Among pre-revenue businesses, debt was relatively uncommon in both geographies (9 percent in both the UK and US samples). Among revenue-generating businesses, however, onethird of US executives say they took on debt, compared with only 14 percent of UK executives. Overall, UK executives are significantly more accepting of the fundraising environment than they were in 2013, even though the number of venture capital deals closed in the UK dropped slightly from 2012 to 2013 (from 367 to 347). The percentage of executives who say the fundraising environment is extremely challenging dropped by more than half, while the number saying it is not very challenging more than doubled. CONTINUED ON 18 17

20 CHAPTER 1 Managing capital with realistic expectations CONTINUED FROM 17 In fact, UK executives who successfully raised capital in 2013 are less likely than those in the United States to say the fundraising environment is extremely challenging, and more likely to say it is either somewhat challenging or not very challenging. This UK-US distinction may reflect the fact that there are so many software businesses in the UK sample. US software executives are more positive about the fundraising environment than the overall US sample. Considering the views of revenue-generating software businesses in both geographies with revenues below $25 million USD, for example, the results are quite comparable. One source of strength for the UK innovation economy is an increasingly vibrant group of angel investors private individuals, many of whom have been part of successful innovation economy businesses, who invest in very early-stage start-ups. While angel investing is substantial in both the United States and the UK, it was the main source of early-stage investing for the UK respondents in this year s survey. UK executives were also more likely to say they received funding from a government grant and less likely to say they received funding from private equity or corporate investors. Looking forward, entrepreneurs plan to reduce reliance on angel funding and government grants while increasing use of other funding types. Fifteen percent of respondents expect to rely on organic growth rather than raising external capital. 18

21 CHAPTER 1 Managing capital with realistic expectations Executives view of the fundraising environment Raising equity capital Not very challenging Somewhat challenging Extremely challenging UK US Fifty-one percent of UK respondents raised equity capital in 2013, slightly more than in the US. UK executives who successfully raised capital in 2013 are less likely than those in the United States to say the fundraising environment is extremely challenging. 75% 48% Access to equity: A top challenge Find fundraising somewhat or extremely challenging 81% 14% 61% 51% UK US 24% Looking forward, 15 percent of UK executives say access to equity is their top challenge in UK % 15% 57% 19% US 2014 RAISED EQUITY CAPITAL TRIED AND FAILED 21% 19

22 Growth means jobs The innovation economy continues as a powerful job creator. Eighty-four percent of UK executives say their business plans to grow in The remaining 16 percent expect to keep their workforce approximately the same. None expect to shrink. Growing in 2014? We will grow our workforce We will stay flat We will reduce our workforce T hat is an even stronger showing than among US executives, 76 percent of whom expect to grow. The percentage increases for software sector and pre-revenue businesses in the United States, which are both heavily weighted in the UK sample. Thus, the UK s strong hiring outlook may reflect geographic differences as well as the mix of the UK survey sample. Nevertheless, the intention among UK businesses to grow is an important measure of their vigour. UK 2014 CONTINUED ON 21 US

23 CHAPTER 1 Growth means jobs Expected workforce growth In total, executives at pre-revenue UK businesses project a median growth rate of 100 percent, identical to that of executives at pre-revenue US businesses and about triple that of US software executives overall. CONTINUED FROM 20 ALL RESPONDENTS: EXPECT WORKFORCE TO GROW BY 31% In fact, most UK executives expect significant growth. Two-thirds of the respondents who anticipate growing in 2014 predict increases of more than 20 percent. Sixteen percent expect to at least double in size. The median expected growth rate is 50 percent in the UK compared with 30 percent in the United States. Executives at early-stage UK businesses that are not yet earning revenue are the most upbeat. Nine in 10 say they expect to hire, a larger share of respondents than for the two most growth-minded US categories: pre-revenue and software businesses. Four in 10 of these UK executives expect to at least double the size of their workforce. In total, executives at pre-revenue UK businesses project a median growth rate of 100 percent, identical to that of executives at pre-revenue US businesses and about triple that of US software executives overall. 28% 36% 32% 25% 18% 16% UK 14% US 1% - 20% 21% - 50% 51% - 100% > 100% 1% - 20% 21% - 50% 51% - 100% > 100% PRE-REVENUE: EXPECT WORKFORCE TO GROW BY 37% 24% 29% 18% 27% 24% 30% 10% US UK 1% - 20% 21% - 50% 51% - 100% > 100% 1% - 20% 21% - 50% 51% - 100% > 100% 21

