Snap, the parent organisation of Snapchat, recently acquired augmented reality (AR) start-up WaveOptics for $500m

Credit: Snap

When Snapchat’s parent Snap announced that it would acquire Oxford augmented reality (AR) start-up WaveOptics for $500m (£352m), investors rejoiced.

The company, founded in 2014 by three former British aerospace engineers, has grown rapidly to become a world-leading supplier of AR technology for smart glasses.

“It’s an amazing story, especially for UK deep tech,” says investor Simon King from Octopus Ventures, a backer of the company who sits on its board.

Just an hour after the deal was signed, however, the potential perils of selling out to deep-pocketed US tech giants came into sharp focus.

WaveOptic's AR glasses can be used to project information into a viewer's eyesight

Credit: WaveOptics

A Wall Street Journal report detailed struggles inside London artificial intelligence (AI) business DeepMind, revealing its founders had explored the idea of partially undoing the company’s $500m sale to Google in 2014.

DeepMind had spent years trying to gain autonomy inside Google but ultimately failed, the report said, raising questions over whether it would have fared better by remaining independent.

Tech industry awash with foreign cash

Such stories highlight the growing tension within the UK tech community between growing companies globally and keeping talent at home.

Foreign funding into British technology businesses now accounts for most of their backing, according to Tech Nation research. It found that 63pc of start-up investment in the UK in 2020 came from overseas, up from 50pc in 2016.

Similarly, mergers and acquisitions in UK technology rose 28pc in the first quarter of 2021 compared to the same period in 2020, according to ICON Corporate Finance.

The UK is particularly skilled at starting businesses that work in so-called “deep tech” fields, such as AI and chip design. But many such companies are being lost overseas.

“We should try to continue to finance them to grow to scale here,” says Anne Glover of Amadeus Capital, the British investment company that has taken stakes in several deep tech businesses including chip maker Graphcore and Oxford Nanopore. “For really disruptive, large opportunities, I would really like to see them stay domiciled here and become global champions.”

Another partner at Amadeus Capital is Hermann Hauser, a co-founder of Cambridge chip design business Arm which has agreed a $40bn sale to US hardware business Nvidia.

Nvidia has pledged to help Arm grow in the UK, but fears about losing more home-grown talent have led to calls for the UK government to block the takeover. The deal would be an “absolute disaster” for the country, Hauser says.

Arm/Nvidia timeline (new)

Where are the British tech titans?

Despite such misgivings, venture capitalists celebrate when US tech giants buy their investments, with the deals heralded as evidence of UK success.

For instance, as well as WaveOptics, Octopus Ventures backed video business Magic Pony sold to Twitter for $150m.

It has also invested in keyboard app SwiftKey that Microsoft bought for $250m and Evi Technologies which Amazon acquired for $26m and developed into Alexa.

King says he does not regard these sales as a “mistake” but admits he would rather have companies stay British.

“I think it’s definitely a little bit irritating that we don’t have these big UK tech giants who are able to acquire companies,” he says. “I still think it’s a great thing because you see all of the people who have been involved in these companies, they stay for a little bit and then they go on to their next thing.”

We’ve acquired Magic Pony Technology to enhance our machine learning efforts and strength in video: https://t.co/Ds03vtC1dH

— Twitter (@twitter) 20 June 2016

If these sales continue, investors may push their portfolio of companies to remain independent for longer as sales for hundreds of millions of dollars fail to provide bumper returns.

“Most venture capitalists do not want their companies exiting certainly below $1bn,” says Tommy Stadlen, a co-founder of investment company Giant Ventures who sold his start-up Swing to Microsoft in 2017.

“I think most venture capitalists will have looked at [deals like WaveOptics] and said we’re really happy for the founders, but ultimately that means we’re going to have to look elsewhere for a fund returner,” he continues.

Until the UK has home-grown technology giants able to snap up fledgling businesses, or giant funds able to back them, nothing is likely to change.

“There is a lot of later stage capital over here but it’s not sophisticated enough to want to lead a deep tech deal. That’s where we struggle,” says Rob Desborough, a partner at space technology backer Seraphim Capital.

Britain goes on the defensive

There are signs that the Government is growing alarmed by the parade of leading British tech start-ups that have been acquired by US giants.

The UK now has the National Security and Investment Act, which allows the Government to block deals that would see emerging technology sold to overseas buyers.

National Security and Investment Bill

This law is an “extremely broad and wide-reaching new power that could allow the Government to intervene and investigate over 1,000 transactions per year,” says Marc Shrimpling, a competition and trade partner at Osborne Clarke.

Even investors wary of seeing businesses sold off are worried that the new act could cause the UK to swing too far the other way.

“The main issue [with the act] is the turnaround time,” Glover says, “if it’s two or three days you can live with it. But if it’s two or three months, that’s going to be impossible.”

Last month, intelligence agency GCHQ published a guide for deep tech companies which warned them away from taking potentially risky foreign investments.

Striking the right balance between economic nationalism and trusting foreign buyers will be vital to the success of the UK technology system. Many investors are content to let the acquisitions continue.

“People aren’t being removed from the country,” says Rob Kniaz of Hoxton Ventures which has backed Deliveroo, Darktrace and Babylon.

“The brains are staying here. It really doesn’t matter whether it’s a British owner, an American owner or a Canadian owner.”

Some entrepreneurs fear the UK could gain a reputation as being desperate to hang on to innovation, scaring off future buyers.

The French technology sector is still recovering from the hit to its reputation caused by its government blocking Yahoo’s 2013 attempt to buy the video sharing site Dailymotion.

French investors privately regretted the country’s actions which they often refer to as a “dark period” which scared off buyers for years.

It took the opening in 2017 of the 366,000 sq ft Station F technology campus in Paris that cost €250m (£214m) for technology giants to finally believe France was again ready to open itself to the world.

Station F in Paris

Credit: Patrick Tourneboeuf

If the UK leans too heavily on measures like the National Security and Investment Act then foreign buyers could overlook British start-ups, leaving them starved of cash.

“Who is going to come in and make an offer when the board has said we don’t want to sell this to any foreign buyers? It destroys any auction process because it means you have a large chunk of the buyers that are being told they can’t bid on it,” Kniaz says.

Until the UK has its own exit route for promising companies in need of hundreds of millions of funding, foreign buyers look certain to be the best opportunity to grow the crown jewels of the UK technology sector.