The UK Tech Sector Outlook - Be Prepared

Recent market turmoil and a KPMG report showing a slowdown in the UK Tech Sector raise some concerns. Is this a pause or is the technology boom coming to an end? It could go either way but there are more reasons than you might think to be pessimistic. Startup CEOs should be prepared.

KPMG released their respected quarterly Tech Monitor on 19 August. It shows a slowdown in both business activity and employment growth for the UK Tech sector in Q2 of 2015. KPMG’s analysis suggests this may just be a pause in the onward rush of the industry in the UK. They blame the May 2015 General Election. And the continued concerns over the Euro area economy for the slight stall.

The report also includes some indicators of great optimism. The authors believe that UK Tech will put the foot back on the gas and power ahead soon. 57% of respondents to the survey expect an increase in activity over the coming year. And 49% expect this will be accompanied by employment growth. KPMG also cite economic tailwinds from a strong UK economy as a reason for optimism. 

The Economic Risks

I hope they are right. But we have reached a stage of the economic cycle where the main risks are on the downside. The upswing may have longer to run but the end is closer than the beginning. On a macro level there are four reasons for this:

1.         The UK economic boom is a bit of a myth. Things have gone well over the past couple of years but the fundamentals are still weak. Productivity and wages have only just started to grow. By tiny margins. Government spending and borrowing are still high. Despite all the heat and noise about austerity the real picture is different. The recent budget also chose to take some risks with the employment picture. In the form a big increase to the minimum wage. 

2.        As we have seen this week China is in trouble. At best this will be a major drag on the world economy. At worst there will be enormous disruption and a significant recession across Asia. Brazil and Russia are already in deep economic waters. The BRICs engine of growth is stalling hard.

3.        The Euro area remains a challenge. Greece may not trigger a collapse in the short term. But several countries are on an economic knife edge. Political upheaval could bring many to the brink. Elections are due in France, Spain and (first up) Greece yet again. Unexpected outcomes are certain. 

4.       Protest as much as you like but we are all affected by the US Tech scene and Investment picture. The numbers here are still growing fast. Near as fast as the number of commentators warning of an impending bust. If this happens the impact will be felt across the world and strongest in the UK.

Small Business Consulting Advice For Startups

Every Tech CEO needs to be aware of the risks. Startups don’t have the resilience or resources to create reserves for such an eventuality. Yet there are a few things you can do even when cash is limited.

• Get your financial house in order. Pay attention to cash and profit as well as growth and revenues. You can't flick a switch but you can take care. Focus on the real numbers not just the headlines that impress VCs.
• Funding will be the first thing to go. Markets shifts can be quite slow. The investment tap will be turned off in an instant. Have a plan to bootstrap things even if you have already raised a couple of rounds.
• Diversify across borders. Don’t just depend on the UK market or even your own region or locality. As a tech startup you can reach the world. If things are tough in the UK they will be much better somewhere else. Be ready to go where the growth is…and no I don’t know where that will be!

Remember your first priority is to survive. If you do then a downturn will be the biggest opportunity you ever see. This is where market disruption turns into transformation. Look at the insurgents that made it through the dotcom crash. It made Google and Amazon the leaders they are today.

This happens because of some fundamental truths about the business cycle:

• Real gains in market share are only made when the market is contracting. When it is expanding everyone wins. When it shrinks, the winners clean up.
• Established players are more likely to sink during a downturn. In good times their existing customer base and reputation keep them afloat. In bad times their customers can’t afford to be lenient and they go under.
• B2B customers will also come under pressure as their revenues and margins suffer. If your product can help them survive you will make great gains. When things are better this will accelerate your recovery. There is no customer more loyal than the one whose business you save.

Next Steps

When a real downturn arrives, be ready to survive. Try to build a position that allows you to take advantage of the opportunities. At least you will be able to disrupt and innovate as hard as you can. Your customers will be searching for new ideas when their markets are shrinking. If possible be in a position to invest against the cycle. You will then reap the rewards when the cycle turns again. You will build a greater business in the bad times if than you can ever achieve in a boom.

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