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Britain’s software sector may lack a champion, but our welterweights pack a punch

Accountancy software giant Sage Group is the big dog in the sector, valued at around £7.2bn, everyone else is somewhat smaller.
Software developers
UK software firms are smaller than their Silicon Valley counterparts

In the UK technology sector, the software sector is the largest by far, featuring companies great and small … well, mostly small.

By global standards, Britain does not have very many software titans.

Accountancy software giant Sage Group is the big dog in the sector, valued at around £7.2bn.

Legacy software specialist Micro Focus (£5.8bn), engineering software company Aveva Group (£4bn), cyber-security play Sophos Group (£2.7bn) and Fidessa Group (£1.5bn), the financial services software outfit, are all big enough to warrant inclusion in the FTSE 350 plus there are a number of companies that are large and listed in London but which are not really British companies - such as payments king, Worldpay Inc (now American-owned), and the Czech Republic's cyber-security firm, Avast.

READ: Don’t sleep on these London listed technology shares

For some reason, however, the UK does not do tech goliaths on the same scale as the US, raising the question: where is Britain's Facebook?

Well, the answer is, it was called Friends Reunited and it could have been a contender but it ended up with a one-way ticket to Palookaville.

Do UK technology firms lack ambition?

According to James Anderson, joint manager of the Scottish Mortgage Investment Trust, the reason Britain does not have its own Facebook, Amazon or Tesla is because management and investors lack patience and ambition.

Boards have been “short-term greedy and long-term stupid” in Anderson’s view, shunning but “spectacular possibilities”, he wrote in a blog posting.

“My prevailing belief is that new British companies fail to compete at scale because they deserve to fail, not because they are doomed to do so.

‘To put it more bluntly: they are unsuccessful because they (and we) are unambitious – indeed, unfit for purpose,” he wrote.

Anderson cited the example of the sale of ARM Holdings, a genuine global tech leader that was sold off to Japan’s Softbank for £24bn in 2016.

£24bn is a lot of money but on the other hand, so is US$263bn, which is the market capitalisation of another computer chip firm, Intel Corporation; graphics chip designer Nvidia Corporation, meanwhile, is valued at US$160bn.

It is hard to argue with the view that the preference in the UK is to cash in the chips, if you’ll forgive the pun, rather than “doubling down” and hanging on in there.

“We fail at every level. I see nothing on the horizon to change this terrible record. It’s very sad,” the well-respected stock-picker said.

Anderson’s chairman at Scottish Mortgage, Fiona McBain, clearly agrees with his view.

“Great results are only attainable if patience is the mantra for investors as well as for founders,” she said, in the investment trust’s most recent annual report.

McBain went on to say, “What is so remarkable about this era for growth investors is that we have been offered the chance to own a set of compelling companies that have the characteristics that denote the potential for greatness at extreme scale.”

Unfortunately, hardly any of those companies seem to be British - and it seems it is because of that word “ambition”, again.

“The combination of digitalisation and globalisation has led to hitherto unimaginable opportunities for a cadre of founder-led companies of the utmost ambition. It's therefore natural enough that the corporate trees can continue to grow at previously incomprehensible scale,” McBain said.

“It's appropriate yet again to cite Amazon in all of these regards. It's not normal for a company of its size to achieve 43% sales growth, it's abnormal to have a cloud computing business with accelerating growth as it hits a US$20 billion run rate or to see the Prime subscription service exceed 100mln customers,” she said.

It would be nice to think that somewhere among the UK software companies there is a charismatic visionary who has the “huevos de acero” needed to build a trillion dollar company but history suggests there most probably isn’t.

British welters punch above their weight

The UK does not have many heavyweight tech companies but the welterweights punch above their weight

Despite the undoubted talent in Britain's technology sector, there is nothing in the software sector that looks like it will be so dominant in everyday life that even now the European Union is working on some way to cut it down to size with some well-meaning red tape.

Nevertheless, the tech sector has been described by no less an authority than Theresa May (and there is no less an authority etc.) as a “great British success story”.

According to the annual Tech Nation report, which maps the evolution of the UK tech sector, British firms attracted more capital than any other European country in 2017.

“Clusters built around AI [artificial Intelligence], machine learning, cyber security and big data industries are supporting growth, jobs and productivity in communities large and small,” the prime minister said in her introduction to the 2018 Tech Nation report.

Digital tech companies in London are the most connected in Europe, second only to Silicon Valley for international connections, according to Tech Nation.

The scores on the door indicate 25% of entrepreneurs across the world report having a significant relationship with two or more entrepreneurs in London, compared to 33% for Silicon Valley.

The UK was in the top three countries for total capital invested in digital tech companies between September 2016 and August 2017, surpassed only by the US and China.

Indeed, the UK had a higher number of deals than China, beaten only by the US, suggesting that the UK does more small deals than the People's Republic.

In 2012, the total investment in digital technology companies totalled £984mln in more than 870 deals; by 2016 this had risen to £3.3bn in more than 2,645 deals.

“With the digital sector growing twice as fast as the economy as a whole, it is clear that technology is a critical component of UK growth, both now and for the future,” Tech Nation reported.

Stock market performance is not too shabby

As the success of Facebook, Apple, Netflix and Google – collectively known as FANG (sometimes with Amazon included) – has demonstrated, the technology sector is regarded as irresistibly sexy by investors.

The UK technology sector may not have produced any companies worthy of rubbing shoulders with the FANG club but the sector, as measured by the FTSE Techmark All-Share index has done well; over the last five years, the FTSE Techmark has risen 47%, compared to the FTSE 100's 22% gain.

The big winners among software and computer services providers over that period have been:

Zoo Digital Group PLC (LON:ZOO): up 1,470%

Triad Group PLC (LON:TRD): up 908%

Sopheon PLC (LON:SPE): up 803%

First Derivatives PLC (LON:FDP): up 700%

Ideagen plc (LON:IDEA): up 551%

Other software and computer services stocks that are at least “four-baggers” include PROACTIS Holdings, GB Group, Arcontech Group PLC, Spectra Systems, dotDigital Group and Craneware.

It would be nice were there some unifying theme among them, other than that they are all software houses or computer services providers, to enable us to spot the next stock market star, but there isn't, really.

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