Only a few months after its controversial float, the food-delivery company Deliveroo may be heading off the market again. Last week, its German rival Delivery Hero revealed it had taken a 5% stake in the business, sending the shares almost back up to the price they were listed at. A full-scale offer is not imminent, but it is hard to understand why you would want to own a twentieth of the loss-making Deliveroo unless you were planning an offer for the whole business. If it does eventually take the business over, it will be far from alone. Last year, its rival JustEat was folded into the Netherlands-based Takeaway and the merged company is now listed in Amsterdam. And last week, the US-based Gopuff, operating in the fast-growing instant delivery market, acquired the British start-up Dija, to add to its earlier acquisition of another UK start-up, Fancy.
Eat or get eaten
We can expect to see a lot more deals over the next couple of years. In most markets, the app economy only has space for one or two dominant players. There isn’t room on our phone screens for nine or ten ride-sharing apps, and few of us can be bothered to switch between different ones to get the best price. One, or at most two, is enough. The same is true for takeaways. Or come to think of it, for banking, or events, or buying a new car, or any of the other things we might do on our phone. In just about every sector, one global player is likely to emerge. The challenge for the UK is, how can we make sure that some of our emerging stars eat up their rivals before they get gobbled up themselves?
After all, Britain has plenty of emerging app-economy giants. In finance, there is Wise, Revolut and Monzo. In events, there is Hopin. In used cars, there is Cazoo. In insurance, there is Marshmallow, and in fashion, BooHoo and Asos. Overall, the UK now has more “unicorns”, as tech start-ups worth more than $1bn are known, than any rival apart from the US and China. But we need to make sure they can expand globally and don’t simply get acquired along the way. How could we do that?
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First, the City needs to get behind them. Building a dominant global lead is almost certainly going to cost a lot of money. Local rivals may well have to be bought out in countries right around the world, and those acquisitions won’t be cheap. Losses at local subsidiaries may have to be carried for years before they ever turn a profit. It might end up costing £10bn, £20bn, or even £30bn to make that happen (Uber, for example, has raised $25bn to get to where it is and arguably it still doesn’t completely control the ride-sharing market). If so, the City should be willing to fund that, possibly in round after round of capital expansion, without complaining that the company burning through all that cash hasn’t generated any profits yet. The American capital markets have been very good at doing that, but the British less so.
Just a little bit of protection
Next, the government needs to discourage foreign bidders. No one would argue for an outright ban, or the brand of simplistic economic nationalism that the French specialise in. That would be a mistake, and over the next few years a number of promising British start-ups will inevitably get sold off. But the government could tilt the scales slightly against bidders from other countries. Regulators could scrutinise the deals more closely and throw up a few restrictions. Licensing rules could be tweaked and employment law changed to make it just slightly harder for a British firm to be bought. With a little more protection, a few of the UK start-ups would have a chance to get to the scale where they could start acquiring rivals.
Finally, the entrepreneurs need to show some courage and vision, and aim to build the Amazons of the next decade, and not just sell out at the first offer that comes along. And, perhaps more importantly, so do the investors. The London-based VC funds need to back companies for the long haul, even if it means they don’t make any quick profits.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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