Fancy becoming one of the new breed of UK Internet millionaires?[QQ] The hype suggests that what used to be the hard part - getting anyone to back your plan - is a lot easier than it was, and funding of technology startups has become as easy in London as in northern California. However, the reality is still somewhat different. The British Venture Capital Association says that in the past three years alone, 4,415 US high-tech companies have received venture capital backing. In the same period in the UK, 659 high-tech startups received venture capital - just 15% of the US total. The difference is also marked in terms of bottom-line liquidity. UK companies received £769 million, while their US counterparts received the equivalent of 16.8 billion in funding - over 20 times as much as in the UK. Of course, the US has an economy six times larger than the UK, with a long-established high-tech entrepreneurial culture, but as a proportion of gross domestic product (GDP), UK investment is still lagging badly. Last year, US venture capitalists invested the equivalent of 0.12% of US GDP in IT startups. In the UK, only 0.04% of GDP was invested. That is a third of the amount, in relative terms, of US investment. Even this has taken the UK some time. In 1997, while the US was putting 0.10% of its GDP into the sector, a mere 0.02% of the UK equivalent went into creating new-technology companies. The British Venture Capital Association says the situation is improving. It points out that 336 high-tech startups received venture capital funding last year, double the number getting such funding in 1996. It says the UK has a 'more favourable investment for current and future high-technology investment'. After all, there are and always have been companies that make it. For Rousbeh Pirouz, chief executive of UK startup mondus.co.uk, getting the funds to set up an online company was relatively painless. Last year, he and colleague Alexander Stroub won the first competition held by venture capital firm 3i for emerging high-tech firms. The prize was £1 million of funding. That figure was followed by a further $12 million investment from Eden Capital. Last week, Mondus, a business selling office equipment and computer supplies over the Internet, was duly launched. 'We were extremely fortunate,' says Pirouz. 'We had a compelling business plan and not much difficulty in finding venture capital. But I have spoken to a lot of people who have found it very difficult.' But isn't it supposed to be getting easier? Take the launch of a new technology-focused index by the London Stock Exchange. Previously, relations between the Square Mile and technology companies have been lukewarm, to say the least. However, now the Stock Exchange says it wants to demonstrate support for technology companies. The result is Techmark, a listing of 171 companies with some form of 'technology' attributes. This definition has resulted in some odd bedfellows, with huge telecoms and drugs giants nestling alongside tiny Internet startups. Only 70 of the companies in Techmark are in classic IT; most of those are in traditional computer software and services markets. Only four Techmark entrants - Dialog, Easynet, Freeserve and Gresham Computing - are defined as Net companies. What's more, although the Stock Exchange is trying to appear extra-friendly to the New Economy, it must prove that its hard-nosed members will really take it seriously and that it is not tokenism or a sop to the IT 'fad'. 'Techmark has been under-marketed and under-developed in a very British sort of way,' says John Higgins, director general of the Computing Services & Software Association (CSSA). George O'Connor, technology analyst at investment bank Granville Equity Research, is somewhat harsher. 'Attitudes towards Techmark have been generally negative rather than positive,' he says. 'Techmark is a smorgisbord of pharmaceutical and telecoms companies. It does nothing for the core IT companies.' Tom Troubridge, head of UK listings at PricewaterhouseCoopers, disagrees, in part. He thinks that there is some value in the fact that Techmark brings together technology-oriented companies. 'Techmark is designed to throw a spotlight on the UK technology market,' he says. 'But its success depends on whether the index performs better than either the main market or Nasdaq.' By keeping Techmark as a 'market within a market', the City is making it easier for major institutional investors, which operate within fairly cautious guidelines, to invest in technology stocks relatively safely. The presence of some fairly solid companies in the sector, to balance out the risk of the smaller startups, will reassure at least some of these punters. But whether Techmark will finally prove to the City that technology stocks are worth investing in long term remains to be seen. Meanwhile, according to industry watchers, it will offer almost no help to small and exciting new companies, particularly the Internet startups that are arousing so much interest. 