28 July 2015

Silicon Fen: how modern Cambridge became a tech phenomenon


Cambridge is growing faster than China, the city’s workers enjoy average earnings of £40,000-a-year, far higher than elsewhere in the country, and unemployment is one of the lowest.

There are at least 2,100 high-growth, mainly technology and life-science companies, sprouting out of the Cambridge cluster as well as the older grand-daddy companies such as ARM Holdings, which makes the chips for Apple, and Aveva, the software company which is doubling in size after a reverse takeover deal with France’s Schneider Electric group. If you tot up total sales of Cambridge companies they come to about £14bn per annum – equal to annual sales of Rolls-Royce and there are 12 billionaires among the university’s alumni.

As well as 25 science parks dotted around the city, the new Cambridge Bio-Campus grows by the day out of the Addenbrooke’s hospital site that will, when Astra Zeneca’s finishes its global research headquarters, be the biggest medical science metropolis of its kind in the world.

Brains attract brains. Microsoft has its research HQ in the city while Apple is due to open its own R&D centre next year. Amazon is revving up its drone technology with more aviation engineers at Evi Technologies, the Cambridge start-up it bought a few years ago. Spotify is expanding while Google, which bought the Cambridge-based artificial intelligence group, DeepMind, is said to be sniffing around in the city.

America’s Qualcomm recently paid $2.5bn for CSR, the Cambridge inventor of Bluetooth and China’s Huawei is said to be looking to scale-up after buying Neul, a pioneer wireless start-up that makes the radio modules that allow ‘things’ to talk to each other for the Internet of Things. Huawei says Neul will become a centre of excellence.

The Chinese also love Cambridge; there are more Chinese students studying at the university than any other ethnic group, 137 of it’s departments have links to Chinese peer groups and there is a now a chain of University of Cambridge shops in China. A Cambridge professor, Peter Nolan, advised the Chinese government to take the state capitalist route to reform rather than copy that of Russia and its robber barons.

There’s more to come: a big Chinese company has alerted local estate agents that it wants a new HQ base while the US genomics giant, Illumina, is about to build a new R&D centre at Granta Park for sequencing the genome, employing 500 people. Recent estimates suggest the city’s life science and technology companies could employ another 250,000 people over the next decade; ARM alone has said it will employ 2,000 people over the next few years.

By all accounts, our very own Silicon Fen is the most stunningly successful city in the UK today. What’s perhaps the most remarkable feature of Cambridge’s growth is that it’s been achieved without dosh borrowed from or invested by the those running the City of London, 57.8 miles due south.

Indeed, the reverse may be true: much of Cambridge’s phenomenal success over the last 40 years is due to the fact that the brilliant academics, who have come up with ground-breaking ideas from Concorde’s droop nose to Bluetooth, have banded together with like-minded backers and business angels to find – and fund – their own eco-system; whether at high table, in lab corridors or the town’s pubs.

Behind the scenes, the university has acted like a huge incubator, investing £1bn in more than 500 hi-tech and computer based companies over the last few decade. There’s a competitive spirit too; academics are not obliged to get backing from the university’s technology transfer group, run by Cambridge Enterprise, but can look for their own backers too.

Nigel Brown, former high sheriff of Cambridgeshire who founded and ran the financial advisory firm, N.W Brown, and set up the first angel network, the Great Eastern Investment Forum, says: “Cambridge is like a primordial soup. It had all the ingredients within the city to start life on its own. Back in the 1970s, local stockbrokers were good at helping raise money from wealthy individuals. The local banks were good too, helping with short-term loans.”

“In fact, we didn’t need City money, even if it had been forthcoming. But I wouldn’t criticise the City for not investing – these small companies needed start-up capital and that’s not something that big City investors are interested in.”

Matthew Bullock straddles both worlds. Working for Barclays in the late 1970s and early 1980s, he was heavily involved the Cambridge phenomenon. Now master of St Edmunds College, Bullock says local companies were so self-sufficient because most of the early technology start-ups were B2B.

“This meant that companies went out and got themselves contracts which allowed them to finance themselves through the supply chain. They didn’t need hard cash; money was to some extent irrelevant. But it also meant the owners were more interested in doing trade sales to exit than growing their companies or taking them to the stock market.”

“The City has always been short-term in its outlook; more interested in financial engineering than helping companies grow. Or if they do get involved, they put pressure on owners to sell too early so companies get swallowed up. There isn’t time for them too grow; most companies need at least ten years to mature.”

Now the big question foxing even the city’s brightest is how to help these Cambridge companies scale-up without the owners having to sell out. Many have made it to a critical size – twelve in the cluster are worth $1bn and two – ARM and Autonomy before it was sold – are worth more than $10 bn.

Bullock adds: “Finding a way to help companies scale-up is the big debate in Cambridge today.” One approach being explored by local lawyers is looking at creating new company structures that have B shares, a mechanism which would allow more owners to hold onto their companies when the institutional and venture capitalists come along to gobble them up.

And they are coming; over the last few years there has been a big change in perception towards Cambridge with funds such as Imperial Innovations, Index Ventures, Wellington Partners and IP Group making their way up the M11. So too are West Coast venture caplitalists such as Andreessen Horowitz, the US venture capital firm that backed Facebook and Twitter, which recently invested $20m in Improbable, a virtual reality tech start-up founded by three Cambridge graduates.

Yet Brown is cautiously optimistic that many of the top Cambridge companies –such as RealVNC and Red Gate – will stay independent. But the going will be tough for them as they grow because the VCs and the business angels will eventually demand an exit; either through stock market listings or trade-sales. “Everybody craves the idea that the next Apple will come from Cambridge but I don’t think it will happen; more likely that pig’s will fly.” He’s happy to eat his words if proved wrong.

“We don’t have the backyard to feed companies of that size as the US does. Let’s be pleased instead with our sweet spot for clever, exciting and profitable companies and keep nurturing them.”

For the first time the city has its own dedicated investment fund, Cambridge Innovation Capital, which should help do just that. Set up 18 months ago by serial entrepreneur, Peter Keen, and the university, the fund has raised £50m. To date, the university has put in a third of the fund with the City’s Invesco and Lansdowne Partners each taking up 20% each.

Victor Christou, CIC’s senior investment director, says the £50 million raised by CIC initially was intended to test the fund concept and the intention was always to raise more capital, possibly with a stock market listing of its own. So far they have invested over £12 million in nine companies out of the over 350 they have seen.

He says that these portfolio companies, if successful, will require more capital and it is easy to see how most of the existing £50 million fund might be used to support them.
“Companies that need between £2m and £4m tend to have the most difficulty in raising finance. What we say to those companies that we invest in is that we will stay with them over the long-term – that means 15 years – and commit to investing at the next stage.”

Christou adds that he always asks the owners of the companies he talks to: “What are your ambitions if money were not an object; what would you do if the brakes were off?” Now that’s a thought: Cambridge with the brakes off.‎

Margareta Pagano is a financial journalist who writes for The Independent. Twitter @maggiepagano