UK tech start-ups deserve better

Can the government do more to encourage tech start-ups? Yes - a lot more, according to serial tech entrepreneur Dan Wagner

Serial technology entrepreneur Dan Wagner (pictured) has blamed dysfunctional capital markets in the UK for making it difficult for British technology businesses to get funding, and has called for generous tax breaks to encourage angel investors and genuine venture capital groups to invest in UK technology start-ups.

He has also criticised the various government schemes intended to encourage technology investment for being too complicated and limited in scope.

Wagner set up online information company MAID - Market Analysis Information Database - in 1984, before going public on the London Stock Exchange in 1994. Today, he runs e-commerce service Venda, which he founded in 2001 and which counts retailers Tesco, Wickes and Wilkinson among its customers, as well as the mPowa mobile payment service that has attracted outside venture capital investment.

"Funding for technology businesses has been somewhat missing for the past 10 years," says Wagner. "Just as it was starting to look good again, we had the banking crisis."

To stand a chance, technology entrepreneurs either have to leave the country - typically for the US - or accept that starting up and running a technology business in the UK will be "a bloody slog".

"It takes a very determined individual to stick with something for 10 years or more to create an established business, mainly because they weren't given proper capital in the first place to establish it faster," says Wagner.

Indeed, he adds, when he was building up Venda he was frequently consumed by the struggle to raise financing to see the company through from one year to the next, and the $76m backing for mPowa has come not from UK investors, but from overseas.

The problem, as Wagner sees it, is two-fold. First, "angel" and venture capital investors are put off by a tax regime that is too complicated and which discourages risk-taking. "There's no incentive for an angel to invest in a start-up. If I've got a quid to invest, that's after it's been taxed at 50 per cent, so I've already lost half the value," says Wagner.

On top of that, nine out of 10 start-ups will fail, so if that pound is invested in 10 companies, typically only 10 pence of that will be left to generate a profit, he says.

"That 10 pence is my chance to make a return. If I make 200 per cent profit, I only make 30 pence. So from my original £2 in income, I've ended up with 30 pence and the government will take 10 pence of that away in capital gains tax," he says.

At the same time, the various schemes intended to encourage investment in technology start-ups by providing tax incentives are too convoluted, bureaucratic and limited.

Instead, subject to certain qualifications, profits from investing in start-up technology businesses should be completely free from capital gains tax, he says.

The kind of people that Wagner believes may be inclined to act as angel investors aren't typically the well-heeled dragons in Dragons' Den or Lord Sugar, but small businessmen with some savings to invest and the inclination to help out a local start-up - if it weren't such a hassle with the slim chance of making a good return being slashed by one-third due to capital gains tax.

Instead, it's much easier to simply buy a few flats and rent them out.

City ignorance

At the other end of the financing spectrum, Wagner also argues that a lack of coverage in the City is also affecting investment.

In many cases, he argues, even technology analysts lack basic knowledge about the industry. An investment bank in the US will have 30 analysts specialising in particular aspects of the IT industry; in the UK, they might have one to cover everything from social media to Cobol tools.

On the buy side, among investment funds, the story is similar and those funds, therefore, stick with what they know.

However, George O'Connor, technology research analyst at investment bank Panmure Gordon, disagrees. "There is a healthy ecosystem of software companies listed in London," he says.

"Yes, we have had notable exits, such as Logica, Misys and Autonomy, but M&A is part of the cycle and the market has sprung to life recently with some very successful IPOs. For example, WANdisco's shares have surged tenfold since its IPO in June last year."

There are too few software companies listed in London, he adds, but investors in the software sector have pretty much doubled their money over the past year.

"While there is a generic valuation gap between US and London - there is a quorum of software companies on the London Stock Exchange that trade on US-style valuation multiples. So London investors do ‘get it' from a valuation perspective," says O'Connor.

@GraemeBurton