Charlotte Street Partners



Tech 'moonshots' will create national failures as well as champions

Written by Alex Massie
17 September 2020

Earlier this month, the $40bn sale of ARM, the Cambridge-based technology firm, to the American company Nvidia was confirmed amidst some concern and some controversy. Yet again, it was claimed, a world-leading British firm was being snapped up by a foreign raider and this said – must say – something about Britain’s ability to foster world-class companies and the resilience of those businesses and, somehow, their supposed role as national standard-bearers.

Perhaps it did. Yet many of those objecting to the Nvidia deal were oddly silent when ARM was sold to Softbank, the Japanese conglomerate, four years ago. Then, indeed, the sale was celebrated in some quarters as a kind of “vote of confidence” in Brexit Britain. The UK would, Softbank’s $32bn takeover demonstrated, remain an attractive destination for foreign investors. We were always open for business.

Now the mood seems rather different. The fear is that Nvidia will cannibalise ARM and, possibly, transfer jobs and responsibility from its Cambridge headquarters to the United States. Perhaps it will. Beneath the headlines, however, the true importance of the story lies in what it understood but rarely acknowledged: ARM is an all-too rare British tech success.

Indeed ARM, which supplies chips used in almost every cell phone, is commonly considered the closest thing the UK has to a world-leading tech “champion”. As such, its importance is as much psychological as commercial. It shows the UK can still compete.

If that is the optimistic appraisal of ARM’s success, a gloomier analyst would ask why ARM has, arguably, been the only UK technology firm to succeed on a truly global scale. Where, then, is ‘the next ARM’ and how do we build it? (And what, worse still, do we do if there is no ‘next ARM’?)

The sense – or fear – that ARM might be a glorious exception underpins much of the reaction to its sale. For if ARM was some kind of fluke, it would be foolish to assume its success could somehow be either exemplary or replicated.

The government is, in its way, aware of this, I think. Hence the suggestion offered by Dominic Cummings, Boris Johnson’s most significant advisor, that one advantage of leaving the EU is that the UK will henceforth be free of state-aid rules that might complicate government efforts to support the tech companies of the future. We are told that Cummings believes the UK should aspire to create a “trillion dollar tech company”. Good idea. If only someone had thought of this before now.

This, it should be added, is part of Cummings’ conviction that the UK should set itself the national goal of becoming the world’s leading country for science and innovation. We might accept the validity of that ambition – and even support it – while also pondering this response too: “Fine. How are you going to achieve that?”

Government has a role, certainly, in fostering the raw material from which entrepreneurship may thrive. That is not only a question of teaching teenagers to code (though that is part of it) and not just about tax incentives either (though, applied correctly, these may sometimes help too). But there are limits to what government may achieve and it is wise to appreciate these, for appreciation is a necessary step along the road to acceptance. 

“National champions” now seems an outdated concept but it is an idea that, though often associated with the 1970s – when the British state owned a removals company (Pickfords) and a travel agent (Thomas Cook) – has never quite disappeared. In the early years of this century there was a definite sense in Scotland that RBS, busy taking on the world, showed just what could still be achieved by a company built, and resident, here. What was good for RBS was good for Scotland. Until it wasn’t.

Impatience is part of the problem but so, in the end, is risk-aversion. When Softbank was pursuing ARM, James Anderson, lead manager of Baillie Gifford’s Scottish Mortgage investment trust, was one of the deal’s chief opponents. Baillie Gifford at that time owned around 10% of ARM and argued that the takeover was a triumph of short-term thinking. Other shareholders, offered a handy premium and a rich return, disagreed.

It seems reasonably telling that Scottish Mortgage, Britain’s biggest investment trust and one significantly oriented towards technology firms, now has almost no exposure to UK companies. Anderson has spent years bemoaning the short-term and risk-averse culture of business in Britain. To wit: “If a company is trying to build a great business for the future in a complex and uncertain world then it almost always needs to take large risks and endure extreme volatility of results and share price. The possibility of failure is inevitable, necessary and far from shameful.”

As Anderson is fond of pointing out, in the case of the American stock market “since 1926 half the added return from equities has come from just 90 companies”.  In that context, it should be clear that government cannot plausibly entertain the same kind of risk – in the pursuit of great, if necessarily uncertain, reward – as a properly functioning market can. The highest growth companies of recent decades really are, to use a phrase newly-in-vogue, ‘moonshots’. Does anyone really have much confidence that the UK government, or any other for that matter, has the ability to sponsor specific companies capable of offering this kind of transformational return? 

Just as pertinently, should it even try to do so? Failure is a necessary element of the capitalist process of discovery. But government exists, at least in part, as a safety-mechanism to protect against failure. As such, it is a conservative enterprise. It is not about picking winners so much as it is a question of protecting against loss and diverting resources, to some degree, from those with most to those with least. The state cannot afford many failures; that is a risk that must be taken elsewhere.

In that context, the state’s responsibilities begin and end in preparing the ground in which companies may grow. It is not the gardener itself. Here in Scotland, the tech environment is not yet close to the “tipping point” at which it becomes self-sustaining. That is one conclusion of the report Mark Logan, formerly of Skyscanner, recently submitted to the Scottish government and that will now form the basis of the government’s approach to the sector.

It is, I think, encouraging that the government has accepted Logan’s report without reservation. It is both ambitious, in the sense of its long-term vision, and modest with regard to the steps that may be taken now. That seems an admirable combination though, as ever, the real question is one of culture, not specific policy. And since culture is an organic thing, it is not susceptible to governmental direction. Hence this: we must aim for the moon, while accepting that we should temper our expectations of getting there. But there is this side-benefit too: even if we may not reach the moon, we may yet be surprised by the discoveries that ensue from the attempt to get there. 

About Beyond the Street and Alex Massie

We are all guilty of being too inwardly focused sometimes, especially as we navigate these changed times. It is all too easy to be caught up in the problems close to home, and for overarching trends to pass us by.

To remedy that short-sightedness, Charlotte Street Partners has enlisted the ingenuity and talent of the writer and commentator Alex Massie. As our new correspondent at large, Alex will look at the bigger picture for us each week. We have challenged him to come up with something a bit different: broad, lateral thinking, thematic insights and a more global perspective.

Alex is a freelance journalist and commentator based in Edinburgh. Not only is he Scotland editor of
The Spectator, but he also writes a political column for The Times and The Sunday Times. He features regularly on the BBC as a political commentator and has written in the past for The Telegraph, Politico, The Washington Post, the Los Angeles Times, The New York Times, the New Statesman, The Observer, and TIME magazine, among others. He was also the Washington correspondent for The Scotsman and assistant editor of Scotland on Sunday

We hope you enjoy his work – and do feel free to forward this email on to colleagues and friends you think might be interested. They can subscribe to Beyond the Street and our other regular briefings here

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