by Real Business - Thursday, 30th August 2007

Adam Twiss is a 23-year-old Cambridge computer studies graduate who walked out of one of his exams, "early, as a protest - it was far too easy." Post-exam dissatisfaction syndrome quickly resurfaced: "British venture capitalists are pathetic. They want five-year projections. How can I do projections? We'll have no trouble meeting our budget for the year, but on top of that I'm already negotiating two contracts, each of which is equal to the budget we already have. And there'll be more. It's dumb to ask me for five-year projections." Nonetheless, pressed, Twiss cooked up some numbers: "Then they spent hours discussing them. What a waste of space."

Zeus Technology, founded in 1995 by Twiss and fellow Cambridge undergraduate, Damian Reeves, is hot, hot, hot. As Twiss is one to point out, had they set up in Silicon Valley, Zeus would surely already have notched up its billion-dollar initial public offering. Even so, the two men are in negotiations with venture capitalists that would value the young business at around £30m.

Their business is Web server software. A Web server is the computer you connect with when you arrive at, or "hit", a Web site. The world's exponentially growing population of Web servers need to be able to handle exponentially growing numbers of hits. And it seems that no-one routes the electrons around the server more efficiently than Zeus. Late last year, it loaded its software into a Hewlett-Packard server and successfully bombarded it with 1.2 billion hits in 24 hours. A world record.

"Zeus consistently returns the best performance figures on all hardware platforms," says Twiss. "Independent surveys have us beating Sun, Netscape, Apache and Microsoft. Their systems handle 500 to 5,000 sites per Web server. We do 10,000." His customers include Lycos, Infoseek, IBM, Intel and Silicon Graphics. Silicon Valley should be quaking if Zeus typifies the fenland phenomenon.

Or should it? Cambridge is conventionally seen as a magnificent high-tech success. Some 1,100 instrumentation, software, telecoms, electronics and biotechnology businesses employ 37,000 people and generate sales of £3.5bn. Last year, Newsweek magazine said Cambridge was one of seven cities in the world with the potential to rival Silicon Valley. In constricted edge-of-town space, science parks jostle with innovation parks and research centres sponsored by the cream of the world's high-tech firms. Consultants, venture capitalists, lawyers and accountants have bid the price of office space up towards central London levels. The roads - designed for a quiet market town in the back of beyond - are jammed with fancy cars. Ordinary people can no longer afford to live in Cambridge or close to it.

And yet... Here's Hermann Hauser, who set a lot of this process in action in the eighties by founding Acorn Computers and investing in another 20 or 30 high-tech start-ups: "Divide this region's income by its IQ, and you'll find the measure of our failure - we must have one of the lowest ratios in the world." According to Hauser, Stanford and the other universities around Silicon Valley have spawned a trillion dollars-worth of companies; the corresponding figure for MIT is $500bn - "but Cambridge is barely on the map - $20bn at a stretch."

Only in the last year has Cambridge's first billion-dollar start-up hit the radar screens, in the form of chip designer, ARM. Cambridge's other 1,099 firms are, by and large, pygmies.

At the St John's Innovation Centre, where tiny start-ups rent tiny offices on weekly terms and get free advice and introductions, managing director Walter Herriot agrees with Hauser: "Our companies could and should have been more successful. Many of Cambridge's high-tech firms are very small, with less than five employees. Typically they have less than 30 employees. We have few firms with a world market share."

Why? Twiss: "This place (Zeus is one of the 50 tenants in the St John's Innovation Centre, which is owned by St John's College) has the right idea, but doesn't live up to it. There are too many people here who are too happy to pursue narrow niches. And when they start making a profit, they think they've arrived. Down the corridor, there's a firm making a comfortable living writing software for offshore fund managers. Not exactly an exciting growth market with billion-dollar potential. It's an English thing. We're not going for the big picture - not the entrepreneurs and not the VCs. In the States, this sort of space is run by the VCs themselves. To get into it, you have to be a convincing prospect to be a billion-dollar IPO within three years. Otherwise, forget it."

Why? Herriot: "Twiss is right. We have a lot of good businesses here, but not many great ones - even potentially. We would move them on if we had more like him with which to replace them. But that's the problem. We see 20 early-stage ideas a month, but progressing them into fundable projects is very difficult. Someone comes in with an idea or at best a badly written business plan. He needs VC backing, but before he will get it he needs smartening up: knock the plan into shape, isolate the intellectual property, do some market research, input some commercial management - not full-time at this stage, obviously - prepare him to negotiate a contract with a VC. That needs pre-seedcorn resources. We can throw out half the propositions we see with no further input, but the rest need £10,000 of professional resources each to move them on. We don't have it."

Why? Hauser: "Cambridge's ingredients haven't gelled. There has always been talent and, in the last ten years, the VC money has arrived. But we weren't talking to each other enough, we weren't professional enough and the university's attitude towards this golden egg was one of benevolent neglect. That's why we started the Cambridge Network and why we're setting up an entrepreneurship centre. From October this year, business courses will be available to every undergraduate and there will also be coaching for entrepreneurs."