'Techmark will have an absolutely minimal impact on getting money for dot coms,' says Higgins. The CSSA has been running its own scheme, the Software Business Network, to aid such hopefuls during the past 18 months. 'It's like putting a new wing on Buckingham Palace and saying that it will help the homeless,' he says. At the bottom end of the funding scale, he adds, there is still a huge cultural divide between the UK and the US. 'There are sources of funding at the bottom end, but this country is still more risk-averse. In California, for example, there is much more willingness to take a gamble on a new company.' Higgins believes that high-tech startups also need more than seed money. The CSSA's scheme aims to get new companies in touch not just with sources of funding, but also with expertise. 'New companies often need advice on things such as how to avoid huge legal fees, or how to avoid paying six months' rent up front,' he says. 'They need more than just cash.' However, companies are never going to get off the ground without money, and it can still be difficult to get it, even in the sexy dot com sector. Shopcreator Developments is one example. Started in March 1998, the company is aimed firmly at the heart of the ecommerce market. Its software allows businesses to set up and manage a full-featured ecommerce trading site, and is one of the medal winners in this year's British Computer Society Awards. When founded, Shopcreator faced the classic startup dilemma: without a product, it could not find backing, but it needed resources to develop its ideas. In fact, the company was funded by its directors, who put their own money into the business to develop a prototype. It wasn't until the start of this year that Shopcreator was able to attract external backing. And even then it was hardly the mega numbers alleged to be showered down on Internet startups. Venture capitalist Downing invested £250,000. This was followed by a further £525,000 from a second venture capital fund. 'We have not had to go begging exactly, but it has not been a pushover,' says Chris Ledgard, Shopcreator's head of marketing. 'The first time we looked for investment, it was pretty speculative.' However, Ledgard agrees that getting funding was less of a challenge than coming up with the basic idea. 'That has been less the case as we have built our product and started to get a customer base, including a couple of fairly big names,' he says. Now firmly established, Shopcreator has 17 employees and is starting to think big. The company already has its sights on going public, possibly next year. It is looking at Techmark, as well as the Alternative Investment Market (AIM), which would provide an interim step towards a full Stock Exchange listing. 'We have a growing plan to float in 2000, although I don't know whether that would be on Techmark or AIM. But we are certainly interested,' says Ledgard. This kind of comment is exactly what the Stock Exchange wants to hear, because it endorses the goal of Techmark which is to encourage technology startups to get backing by going public much earlier than expected. Some think that the Stock Exchange should be doing much more to emphasise this aspect of its new venture. Analysts and software startups generally agree that Techmark represents a significant change in attitude within the City towards high-tech stocks. Previously, while attracted by the growth rates of IT companies, City investors remained cautious about committing resources to such companies. Startups are not likely to benefit directly from the technology-focused index. But it should finally give them clear access to potential new investment. However, IT is a global market and Techmark must compete against established listings such as Nasdaq and the mighty US venture capital market. Unless City investors back Techmark fully, the index may prove nothing more than an Internet marketing exercise by an unconvinced UK financial establishment. HOW TECHMARK WILL WORK Techmark is not intended as a separate market from the existing Stock Exchange, unlike the Alternative Investment Market (AIM). It pulls together existing technology-based companies from across the Exchange into one single index. This means that when Techmark launches on 3 November, all 171 companies listed will be full members of the Exchange, meeting existing Stock Exchange regulations. In future, however, the idea is to change the rules for younger companies wanting to list on the stock market within the Techmark index. This is because the City recognises that technology companies often want to float much sooner than more traditional companies, and often lack the three-year track record usually required. Some firms have already benefited from one-off exemptions to this three-year rule, including both Freeserve and QXL.com. In return, those wanting to apply under the new rules will have to report quarterly, have a market capitalisation of at least £50 million, and their directors may have to prove they have access to working capital for two years, compared with the present 12-month requirement.
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