24 CHAPTER 2 Silicon Valley Bank s Innovation Economy Outlook 2014 UK Report The challenge: Scaling up Clearly, the foundation for a vibrant UK innovation economy is solid. The UK has a critical mass of well-performing businesses. Executives are optimistic about the future and are demonstrating their capacity to build businesses with the capital that is available to them. Together, this means a strong pipeline for job creation. T 31% he challenge now is to translate this potential into stronger businesses that together create the critical mass for a successful innovation economy. Across the survey, in the United States and globally, the proportion is only slightly smaller, with 89 percent calling the search for talent extremely or somewhat challenging. UK innovation economy executives say their two biggest challenges in 2014 are scaling their operations and recruiting and managing talent. These are two of the top three challenges most often cited by US executives (access to equity is the third), but UK executives give scaling operations and recruiting/managing talent even greater emphasis. Because scaling operations involves people, the core challenge is very much a matter of finding and retaining talent. Two familiar forces are driving this situation: supply and demand. Across the board, innovation economy executives say hiring is a major problem, even more so than last year. Ninety-four percent of UK respondents consider it extremely or somewhat challenging to find the talent they need to grow, the same as US software executives. On the supply side, innovation economy businesses, particularly younger start-ups, draw heavily on people with sciences, technology, engineering and maths (STEM) skills. This talent pool has not grown rapidly enough to meet increased demand. On the demand side, the strength of the innovation economy the large number of start-ups being funded and the strong performance among later-stage businesses means competition for talent is fierce. Respondents cite skills and education as the most challenging aspect of finding and retaining people to help them grow their businesses. Experience comes second, followed by salary and benefits. Top hiring challenges Skills and education Experience Salary and benefits Candidates prefer businesses of a different size 27% Location Other 25% 3% 9% 5% CONTINUED ON 24 22

25 CHAPTER 2 The challenge: Scaling up UK US Greatest challenges in 2014: UK vs. US UK innovation economy executives say their two biggest challenges in 2014 are scaling their operations and recruiting and managing talent. 30% 27% 25% 24% 22% 20% 15 % 15% 10 % 5% 0% Scaling operations Recruiting employees and managing talent Access to equity Competition Business conditions in existing markets Access to credit New products or markets Regulatory/political environment 23

26 CHAPTER 2 The challenge: Scaling up Is finding talent challenging? Ninety-four percent of UK respondents consider it extremely or somewhat challenging to find the talent they need to grow. CONTINUED FROM 22 When it comes to top challenges in hiring skills, education and experience UK respondents, like US software respondents, put skills and education at the top of the list. The broader US population reverses the order, listing experience as the greatest challenge. In terms of skills and experience, UK executives like their US counterparts tend to focus primarily on experienced workers with STEM skills. Yet finding workers with experience is especially difficult in the relatively younger UK innovation economy, where the talent pool has had less time to develop and there are fewer large innovation economy businesses to spin off experienced employees. As the charts show, UK executives are more likely to seek entry-level employees than their peers in the United States. This may be a response to the relative shortage of experienced employees with relevant skills (since, as in the United States, immigration restrictions make it challenging to hire foreign employees, even those with experience). It may also be a way to protect the bottom line by relying on entry-level employees, businesses can spend scarce pounds more efficiently SURVEY 69% Somewhat challenging 25% Extremely challenging 6% Not very challenging 2013 SURVEY 51% Somewhat challenging 38% Extremely challenging 11% Not very challenging The emphasis on experienced workers with STEM skills wanes as businesses mature and need broader capabilities. But even at this later stage, most of the jobs will go to experienced workers with STEM skills. 24

27 CHAPTER 2 The challenge: Scaling up Hiring: Looking for experience, looking for STEM skills Jobs and hiring UK US UK ALL 46% Experienced STEM UK executives are more likely to seek entry-level employees than their peers in the United States. SKILL SETS IN HIGHEST DEMAND IN 2014 ENTRY-LEVEL VS. EXPERIENCE 100% 100% Entry level STEM (9% US) 90% 90% 28% 80% 80% 12% 70% 70% (8% US) 60% (53% US) 14% Experienced non-stem (30% US) Entry-level non-stem 60% UK REVENUE-GENERATING 40% 60% 50% 50% UK PRE-REVENUE 40% 40% 62% 41% Experienced STEM 30% 30% 10% 15% 20% 20% 10% 36% 10% 10% 18% 8% Experienced STEM Entry-level STEM Experienced non-stem Entry-level non-stem Entry-level STEM Experienced non-stem Entry-level non-stem 74% 26% 0% 0% Non-STEM STEM Entry-level Experienced 25

