Unicorns, or Cataphracts?

Much song and dance is made about privately held businesses with valuations of over $1Billion - ‘unicorns’.

Did you know that the UK is home to the most unicorns outside of the USA, China and India?

Think about that next time you’re walking past scattered tents full of homeless people in your local city centre, or enduring potholes on our battered highways, or waiting anxiously for a GP appointment.

Despite our continued creation of said unicorns, here we are in an economic stagnation for most things outside of residential property speculation - following one of the most prolonged periods of low interest rates and easy money we will ever experience.

The business news headlines? Littered with tech companies falling from grace or historic brands cutting staff in response to rising input costs, taxation and regulation. The USA? On a totally different trajectory. Their tech industry, just like ours, suffered badly during the slowdown following the post-pandemic mania of 2021. Yet, they recovered again, much quicker than we did - just like in 2008. Closer to home, countries like Poland and Sloevenia are about to surpass us in terms of GDP per capita. Sure, it isn’t a perfect measure of how a country is doing - but it’s about as close to an accurate single measure as you can get.

A lot of this was very predictable. Every new wave of technology is inevitably accompanied by hype and then pessimism - it means Gartner can publish a new chart every year. It is a seemingly unavoidable characteristic of technological progress - and in my mind bears some resemblance to an en masse Dunning-Kruger progression arc. Blockchain was the future… in 2021. Now, it’s AI - and anybody still working on blockchain is treated with - in my opinion - way too much pessimism. If anything, now is the period where the real value creators come forward; Whilst everybody else is washed out in the surf and herds of sheep-like investors go cold on products that have actual utility and value. It’s all a feature - not a bug - of innovation by humans.

I am seemingly talking about two separate topics here - tech unicorns on one hand, and the wider health of a national economy on the other; But I am trying to infer a relationship between the two - or perhaps, lack thereof, in the case of the UK.

Tech has come to mean ‘software’. This has been true all over the world, effectively, since the dot com bubble - but it is particularly pronounced here in the UK. Why is this? Because software has a very low cost of reproduction compared to physical products and is therefore easier to scale. It’s also permission-less leverage. It’s easier to build a SaaS or mobile app company than a SpaceX competitor. This is exceptionally pronounced in the UK where we have the most expensive industrial electricity on Earth and a large number of taxation and regulatory hurdles that make employing staff the last thing a sane business owner would ever do here (even despite the wage compression caused through unprecedented levels of immigration in recent years). It is also partly due to how much investors love easy-to-model annual recurring revenue. It is seen as a comparative safe haven compared to commodity-intensive business models, or business models with lumpy, seasonal sales - or supply chains that are more exposed to geopolitical events.

There are a number of problems with this on a longer time horizon, however.

Software companies tend to have smaller headcounts than business in other sectors at similar levels of revenue - and they are often bought out via acquisition courtesy of a larger, usually international, competitor - or potentially a private equity firm. This is great for the founders and any early employees lucky enough and resilient enough to have received the vested equity from their stock option plan - they will have life changing wealth and may well reinvest some of that back into other companies as an angel investor.

But, from a country-level economic perspective, this isn’t so good. Manufacturing businesses, for example, tend to produce greater levels of wealth distribution through their supply chains and geographical footprints. This was something Simon Reid and I harped on about relentlessly after the ‘Making It’ report was launched in Liverpool City Region. There are financial and ‘ease of doing business’ incentives at OEMs and Tier 1 manufacturers which often (though not always) facilitate the propagation of local, regional and national supply chain companies, which in turn generates further economic growth and employment. Software companies rarely do this at any notable level (i.e. beyond using a local furniture supplier to fit out their office - if they even have one nowdays…)

In cases where an overseas buyer has acquired a business, there is a real risk that after a few years and fluctuations in the market, the IP and secret sauce gets extracted from the acquired company and there is no longer an economic incentive to maintain headcount at an overseas satellite office. Look no further than LPW Manufacturing in Widnes - acquired in 2018 for $81,000,000 by Carpenter Additive (a huge US stock market listed company). A few years later, the Widnes site was shut down completely. Not a single job spared.

In cases where a private equity firm is involved - especially if the deal is done as an LBO (leveraged buyout) - things can turn south very quickly. You need only look at what is happening at ASDA - but in the interests of fairness, I will point out that there is credible research that most PE buyouts are actually fine and there is just significant media attention drawn to the ones that turn sour.

Why am I writing about this now?

We are undergoing another shift, brought about by the threat to our established international order.

Tech is ceasing to mean just ‘software’ - and is now beginning to mean hardware, energy, defense, heavy industry, construction and traditional engineering, again. Look no further than the rapid renaissance of El Segundo, California - the focal point of the new life being breathed into the US defense industry.

Tech is becoming core to - and perhaps even synonymous with - “Resilience”.

I want the UK to be in a position to ride this wave. We are seeing positive momentum with the success of companies like Helsing and ZoneAware - and a number of angel investing syndicates and incubator/accelerator programmes popping up which focus specifically on defense. We already have a well mapped and represented manufacturing industry, and a heritage in resource extraction and production - albeit, under severe threat and beginning to dwindle.

None of this matters, however, if we do not crack the energy costs, taxation and regulatory problems we have - and my personal opinion is that sooner or later we are going to be forced to swallow the bitter pill that we need our own secure natural gas supplies and plenty of nuclear [at a much higher volume than we currently use] much more than we thought. There is no such thing as a low-energy rich country.

The opportunity here is one of revitalising our economy and going some way to fixing our social and cultural problems through the creation and application of homegrown technology solutions to our stagnating and receding “non tech” and non-service industries. These businesses, however, should not be put on a pedestal as the tech unicorns have been - nor should we think about their input requirements the same way. We should instead create a policy platform and education/skills, finance and physical infrastructure which creates stable, highly productive companies that are not dug lightly into shifting sands market dynamics; We should be enabling the creation of Cataphracts (can I coin this term? Am I of enough notoriety to be ‘coining’ terms yet?). Heavily armoured, resilient companies that more directly contribute to the growth and security of our country, its economy, its society and its culture.

We are entering an era of de-globalisation and de-education (You were wrong, Eric). Tariffs and trade warfare are becoming the norm, as leaders begin to realise that foreign ownership of key national assets comes with its own problems that are not always so tangible and nominal as in traditional economic planning. We are on the precipice of a number of total war theatres opening up, against an opposing alliance that could feasibly out-manufacture us and fight us assymetrically so that they win. The way we wage war - the ‘doctrine’ that informs how generals organise the training and operation of our forces - is, unsurprisingly, heavily influenced by what we can build and how quickly we can build it, train people on it and operate economically at scale.

So, this is a rallying cry - certainly to any of the e/acc and anglofuturism types out there, but also to all the other entrepreneurs, builders and policymakers; We need to look ahead three steps, instead of one. Do not lament that we did not ride the internet wave of the Millennium in the same way the USA did - instead, be ready to manoeuver to exploit the world we will be entering in 2030 and 2040. It will not be one where the enterprise SaaS unicorns that the bulwark of the VC market loves, dominate. It will be one where the winners are people seen as ‘unpalatable’ or eccentric (think of characters like Palmer Luckey, Alex Karp and Joe Lonsdale) by the established power systems that govern our country today. You need only read about how hard it still is to commercialise scientific research or spin out of most of our Universities (by the way, we have way too many - but that’s another blog coming soon…) or hear how we treat defense startups because neutralising hostile actors directly is, regrettably, still not considered ESG under any circumstance.