Giving air to new ventures

Billions of pounds are being invested in startups with the brightest technology ideas. Sally Flood reports on where the money is being spent, and the next big growth areas

In the heady days of 2000, venture capitalists distributed some £8bn to UK startup companies.

Today, despite the collapse of the internet bubble, that figure is up to £9.7bn.

Alan Bristow, chief executive of Icon Corporate Finance, says the point about innovation is that it never stops, even if the stock market crashes.

‘There are always going to be smart people coming up with ideas that financiers will want to back,’ he says.

What has changed in the past six years is the willingness of venture capitalists to put money into unproven markets, says Peter Cochrane, chief executive of Concept Labs, a company that identifies new technologies and business models for commercial development.

‘Venture capital is more like investment banking these days,’ he says. ‘It means that startups need to be very strong to survive the early period.’

It also helps if startups are developing the technologies that venture capitalists (VCs) believe will turn into best-selling products and services.

Maisie Ng, managing partner of venture capital firm Add Partners, says her organisation is generally investing in things IT directors will be buying in the next three to 10 years. In the near-term, she believes most IT innovation will happen around mobility and convergence.

‘Although we have been talking about this for years, it’s only now that the infrastructure to deliver convergence can be glimpsed,’ she says.

For example, Nokia has developed a mobile phone that can switch from WiFi in the home to cellular networks outside.

The next step, Ng believes, is to develop networks and applications that will allow users to roam freely between wireless networks using a single device.

Convergence is also an attractive area for Prism, a venture capitalist based in Silicon Valley.

Woody Benson, managing partner at Prism, says issues remain in allowing every device to have an internet protocol (IP) address that can be accessed from anywhere.

‘Innovation is needed to solve those problems, from size to scalability, reliability, addressing and quality of service,’ he says.

‘Delivering services over IP will require new infrastructure, applications and content offerings for voice over IP, video and data.’

Prism is looking to invest in technologies that will allow organisations to run the IT department as a business, says Benson.

He says Prism is seeing a lot of new technologies based on productivity, connectivity, automation and data management.

‘I see a lot of growth in providing information workers with 24/7 connectivity and access, where information is managed, organised and classified automatically,’says Benson.

Prism believes infrastructures will develop to enhance data storage and management, with the introduction of distributed database servers, grids and classified, unstructured data.

Benson also suggests there will be dramatic innovations around security – driven, in particular, by the US Homeland Security legislation.

‘Authentication and authorisation across platforms, and protection of consumer data are all big areas for investment,’ he says.

‘In the enterprise, it’s about moving from point products to holistic security solutions. Homeland security requires technologies to monitor, protect and control information and physical assets.’

Homeland security is also one of the three key markets for Foresight Venture Partners, another veteran Silicon Valley VC firm.

‘We don’t invest in many early stage companies, but we will make exceptions for promising firms in homeland security, alternative energy and nano-materials,’says Jamie Richards, a partner in the firm.

Foresight recently invested in a nano-materials company making energy-saving supercapacitors for mobile phones, iPods and vehicles.

‘The technology could also be applied to sensors for detecting bio-terrorism threats,’says Richards.

The UK is a global leader in commercialising nanotechnology, says Richards, pointing to the stock market listing of UK nano-startup Oxonica in 2005.

‘We invested more than £5m in Oxonica over a period of five years,’ says Richards. And as processes become more complex, Concept Labs’ Cochrane believes there is huge potential for technologies that allow IT directors to make decisions more effectively.

One of the technologies that will address process intricacy is improved enterprise search technology, along with more sophisticated ways to gather and apply corporate knowledge.

‘Business today is so complex that it is beyond the ability of people to analyse situations and make decisions,’ he says.

‘We are having to gather more information from even more sources and make sense of that information.’

Cochrane says global changes happening outside the boardroom will also have an impact on the way that businesses work in the future.

‘To date all of business has been run on one axis: the mighty dollar,’ he says. ‘But increasingly, companies will be run according to other axes – the social consequences of the business, and the ecology or impact on the environment.’

As global warming becomes an increasingly important issue, along with water shortages and energy price rises, Cochrane says companies will need to be able to make decisions based on many factors.

To meet this need, he says many startups are working on business modelling technologies.

‘Business modelling is how wide open, and there are a lot of new things coming down the pipe,’ says Cochrane.

The IT department of 2010 and beyond will not be unrecognisable to today’s IT director – but tasks will be more complex, and be dealt with in better, faster ways, says Nigel Grierson, managing director of private equity firm Doughty Hanson.

‘We are at a place where the tech industry is mature,’ he says. ‘People don’t want completely new things – they want to do things they are already doing in different ways.’

Intelligent networks

Deepstream Technologies is a promising UK startup company that has recently received venture capital funding from investor Doughty Hanson.

Deepstream develops intelligent sensors that can be embedded into electronic products and used to report on everything from location to local conditions, says Nigel Grierson, managing director of Doughty Hanson.

‘What Deepstream has is a unique, patented product that can be manufactured in a labour-free environment, and which meets the needs of a big important market,’says Grierson. ‘That’s what we look for in an investment.’

Peter Cochrane, chief executive of Concept Labs, a company that identifies new technologies for commercial development, believes Deepstream is at the leading edge of a new era for the IT industry.

‘In the future, we will see sensor and positioning networks that will know where people are at any given moment,’ he says.

‘It will be really important to know what conditions are, and where goods are.’

Cochrane points to the logistics industry as a prime customer for these new, intelligent networks.

About 45 per cent of product costs currently involve transport, but as much as $2 trillion is lost annually through inefficiencies in the supply chain.

‘A vast amount of money is being lost, so it makes sense to innovate and find new solutions to reduce that loss,’ says Cochrane.

He describes logistics as ‘the last gasp of Dickensian business practice’, along with decision making and business modelling.