And here's another view, from Rupert Hart, who has worked for Hauser and has his own impressive network of high-tech contacts: "First, there's a provincial attitude here. People don't really believe they can become incredibly rich - they think that only happens in Silicon Valley. Second, people are scared that if they discuss their ideas someone else will pinch them. In the US, they know that the only person who is going to make turn an early-stage idea into a fortune is the entrepreneur who's fired up to take it forward. Therefore, they can freely use bystanders as a 'brainstrust'. And they do."

Cambridge Network is the biggest and fanciest of a dozen networking forums that have sprung up in the last ten years to get the talking going. Hauser's £50m venture capital fund, Amadeus, was one of the founders, alongside 3i, the university (whose attitude towards the golden egg is being revolutionised by its current boss, vice-chancellor Alec Broers), Arthur Andersen and two local firms. The organisation has pulled 600 paying members, runs a speaker series which also promotes in-the-flesh networking, sponsored an analysts' tour which drew plenty of US participation, and its finest manifestation to date: an all-singing, all-dancing Web site, which cost £100,000, subbed up by the members.

Last October, Cambridge Network got Larry Sonsini, a renowned Silicon Valley lawyer, to speak on what makes Silicon Valley tick. Sonsini identified five drivers:

• A vast pool of venture capital: Silicon Valley start-ups were showered with $6bn-worth of venture capital in 1997.
• Stock-based capital markets, to which start-ups are rapidly driven by the VC seeking early returns and by the entrepreneur seeking to escape the VC's controls and reap the value of share options.
• An entrepreneurial culture which favours the start-up over other types of investment and recognises that failed entrepreneurs make better risks next time round.
• A supporting infrastructure and encouraging attitudes within universities, big local companies and local government.
• A tax regime which rewards start-ups and research and development spending.

Cambridge may now be getting its act together on some of these triggers, but in others it's not at first post. Everyone agrees that Cambridge's physical infrastructure is on the verge of snapping. Often cast as the villain of the piece is the South Cambridgeshire District Council which runs the village-rich, town-free zone extending 360 degrees around built-to-its-boundary Cambridge. The council wants to protect its green and pleasant land, and says opinion surveys of its constituents support this policy. Last year this culminated in a dramatic planning decision: to block a new science park to focus on the Human Genome Project.

Lining up a dramatic challenge to the council is Peter Dawe, a local entrepreneur who made tens of millions by founding Pipex, the Internet service provider that predated all its competitors. What Cambridge needs, says Dawe, is "C2", a new town - the UK's first since Milton Keynes.

Not a man to ignore the practicalities, Dawe set up Cambridge New Town Corporation. It has identified a swathe of ex-military land seven miles north-west of Cambridge to host a population of 50,000, not as a dormitory, but to take the commercial development that can no longer be shoehorned into Cambridge. Says James Milner, a young Cambridge graduate who is Dawe's project manager for C2, "Cambridge has 80,000 jobs and 40,000 working people. No wonder its roads are jammed. Current policy is to add 100 houses to that village, 200 to this one. These accretions are never big enough to warrant genuine new infrastructure - roads, schools, business facilities. Which means that the people who move to them get into their cars to go to work, take their kids to school, do their shopping and pursue recreational activities. The New Town, together with limited new road development would solve the Cambridge squeeze for 20 years." South Cambridge District Council opposes C2.

The Genome Park and C2 proposals are now being reviewed by the deputy prime minister. It is widely expected that the council is about to experience government strong-arming. Notably, central government appointed Dawe to the local super-planning body, the East of England Development Agency.

Central government's enthusiasm for Silicon Fen is also evident in many other aspects of its policy. Indeed several paragraphs in the recent Budget, such as the introduction of R&D tax credits and measures to encourage large companies to put up venture capital, might have been authored by Larry Sonsini himself. And although it was the late lamented Peter Mandelson who as Secretary of State for Trade & Industry uttered the milestone assurance, "We are entirely relaxed about people becoming filthy rich" (on a visit last October to Silicon Valley) and it's hard to imagine his replacement, Stephen Byers, playing his cards so far away from his chest, few doubt that Byers' heart is not in the same place.

Will all these developments help Cambridge lift its IQ-to-income ratio to Silicon Valley levels and notch up the missing $980bn of corporate capitalisation? "Looking forward 20 years," says Walter Herriot, "I'm pretty sure we can say, You ain't seen nothing yet." Hauser cites companies such as Entropic in speech recognition and Advanced Rendering Technologies (it creates Toy Story-type images) which, unlike Acorn but like ARM, have world-beating expertise run by seasoned managerial talent. Both companies have attracted Silicon Valley emigres as chief executives. But there may yet be lessons to be learned close to home. Twiss says Amadeus dismissed his approach for "a very few million pounds" on the grounds that Internet companies were overvalued. Several US VCs adopted the same attitude to Netscape's first, pre-business plan, solicitation of $5m. Kleiner Perkins, the VC that said yes, reaped $400m from its investment.