28 Because scaling operations involves people, the core challenge is very much a matter of finding and retaining talent. 26

29 CHAPTER 3 Silicon Valley Bank s Innovation Economy Outlook 2014 U.K. Report Connecting to the global innovation economy UK innovation economy businesses want to make their mark at home. At the same time, they see the benefits of extending their reach more broadly by tapping into large sales markets abroad (particularly the United States), accessing new pools of skilled employees and augmenting the capital available domestically in the UK. T o envision the shape of the UK innovation economy in the future, consider the words of Thomas Friedman: The world is flat. In all aspects of their business, UK innovation businesses are more internationally focused than their US peers. Although a majority of UK businesses expect most of their 2014 revenue growth to come from within the UK, 41 percent are looking beyond their shores for growth, and virtually all of those (88 percent) are looking to the United States. When it comes to hiring, UK businesses look primarily at home for talent, but 9 percent say they expect to hire in the United States in SEIZING THE OPPORTUNITY AT HAND Looking forward, UK innovation businesses plan to extend their reach in 2014, increasing the gap between UK businesses and their US counterparts. For both sales and service, UK executives are 20 percent more likely to say their business is now active abroad, or will be in the next 12 months, compared with US executives. What international locations are most appealing to UK entrepreneurs for doing business internationally? Asia may come to mind first, but the United States remains the primary draw for sales growth and talent. This makes good business sense for UK executives, given the size of the US market, common language and relatively comparable business environments. CONTINUED ON 28 27

30 CHAPTER 3 Connecting to the global innovation economy 59% 2% 36% 3% CONTINUED FROM 27 Many UK executives also are considering service centres in the United States to support their sales. For production, Europe and Asia garner the greatest interest, led by Eastern Europe (20 percent) and China (17 percent). The United States and India tie for third place, at 7 percent each. Perhaps most notably, a full third of UK executives have no preference (compared with only 14 percent of US executives). For many executives, research and development represents the crown jewel of the innovation economy. For this, however, a preponderance of UK respondents have no geographical preference. Of those who do, most prefer to stay closer to home. US executives are much more likely to express a preference and twice as likely to look to Asia (especially India) for research and development projected revenue growth: UK businesses UK US Asia Europe Top hiring locations UK US Western Europe Eastern Europe 89% 9% 1% 1% 28

31 CHAPTER 3 Connecting to the global innovation economy International footprint by activity UK Currently Next 12 months US UK executives are 20 percent more likely than their US counterparts to say their business is now active abroad or will be in the next 12 months. Currently Next 12 months 25% 52% 80% 70% 14% 60% 50% 40% 30% 14% 8% 11% 39% 4% 35% 47% 6% 39% 53% 44% 8% 36% 20% 10% 0% Research and development Production, including coding and manufacturing Service locations Sales 29

32 To envision the shape of the UK innovation economy, consider the words of Thomas Friedman: The world is flat. 30

33 CHAPTER 3 Connecting to the global innovation economy Most appealing international locations by activity US Europe Asia No preference 50% 45% 50% 48% 39% 40% 37% 35% 30% 25% 20% 15% 10% 5% 0% Research and development Production Service Sales Other Americas and Middle East categories were omitted from the chart as they were less than 5% in any measure. 31

34 Seizing the opportunity at hand The UK at last has the makings of a vibrant innovation economy. Entrepreneurs are turning their passion and ingenuity into breakout businesses. The innovation ecosystem is fueling their success by providing early-stage funding and global opportunities. Businesses are making the most of this momentum through careful management of financial resources and expectations. T he next steps include continuing to make smart choices about where and how to grow. By thinking about growth using a both-and mind-set, UK entrepreneurs can maximize their potential. They can draw upon an increasingly vibrant local scene. And when it makes sense, they can look farther afield to drive top-line revenue growth or find the talent and later-stage capital they need to succeed. Doing so will generate and support the continued economic and jobs growth that makes the global innovation economy such a powerful phenomenon. 32

