Cambridge and the UK - Transatlantic Gateway

News flash: Business Weekly - 21st July 2000

From both sides of the Atlantic partners of the Cambridge Gateway Fund, Alan Barrell in Cambridge and Stephen Gray in New Hampshire reflect on the rapid evolution of business development, business relationships and investment patterns, involving Cambridge, one of the worlds technology hot spots with forces of growth and globalisation in North America, Continental Europe and Asia.

View from the UK side

Times have changed
When N W Brown established the Cambridge Gateway Fund as a new operation providing early stage venture capital for technology based companies in the East of England, the term Gateway was chosen advisedly. The momentum in the development and application of technology and the generation of so many new companies and the increase in available private equity for investment has heralded a new era. New business models have emerged. Faster growth and globalisation have become essential. Getting started in the USA remains the greatest challenge for most companies. I remember the struggles establishing Domino there. A Cambridge Phenomenon Company which established a traditional manufacturing and marketing subsidiary. Success came eventually. Today, licensing alliances, partnerships and means other than a long slog are much more in evidence. In the USA in the 1980's the multinational model was of a strong central headquarters and tightly controlled subsidiaries around the World. Nowadays many MNC's including those based in USA literally have no single centre, they are global and local, held together by common purpose and the smart use of technology.

Today and Tomorrow
Things have changed mightily. Many people speak of the UK and in particular, hot spots, such as Cambridge literally as "the Gateway". The common language we share (perhaps almost share!) with the USA makes the UK the natural gateway for companies and investors in the USA, making their first forays into Europe. Likewise, and for reasons of language, culture and understanding, many people in the countries of Europe, as I learnt during a recent Venture Capital Summit in Sophia Antipolis near Nice, regard the UK and places such as Cambridge, as a gateway and first stepping stone towards the lucrative US markets. More recently, we have seen the hunger for technology and technology transfer stimulate business people in Singapore, Hong Kong, China, Thailand and Japan to look for their own gateway into the pool of huge potential which it is generally agreed exists in our economy and in particularly within this East of England region of ours.

The strategies of companies based on new models, such as ARM Holdings, Autonomy and others, which have begun to achieve US level valuations, have developed very differently from those some of us worked with back in the 1980's. At a recent seminar organised by Ernst & Young at Downing College, Jonathan Brooks, the Chief Financial Officer of ARM Holdings very clearly stated that the principle reason that ARM floated on the NASDAQ was not simply to raise money but to raise profile and to have a US presence beyond the US office. The management of the company took the view that if they were to achieve their stated objective of incorporating their technology into the products of all the large players in the silicon business, they would need to have a high profile and appear credible in the USA. Being successful in this was a key strategic requirement if ARM was to become a truly global player. This is but one example. The other reason that companies go the American route faster these days is not only that the markets there for some technology products are huge, but access to capital and access to public markets is still far greater than in Europe.

Evolution or Revolution
If we have seen an evolution in the way in which new technology companies look at the US market, think about it and courageously plunge in, investing large amounts of cash on the way, we can also discern equally significant shifts in the way in which US Corporates, investors and others working in the area of financing businesses are thinking and acting. US funds such as the Cross Atlantic Fund of $150 million have been set up with Pennsylvania State Pension Fund, devoted specifically to find and invest in technology companies in Europe. Zeus Technologies, a successful Cambridge company founded by two graduates, which recently moved out of the St. John's Innovation Centre was the first European company to receive a venture capital injection from this fund. Every week we see in Cambridge a new group of venture management operators, lawyers, investors, specialists in helping companies move to a NASDAQ quotation. Some American Financial Institutions have invested in Cambridge. Venture capital funds and large American law firms are reputedly considering setting up offices over here. All of that in addition to Microsoft, AT & T, Hewlett Packard (in the region close to Ipswich), Adobe (in Norfolk) and there are others.

Therefore 4 July 2000 could be regarded as a day of celebration for us all here in Cambridge and the region. There has been a sea change in attitudes and cultural development and it has not all been one way. We are learning a lot from our US counterparts concerning entrepreneurship, risk taking, the application of technology, the establishment of new businesses and much more. The American culture has evolved progressively. Globalisation is no longer "running the world from the US base". There are now large US owned multinational companies with no single identifiable centre point. There is much more information exchange. In Cambridge we are blessed with strong ties helping us reach into Silicon Valley and the East Coast Technology Pool to exchange best practices, to learn and to collaborate. The Cambridge Massachusetts Institute, if it fulfills its ambitions, would be a wonderful boon to all of us interested in business development here.

The way ahead
None of us doubts that the US economy is still the most important in the world and that the US market is the most significant for UK and other European based companies, but the sense we now have is much more of partnership, collaboration, mutual respect, two way communication and a very great deal more commitment from Stateside to invest and engage here in Cambridge, one of the most important centres of technology and business development in Europe. Those partnerships in a world, which clearly is, by dint of electronic and modern communications technology becoming smaller by the day will be hugely important enabling Cambridge to provide a Gateway to and from America for our own interests, the whole of Europe and indeed embracing Asia and the rest of the world.

