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12/10/2005. Source:Scottish Equity Partners (SEP). Russ Cummings
UK investment in the IT sector has fallen for the fourth year in a row, according to Venture One statistics, says Scottish Equity Partners. On the face of it this is disappointing news but, looking more closely it can be seen that the rate by which it fell has decreased sharply. From 2000 to 2001, the total amount raised by UK companies fell from €4452m to €1830m, a drop of around 60%. By comparison, last year’s fall of only 5% is cause for relative celebration.
The outlook for IT companies in Europe is undoubtedly more positive than it has been for a long time. The IT industry continues to be one of the fastest growing areas of the global economy.
However, this turning point in the market will be the real test of what has been learned from the downturn, which, although it had an impact across all technology sectors, undoubtedly affected IT more than others.
Compared with IT, healthcare and energy investment statistics show a much more stable picture over the last four years. The sharpest year on year fall in healthcare was only 34% and investment rose by 14% in 2004, while investment in the
energy sector has consistently risen most years.
One of the reasons for this may be that, perhaps more than any other sector, the IT market has been driven by technology rather than customer need and technologists have underestimated the inertia to change consumer behaviours.
In the boom years of the 1990s, the marketplace was apparently equally enthusiastic about the potential of technological innovation and there were many eager early adopters - although that did not always mean they were paying customers. Yet, when apparent demand so closely shadowed what was on offer, it was easy for the line between who is driving who to be blurred.
But now IT buyers are no longer willing to dance to the tune of the IT industry. Customers are once again defined as users willing to pay for a product or service and experimental products and services have been shaken out to leave those where real benefits are delivered to mass markets.
This doesn’t mean that IT spend is static - far from it. In fact, after several low spend years the market is again predicted to grow strongly. However, while IT companies can afford to be optimistic about the future, neither they nor the investment community can afford to overlook the new drivers of IT success.
The most important of these is the market itself. Technological innovation must be matched with market understanding, from the very earliest stage. IT companies will need to pay much closer attention to how much customers are prepared to spend, on what, and how often, than they ever did before. They need partners to access those customers in a cost effective manner and they can’t assume that where technology leads, the market will follow.
Productivity and cost management are the other key issues for IT companies, as they are in other technology sectors such as healthcare and biotech. Companies are having to put more effort now into delivering the same or greater output with fewer inputs. As well as putting them in a better position to win business in an increasingly competitive and cost-conscious marketplace, an increased focus on productivity also means that investment finance can be used to achieve more, quicker.
During the late 1990s, companies across many other sectors aspired to the innovation and fast growth of the IT industry. Now, it’s time for IT companies to learn business strategies from slower-growing industries. It might not be the dazzling upturn that some had hoped for, but one definition of optimism is to be able to see opportunities where others see difficulties. For those IT companies with a strong commercial focus, with the ability to innovate and invest, there is a great deal to be optimistic about.
Russ Cummings
Director, Information Technology, SEP.
Scottish Equity Partners (SEP) is one of the largest independent private equity groups in the UK, and is currently investing from a venture capital fund in excess of £100 million, which is backed by leading UK and European institutional investors.
With offices in Glasgow and London, SEP is one of the most active venture capital investors in the UK and has a strong investment track record. Typically, we invest between £500,000 and £5 million or more, in financings of up to £30 million, in early stage and growing companies in the information technology, healthcare & life sciences and energy related technology sectors. For more details visit www.sep.co.uk
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