The US, the UK and company creation

May 2018
James Anderson

The value of any investment and any income from it, can fall as well as rise, meaning that investors may not get back the amount invested.

I am sitting in the sunshine with a fashionable coffee at the Cool Cafe in Menlo Park Business Park. There are Teslas in the car park and I’m waiting for my Lyft after meeting the extremely impressive new (female) CEO of Grail. Grail may be able to make most cancers curable. So I’m living the clichés but what’s the substance? Why doesn’t this happen in Britain? Is it chance or more serious?

The best conceptualisation that I’ve heard of why new companies flourish comes not from the left coast of America but from the right side of China. Robin Li of Baidu opines that three characteristics are required: lots of nerds, serious venture capitalists and markets of scale. Everyone now has nerds and most venture capitalists at least pretend to be global. This leaves us with markets at scale. For sure China and America offer this but nowhere else does; it’s conceivable India will but it’s already been colonised by Sino-America before this can be clarified. So perhaps we just need to accept this and move on. QED so to say.

But although this is appealing I don’t think it’s fundamentally sufficient. Out of modesty I think Robin Li neglects the most critical factor of all: founder and firm motivation. After all as our government endlessly tells us global Britain isn’t excluded from international markets and most certainly not from those of American hegemony. Indeed at times we’re welcomed as being neutral outsiders with the right language. ARM has benefited hugely from not being a US company. Spotify is beating Apple, Amazon and the music labels without being troubled by its very Swedish values.

Robin Li of Baidu opines that three characteristics are required: lots of nerds, serious venture capitalists and markets of scale.

So 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.

Such a strong view needs considerable justification. That’s why I started with Grail. At one remove this could - should - have been a British success story based not in Menlo Park but in Cambridge. As Kevin Davies relates in ‘The Thousand Dollar Genome’ next generation genomic sequencing was literally invented in a pub in Cambridge. The resultant company was called Solexa. It was eventually bought by Illumina for $600m as a scientific success but total commercial failure. Illumina in turn spun off Grail with the ambition of finding a universal test for cancer via liquid biopsy and generating a substantial value creation for shareholders. Illumina itself is now valued at $37bn.

But there’s another avenue to explore before I visit Illumina tomorrow. Roche tried to buy Illumina for $6bn in 2012-13. Illumina has determined leaders but no controlling founders or families. Yet the bid failed. Why? Because three institutional shareholders refused to sell. We were one of the three. Roll this forward to 2016. SoftBank tried to buy ARM - almost certainly Britain’s sole serious shot at building a global technology platform. SoftBank succeeded. We were the largest shareholder but we were alone as opposing active managers (L&G index funds were willing to fight too). But there wasn’t a quorum. There was a recommendation from Board and management to sell. Mr. Son rejoiced and went on to say that ARM would be as valuable as Alphabet.

So 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.

The examples roll onwards on both sides of the Ocean. We don’t need to speculate as we know what happens. Skyscanner was - is - a great business but, CEO apart, the owners wanted to sell. The only decision was to become Chinese rather than American.

But we also need to refine the US perception. This isn’t about America: it’s about the profound contrast between the US of Wall St, Washington and Trump and the US of the West and of immigrants. The former is at least as short-term greedy and long-term stupid as are the British mentalities. The latter pairing is totally different. Jeff Bezos driving to Seattle, Mark Zuckerberg deserting Harvard, Steve Jobs returning to Apple are all just as momentous but intrinsically Western epics as cowboy legends. They are also predominately immigrant stories far from the establishment. Why is South African Elon Musk in California? He’s clear it’s because people like him can dream there, although the general American dream is long over statistically speaking. Britain doesn’t understand that outliers matter. Yet another tragedy of Brexit is that London in the age of Trump could have become the natural home of the determined potential genius. That’s no longer possible.

So I think there isn’t even much need to speculate as to our failings versus the Western fringe of America. We fail at every level - from management softness, to investment feebleness to societal love of the safe return over the spectacular possibilities. I see nothing on the horizon to change this terrible record. It’s very sad.

The views expressed in this article are those of the author. Its express purpose is to highlight areas of intellectual thought and debate which inform the investment philosophy that underpins Scottish Mortgage, in the hope that they may be of wider interest. The author(s) therefore make(s) no suggestion that this article constitutes independent investment research and it is not subject to the protections afforded to such.

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