There is no doubt that the Cambridge Network, the Great Eastern Investment Forum, ERBI, the Cambridge and Europe Technology Club and other local organisations have played a significant part in helping bring us to the current state of affairs. As some of us have written repeatedly, we in this place face such enormous opportunities, the kind that occur no more than once in a lifetime or a business cycle. Our opportunity is to widen the Gateway and ensure that as US companies and investors relate ever more strongly with Europe, that Cambridge becomes consolidated as the technology capital!

View from Stateside - Looking Outwards

Size and Scale - the US Economy
Capital availability and the exceptional returns achieved by venture capitalists in the United States during the last decade have served to fuel what seems an ever-expanding universe of new technology companies and e-commerce millionaires in North America. The capital capacity among the most well recognized VC's outstrips anything that came before. Billion dollar funds seem commonplace. The appetite among pension funds, insurance companies, banks, endowments, private family offices and foundations to support these proven track records is almost insatiable. Investors from Europe, the Middle East, Asia and Latin America have also joined the throng.

This juggernaut does not seem ready to let loose any steam, but a trend is emerging on the periphery which has now reached proportions that require us to take notice. Venture capitalists from elsewhere are beginning to gain recognition. Israel is a country that embodies a strong commercial ethic and has garnered significant VC funding in the last five years. The technology coming out of Israel and European centers, such as Munich and Helsinki, rivals any available in the world. While many of the local VC's and companies are gaining a growing share of the world's investment dollar, the US venture community is not prepared to cede this territory to the locals. Just as North American companies seek to sell their goods abroad, so too the venture capitalist.

These VC's are coming in strength as well. Groups such as Warburg Pincus, Providence Ventures and Cross Atlantic Ventures have already established offices in London as branches of their respective operations. Others, such as Benchmark Partners and Carlyle Group, have announced sizeable, US$500 million+, funds for investment solely in European technology. These firms bring a wealth of history, knowledge and expertise with them. Qualities which will surely aid the development of some of the region's newest enterprises. That the American VC firms are targeting Europe is a sure sign that not only is Europe perhaps the next great boom region, but that the momentum may be slowing in the US for the kind of returns that characterized the 1990's. However, Europe is not North America.

The Future is important
There are indeed significant cultural differences among the European community that can easily translate into barriers for commerce and launching business models across borders. To date investors have felt very comfortable backing investment managers with whom they have invested before, even if the new remit is on another continent. Surely there will be a number of great successes among these VC's and their investors, but they may miss some of the region's most important and lucrative deals and they may not realize their full potential, because they are not a part of the local financial and commercial fabric.

Because of the efforts of Amadeus, Cambridge Gateway, Prelude and others some investors are beginning to recognize not only the value of Cambridge science, but also the value of its local and growing financial and entrepreneurial community. There are very few investors who do not believe that Cambridge is one of the world's premier centers for technology research. However, skepticism has existed with respect to Cambridge's ability to develop and commercialize those very same technologies. Today, with the success of ARM, Virata, Autonomy and others the investment community is sitting up and taking notice.

Interestingly, the venture capitalists in the US are located in the heart of Silicon Valley or Austin, Texas or Boston, but in coming to Europe many have chosen London. Now, Cambridge is only a 50-minute train ride from King's Cross, but it can seem much further in reality. London is still considered the financial center of Europe by virtually all North Americans, but successful venture capitalists bring much more to the table than just cash. They bring their knowledge of corporate governance, international marketing, patent law, staff compensation and executive search. Although we regularly hear that investors want to tap into Cambridge they are still reluctant to plant the flag there. A significant number of European based investors, however, are jumping on board and supporting some of the local VC's. They recognize the value of local representation, but more importantly, local history and local culture.

And the visits continue
Like many investors, the global investors in venture seem to acknowledge Cambridge's credentials, but now want us to prove it again before throwing full support in this direction. It is an understandably cautious approach to a region rich in science and light in commercial listings and successful venture firms relative to Silicon Valley. With that said, perhaps the greatest change in the last year or two is the increasing numbers of foreigners traveling through Cambridge on "fact finding" missions. Potential investors from as far off as Singapore, Tokyo and Bangkok have sent significant delegations to Cambridge in the last twelve months. It is difficult to tell what will come of these visits, but history would dictate that it might be the beginning of significant opening for this region to a larger world audience of investors.

Change in this sector of the economy has proven to be swift and Cambridge should be no different. With the current developments of Marconi and Microsoft underway, the employment landscape will change rapidly. With this will come additional ancillary business and infrastructure requirements. Highly motivated people will locate in and around Cambridge and further fuel the community's supply of entrepreneurs and managers available to help grow new businesses. If the local venture firms are successful at providing investors acceptable VC returns in the next two years, you will witness the combination of all these factors build Cambridge into one of the world's premier business creation cradles.

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