35 Entrepreneurs are turning their passion and ingenuity into breakout businesses. 33

36 GROUND About Silicon Valley Bank s Innovation Economy Outlook A SNAPSHOT OF SURVEY RESPONDENTS The Innovation Economy Outlook 2014 is Silicon Valley Bank s fifth annual report based on its survey of executives in the innovation economy. W hen we launched the survey and report in 2010, we focused on United States start-ups businesses with up to $50 million USD in revenue and fewer than 500 employees. Not surprisingly, given our focus, we named our findings Startup Outlook. As SVB has grown by serving entrepreneurs and high-growth businesses of all sizes around the world, so has our survey. Last year, we added start-ups in the UK. This year, we expanded the survey to include executives covering the full depth and breadth of the markets we serve, including executives in larger businesses and from around the world. In light of our expanded focus, we have renamed our report the Innovation Economy Outlook. This report focuses on the innovation economy in the UK. In light of the deep connections between the United States and UK markets, we also compare the views of UK respondents with those of their counterparts in the United States. This is a companion to two other reports based on survey findings: one focused on the United States and the other offering a global overview. In each, we examine the views of executives on the business environment, the outlook for 2014 and the opportunities and challenges ahead. All reports are available at VIEW REPORTS In addition to the three comprehensive reports, we are issuing targeted reports that look at executives views by industry sector, business stage and geography. We will also examine key public policy issues, the representation of women in the innovation economy and the ties across geographies that link innovation economy businesses. We are grateful to the 1,200 executives around the world who took the time to answer this year s survey. Through them, we hope we will encourage others to see how much the future has to offer to those willing to do the hard work that drives the innovation economy. 34

37 Overall very positive we re predicting around 80 percent growth. CFO, ENTERPRISE SOFTWARE BUSINESS We hope to renew our financing facilities with SVB this year and expect to increase the level of our FX hedging. CFO, ENTERPRISE SOFTWARE BUSINESS 2014 is the year my company will develop a working prototype. There is immense interest in the company from established players but we are not ready for them. CEO, MEDICAL DEVICE BUSINESS 35

38 SNAPSHOT UK survey respondents The 2014 survey reflects the views of 100 executives with UK-based high-growth technology and healthcare businesses. More than half of the respondents are CEOs, and 85 percent are C-level executives (CEO, COO, CTO or CFO), comparable numbers to the much larger US survey. Software Hardware Healthcare Other Company size based on number of employees 50% UK 82% PERCENTAGE OF RESPONDENTS BY SECTOR US 7% 39% 17% 2% MEDIAN NUMBER OF EMPLOYEES: UK 10 MEDIAN NUMBER OF EMPLOYEES: US 21 15% 9% Fewer than 10 A % 13% % 11% n overwhelming majority of UK respondents come from the software sector. We see more parity in sector distribution than is reflected here and believe healthcare businesses in particular are underrepresented in this year s sample. A larger sample size would likely produce a more balanced distribution of industry representation in the UK economy. 9% 13% % 5% % 2% % 2% In general, the US sample (1,004 executives) draws more broadly from different sectors and includes a somewhat greater proportion of larger businesses. Since software executives tend to be more optimistic, and younger businesses face different opportunities and challenges than mature ones, these differences are important in understanding the survey responses. 36

39 SNAPSHOT A snapshot of UK survey respondents 60 Business size based on revenue UK Publicly traded vs. privately held US 100% Privately held 25% Pre-revenue 96% 31% 32% Publicly traded Percentage of profitable businesses 43% 10% $5M $24.9M $50M+ 4% 53% Less than $5M USD $25M $49.9M Privately held 21% 4% 8% UK Profitable Not yet profitable MEDIAN US REVENUES (USD) $7.0M 6% 46% US MEDIAN UK REVENUES (USD) 57% Profitable Not yet profitable 54% $1.9M 10% 37

40 Acknowledgments Special thanks to dciq for your collaboration on this study. Thank you for your support: Entrepreneur First Seedcamp Level 39 Techstars Techhub Startupbootcamp 2014 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. A third-party firm, Q&A Research, conducted the survey online on our behalf from January 8 through January 29, Silicon Valley Bank is registered in England and Wales at 41 Lothbury, London, EC2R 7HF, UK under No. FC Silicon Valley Bank is authorised and regulated by the California Department of Financial Institutions and the United States Federal Reserve Bank; authorised by the Prudential Regulation Authority with number ; and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. 38