With economies faltering, what we need are the trailblazing startups that can shape our future
FTSE 100 companies and the public sector are failing to take advantage of the transformative potential of the internet economy, which now represents more than 8% of UK GDP.
"Flatlining", "pre-recovery", "stagnant", "sluggish" - we're running out of adjectives to describe the UK's seemingly moribund economy. Stripped of its AAA rating last weekend, it shrank by 0.3% in the final quarter of last year, and – amid signs of a possible triple-dip recession – more of the same is predicted for 2013.
The Eurozone economy, meanwhile, is a horror show in slow motion. After a contraction of 0.6% last year, the European Commission predicts that the 17-nation region collectively will shrink by 0.3% this year. And there will be no return to growth until 2014.
The EU's unemployment woes are well-documented, too. Almost 12% of its workforce are unemployed, amounting to nearly 19 million people. The unemployment rate for Spain, the Eurozone's worst performer, stood at 26.6% in the most recent figures, while in Greece, the second worst, 20% are unemployed.
Let's not be in any doubt here. These are the sorts of crisis conditions – as Europeans know only too well – in which destructive and extreme ideologies fester. They threaten the very social fabric – and destabilise societies.
But it's the figures for youth unemployment, which give perhaps the greatest cause for alarm: a quarter of Europeans under the age of 25 across the Eurozone are without work (in the UK, it's about 18%). In Greece the figure is a staggering 57.6%. In Spain, it's 56.5%..
The significance of this doesn't just play out in the here and now, but reverberates down the line. In a report published last year, McKinsey argued that weak demand and hiring restraint across advanced economies could seriously damage the chances of employment returning to their pre-recession levels. This, in turn, is leading to a growing mismatch between employers' needs and workforce skills.
Yet while these gloomy statistics appear to spell continuing unemployment and patchy growth for the foreseeable future in Britain, and beyond, one area in particular is defying the trends: research last year assessing the internet's economic impact in the G20 made a startling revelation: by 2016, with 3 billion internet users globally, the internet economy will reach $4.2tr – and the UK is leading the way. According to the Boston Consulting Group, the figures for 2010 (the latest we have) showed that the internet economy in the UK accounted for 8.3% of GDP. The UK's closest rivals were South Korea on 7.3% and China on 5.5%, followed by Japan and the US on 4.7% each.
By 2016, the internet is forecast to grow to 12.4% in the UK, contributing some £225bn to the overall UK economy.
To get a sense of just how significant the internet is to the UK, you only have to compare it with traditional industry. The internet sector has eclipsed construction, education and health, as a percentage of GDP. It already dwarfs utilities and communications and is only a couple of percentage points behind financial services.
It is also reshaping the daily lives of millions by creating a fluid, connected labour pool via social media such as LinkedIn and freelance services platforms such as Peopleperhour, Taskrabbit and Etsy. Meanwhile, education startups such as Codecademy and General Assembly are changing the way we learn, and holiday rental site HouseTrip and taxi-booking app Hailo, are helping growing numbers to use their time more efficiently.
All of which means that the UK is right at the forefront of what has arguably become the 21st century's most compelling global, economic, social – and, increasingly, when you consider events like the Arab spring – political story; a third industrial revolution.
No sector will remain unchanged, no business or service untouched. And that is why, as politicians wrestle to restart growth and boost jobs, the 8% figure must become our economic benchmark, in both the public and private sectors.
But all too often when we refer to the internet economy, startups seem to get all the attention. Certainly the past 15 years have seen London, in particular, generate some incredible homegrown successes including ASOS, JustEat, King.com, Mimecast, Moshi, Net-a-Porter, Playfish and Skype.
It is the US giants Apple, Amazon, eBay, Google and Facebook, which currently generate more than £15bn of annual UK revenues combined. Add to this the rapid adoption of the internet by SMEs, the continued innovation of Arm in mobile and Raspberry Pi in low-cost computing, it is clear British innovation is in rude health. This is a fact that has recently been recognised by the LSE, which proposes to open up the main market to high-growth internet stars.
So, perhaps we are looking in the wrong places. While it is startups, SMEs and large internet companies that are driving the 8%, what about the FTSE 100 and the public sector? It seems odd, given Britain's No 1 position in the G-20 internet and the sector's surging growth, that £658bn of institutional capital in the City, with the likes of Invesco, Fidelity, Threadneedle & Blackrock, more or less sitting on the sidelines.
Is it because fund managers are not encouraged or rewarded to follow the internet economy? Or is it that analysts are not providing the bulge-bracket banks such as Goldman Sachs, Morgan Stanley, JP Morgan and Barclays the necessary coverage? Is £130bn of potential FTSE 100 internet market cap not interesting enough? Where is the Mary Meeker of this generation – not just tracking the new internet stars, but maybe more importantly, asking the FTSE 100 how they are leveraging the internet to improve productivity and expand margins?
Business fortunes can change rapidly and no board wants to be the next Kodak or HMV. So as a basic health check we must be asking, as investors, whether the current crop of FTSE 100 is above or below the 8% internet threshold.
In our own research with over 20 FTSE 100 companies, it was clear that many either don't know or won't say how much of their sales, customer support, procurement and operations leverage the internet.
There are some rising stars – WPP has 30% of its global sales (£3bn) online, while Pearson has 33% (£2bn) in digital sales. But overall the picture was decidedly mixed. Tesco, for example, only has 6% of its UK sales online, however, unlike Sainsbury's, at least it is prepared to answer the question.
Peter Drucker famously argued: "If you can't measure [performance], you can't manage it." But despite the fact that the internet is now so central to economic activity, there is clearly little recognition within the City that the internet has become a core economic benchmark.
Understanding the internet's role in our economy and society is so fundamental now that we cannot afford to operate blindly. If we are in a global economic war for talent, resources and income, perhaps we need to establish the internet age-equivalent of Winston Churchill's 1941 creation of the Central Statistical Office (the precursor to the Office for National Statistics), and build a transparent central statistics body for relevant economic internet related data.
Government can and does have an enormous impact on the economy. The flurry of policy initiatives that have been developed to support startups and high growth companies is impressive, but we need to hold the public sector to the same 8% benchmark as the FTSE 100.
There are enormous savings to be made by using the internet and related technologies to improve the management and service delivery of the £694bn expenses guided by ministers and permanent secretaries annually. Yet while there are some talented individuals in place, who are driving innovative thinking, as well as some standout performers – including the HMRC, which collects over 80% of income tax online, and the DVLA, which processes 33% of driving licences electronically – in general, when we asked government departments about their internet adoption rates, we were met with confusion – or else no response at all.
We have no excuses. In fact, we have a unique opportunity to capitalise on and consolidate the UK's G20 economic leadership; to build a balanced internet economy, where we celebrate the City, not just Tech City, and Whitehall, not just Moshi Monsters. In order to do so, we need to adopt a three-point plan:
• ask FTSE boards, ministers and permanent secretaries the 8% question and demand answers on an annual basis by end of 2013, and, by 2015, quarterly;
• create a public, transparent body to let citizens and investors track the numbers;
• celebrate the champions – and short, or fire, the laggards.
It's not often these days that the UK economy has something to celebrate – and in this case continued leadership has huge rewards for us all. Let's not squander our hard-won success, but rather get the City and Westminster on the bus, so they can ride with the rest of us. We are the 8% – come join us.
Saul Klein is a partner at Index Ventures and co-founder of Seedcamp, a pioneering startup accelerator.
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