2019 – things are getting distributed, edgy and interesting

It’s hard to think of a year in recent memory that begins in such an atmosphere of uncertainty as 2019. Brexit is almost upon us and yet, with the terms still being disputed, nobody really knows what it will actually look like. Depending on who you listen to, it’s not even 100 per cent certain to happen on March 29 – or at all – so it’s impossible to say what the impact will be.

It brings to mind the ancient Chinese curse that goes ‘May you live in interesting times’. Right now, the times we are living in are nothing if not interesting.

On a positive note, at Episode 1 we’re really loving the whole technology and early stage ecosystem in the UK at the moment and we’re really looking forward to what that has in store for 2019.

One of the trends over the last couple of years that we at Episode 1 haven’t really talked a lot about before is the whole crypto / blockchain scene. I think right now is a really interesting time for that.

I’ve never been convinced by ICOs or cryptocurrencies and haven’t bothered buying any of them. I think the whole idea of the cryptocurrencies being a store of value is complete nonsense particularly with volatility – the huge spikes and crashes we’ve seen with currencies like Bitcoin.

But now, hopefully, we’re seeing the end of the cryptocurrency pricing hype that has perhaps obscured the exciting potential of the underlying blockchain technology. 

It’s like Amara’s Law, where there is an initial overestimation of what a technology can deliver followed by a degree of disillusionment when those expectations are not met. But over time, the technology develops and becomes properly useful and starts turning up in everyday applications. In the long run, the early hype was kind of justified, only it was five to 10 years ahead of the reality. 

I think blockchain is going through that curve and is now on the downward cycle and we continue to be keen to look at startups applying the technology to build business value. The challenge is that over the last couple of years all the blockchain applications we have seen have also been massively overpriced. We also believe it is a relatively small number of applications where blockchain is particularly useful (some great flowcharts / decision models in Meunier’s article). So we have not invested so far but remain hopeful that with more sensible valuations we will do in 2019.

For example, one company we are still researching is using a blockchain to record information about property transactions. Being able to see what has happened to a commercial property over its entire history through a distributed, tamper-proof blockchain that can hold both public and private information looks like a really interesting application. The challenging question is whether the actors in the market want the information in a distributed ledger and whether they trust the security applied on any private information stored. Our investigations are ongoing on those issues and the potential investment…

Close to the edge

Another area of focus for us this year will be edge computing. We have an investment in a company still in stealth mode in this area and another potential deal in the pipeline. Both companies are building the infrastructure necessary for widescale adoption. Edge computing makes it possible to provide cloud services to developers or businesses by using spare capacity across many distributed devices or devices in useful remote locations. The speed of communications networks and the processing power of mobile and remote devices makes edge computing viable – a cost-effective, decentralised, resilient way of doing things at a time of increasing demand for cloud services. It can leverage the spare capacity in your computer, mobile phone – perhaps, one day, even the microprocessor in your fridge – to power other applications. 

There are a lot of ways it can have practical use, such as in remote environments or for people working in the field, but we believe there is real value in creating the infrastructure and then seeing what people build on top of that. We also agree with the entrepreneurs in these companies that the Filecoin approach of incentivising consumers with cryptocurrency payments is not enough of an incentive especially as it adds complexity and decreases speed of operation – so this is not their favoured business model.

These are just a couple of the technologies that we will be exploring as we accelerate our investing in Fund 2. Our target is to invest in 8-10 new companies per year. We had a relatively slow start in 2018 as we concentrated on building our foundations for our second fund, but we pushed the gas towards the end of the year, with eight deals now closed and three more in progress. 

Coming back to Brexit, it’s interesting to note that 70 per cent of those 11 companies have at least one foreign founder. That really reinforces my belief that it is vital Britain remains open to entrepreneurs from other countries. The UK has been great at attracting founders from overseas to set up businesses here – very often with British co-founders, and nearly all our companies have benefited from being able to hire talent from across Europe and indeed across the globe.

The government’s plans to clamp down on immigration and its talk of limiting numbers to less than 100,000 per year are potentially disastrous. Immigration is a force for good in our country and it is important that we remain open for business and open to talent. 

London, in particular, is very good at attracting that talent thanks to a thriving culture of entrepreneurialism, investment and collaboration. As long as we can keep that alive, I’m pretty hopeful about the next few years. 

If that doesn’t happen, we will see more off-shoring, with commercial operations based here but development teams being set up in places like Croatia, Romania and Bulgaria.

Staying focused in changing times 

While Brexit and Trump’s trade wars create a very confusing and chaotic climate, both economically and politically, the immediate impact is perhaps less likely to be felt in the tech startup sector than in, say, manufacturing businesses that rely on just-in-time supply chains. 

VCs think long term and entrepreneurs should as well.

We are investing in companies at the very beginning of their journeys, a point when revenues are often zero. The time it takes to get to an exit varies but is usually long enough to ride out the bumps of short-term economic cycles.  

Zoopla made it to an IPO just seven years after it was founded making it one of my fastest high multiple exits. Shazam, on the other hand, was perhaps the longest – I first invested in 2001 and it was 17 years before its acquisition by Apple. Both were great outcomes, but the point is that it takes a long time to build a great business and as an early stage investor you have to think long term and not worry about the short-term cycle. Besides, plenty of great businesses have been founded in the most difficult times, such as Uber in 2009 and ARM in the downturn way back in 1990. 

In a way, such challenges can be positive. Upheavals like Brexit might make it harder to raise money for a while but tougher conditions can bring the kind of discipline and rigour to planning and decision making that we encourage our portfolio companies to apply anyway. 

For us, the focus is always on building a company that business customers want to trade with and on always thinking well ahead in terms of cashflow and finance requirements. 

A truly great idea, backed with innovative technology and driven by passionate and committed founders, can fly in even the most challenging of times. 

I think 2019 and 2020 will be times of transition and the year ahead will be something of a roller coaster for the UK and perhaps for the US, too. While I believe Brexit will be bad for Britain – and a no-deal outcome will be a disaster – I don’t think the sky will fall in for early stage technology investment. In fact, our sector is getting more competitive, with later stage investors increasingly looking to get in earlier. 

The Episode 1 approach is to always be thinking about how we can help our portfolio companies more and focusing on how to get them through the journey from Seed to Series A more effectively. 

It’s only a year ago that Anouk started with us, and Siobhan joined the team in September 2017, bringing expertise in people and culture and go-to-market strategy, respectively, to help our companies be more effective more quickly through hiring well and getting their sales propositions right. 

Last year we demonstrated that our strategy was working. We’re looking forward to pushing even harder on it in 2019, whatever these ‘interesting times’ bring.

Simon

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