God save the queen (of money)

God save the queen (of money)


Earlier this week, Dealroom released a report on UK tech. The conclusion: the UK has become the world’s hottest tech hub in 2019.

Here's how they make that case:

  1. Venture capital invested in UK startups during January to July 2019 is $6.7 billion, a 43%+ YoY growth compared to 2018.
  2. Capital invested in UK startups by US and Asian investors is skyrocketing: from $1.5 billion to $3.7. Not bad.
  3. These top 30 foreign-funded companies have created an additional jobs 15,000 jobs in 2019, up 50% from 2018.

It's clear that investment in UK startups "is reaching new heights." As in Europe in Q1 and Q2, this growth is primarily driven by rounds above $100 million.

But why is this happening in the UK? Isn't Brexit happening? Shouldn't be freaking out?

Perhaps investors are betting that Brexit won't be as bad for tech. Maybe global funds are trying to deploy cash in a world where negative yield bonds are the norm. Or it could be a considerable cheaper pound driving bargains in London.

GBP/USD over the past 6 months.

Let's dig deeper

Investment from US and Asian investors reached $3.5 billion in Q1 and Q2 2019, more than each of the full year 2018 and 2017.

This is what's driving the UK's growth. In 2018, only 6% of the $8.2 billion raised came from Asian investors. In 2019, that number is 25% so far.

Source: Dealroom.co

What's even more, capital growth from domestic investors is actually slowing down. Last year, it accounted for 43% of the money so far, or $3.7 billion

If 2019 keeps its current pace, it will only reach $2.88 billion. That’s a considerable difference for Europe’s main tech scene.

But let's dig EVEN deeper

In the first half of 2018, UK tech startups raised $3.8 billion, versus $6 billion in the first half of this year. That $2.2 billion difference was led primarily by megarounds.

Who is driving those rounds? And here's where it gets interesting: Softbank's Vision Fund accounts for $1.2 billion of that, or about 60% of the difference – $800 million into Greensill and $400 million into OakNorth.

Is Masayoshi Son, affectionately known as Masa, reckless? Doesn't he see the impending Brexit doom? But

Masa isn't reckless, he is a visionary. Eugene Izhikevich, CEO of the AI startup Brain, says:

“After the dot.com bubble collapse, he was investing in China. You had to drive on a dirt road between Hong Kong and Shenzhen. He has a gift of seeing things before they become reality. What’s obvious to him becomes, ten years later, obvious to everyone else.”

This is how the Hong Kong <> Shenzhen route looks now and I can tell you this: it's not a dirt road and you don't have to drive. I took that train twice and impressive doesn't do it justice.

SoftBank's "cluster of number ones"

Masa has what he calls the “cluster of number ones” strategy: a SoftBank-led ecosystem of AI companies, spanning all industries from healthcare to transportation, from ride-hailing to robotics.

This thesis underpins the Vision Fund’s investment portfolio, and could be the reason why he invested $1.2 billion into the UK (so far this year).

And it's not new.

In 2016, Softbank acquired Arm for 24 billion in what was, at the time, Europe’s biggest ever technology deal.

Why? Because by 2035 there will be a trillion connected devices, "a vast Internet of Things of autonomous vehicles, smart robots and artificially intelligent sensors," and Arm would be the company behind all these devices.

That's the same thesis behind the Greensill and Oaknorth investments. Masa wants to own supply chain logistics and business financing, among other things at a big enough scale where data an AI beneifts kick in.

Here's Munish Varma, partner at the Vision Fund:

"Data has become very prevalent with more data created in 2018 than in the entire time of history put together while the cost of processing that data has also come down dramatically. When you couple that with the rise of AI and machine learning and our ability to make sense of that data having also increased exponentially."

Softbank also invested in Uber (future of transportation), WeWork (physical future of work), Slack (digital future of work) and many, many more.

It might well be that Softbank's desire to own the AI-driven world is a big reason why the UK is, numbers-wise, Europe's hottest startup scene.

So should you move to the UK for a tech job? You could be a contrarian. As Peter Thiel says, contrarians are often wrong, but when they are right, they are really right.

But if you don’t have Masa’s financial cushion, which let's be real, you don’t, I’d wait until the Brexit dust has settled.