One in a billion
By 1990, Hermann Hauser's tearaway start-up, Acorn, was in disarray. Even before its computers lost the marketing battle to Intel and Microsoft, production difficulties had forced it into the arms of Olivetti. But its outstanding technology held promise in areas such as mobile phones and palmtop computers. In November 1990, Hauser spun off his 12-person design team as a separate company, ARM (Advanced Risc Machines) and persuaded US giants Apple and VLSI to buy into it. Then he brought in Robin Saxby, an ex-Motorola professional, to run it.

Saxby: "The Cambridge side was important - talent, networking, local companies doing good things and so on - but alone, they weren't enough. What got me in were the Silicon Valley connections of Apple and VLSI, especially Larry Tesler, the Apple scientist they put in as their director. He's still on the board. It was Cambridge technology but California culture.

"I never moved to Cambridge, although I did a weekly commute there for the first couple of years. Cambridge is too far from Heathrow. In this business, you have got to have a global attitude from the beginning. And Cambridge is too far from London - that's where you find the patent agents, lawyers and financiers that make start-ups work. The centre forwards are in Cambridge, but you need a goalkeeper and other talents, too, and they come from big business centres. It's the same in Silicon Valley. The technology talent is in the valley, but the headquarter functions draw on San Francisco.

"We had 12 engineers, a minimal amount of cash and no patents. The crucial thing was to get to break-even before the money ran out. We closed the first purchase order on December 28, 1991. We were in profit a year later. In 1993, we set up the Japanese subsidiary. We don't build our chips. We design them and license them out. They give high performance but consume little power. Laptops running our chips run for days not hours. Our licensees include Intel, Sony, Hewlett-Packard, NEC, Sharp, Samsung, IBM and 100 others."

ARM floated simultaneously on NASDAQ and the London Stock Exchange last year. Its shares have doubled since December, giving it a market capitalisation of almost $2bn.

Saxby on Cambridge: "I ran into a bad aspect of Cambridge on day one when I tried to lease a photocopier. Our billion-dollar shareholders cut no ice. Suppliers wanted parent company guarantees. Apple and Acorn didn't want to get into that syndrome. Eventually, we sorted it. It can be equally idiosyncratic on the good side. You need an electron microscope - the university is only too pleased to lend you theirs. You want a chip taken apart - it doesn't take long to find the right person. "Cambridge lacks space for development. We're on two sites. We've now found a single site, but it will open three years after we needed it. The pace at which the city moves, due to its history, is a problem. So is the traffic.

"Cambridge is a good base, but you have to think broader. We are now 370 people of which forty - half our design capability - are in Cambridge. That's about right."

Challenge Silicon
Your mission: to plot Britain's answer to Silicon Valley. Your time limit: 24 hours. So who do you contact? Hook up with this lot, and you'll have the answers by bedtime.

09:00. The godfather of high-tech finance is Hermann Hauser of Amadeus (although even he can miss opportunities, as Adam Twiss discovered). Tel: 01223-578365.

09:30. E-mail discussion with an Amadeus investment. Charles Muirhead, the young CEO of Orchestream, is one of the UK's brightest. charles.muirhead@orchestream.com

09:45. Pop round to Adam Twiss at Zeus Technologies in the St John's Innovation Centre. There are some 50 tenants in the centre which is owned by St John's College. Tel: 01223-421727.

10:30. While you're there, have a word with Walter Herriot, managing director of the centre. Tel: 01223-420252.

11:00. Guided tour around the proposed C2 Cambridge New Town development with Peter Dawe. Tel: 01223-237700.

13:00. The new financiers. Get on the mobile. Thomas Hoegh of Arts Alliance specifically invests in early-stage British Internet companies. Tel: 0171-594 4026. e-mail: Thomas@artsalliance.co.uk Also Richard Gourlay. He's part of the Cambridge Network and runs Top Technology's investment fund. Tel: 0171-242 9900.

14:00. Late lunch with Cambridge University vice-chancellor Professor Sir Alec Broers, Microsoft lab director Roger Needham, Andy Hopper of the Olivetti & Oracle Research Laboratory, and Robin Saxby who runs ARM, the UK's great high-tech success story. (This will take some setting up. Start with Saxby. Tel: 01628-427751.)

15:30. Final phone calls. Over in Oxford, Jonathan Church has taken over as chief executive of the business angels matching service, Venture Capital Report (it's an Arts Alliance investment). He's got big plans. Tel: 01865-784411. Try to track down Mike Mowlem at the DTI. He was the force behind the famous Mandelson trip to Silicon Valley. Tel: 0171-215 5000.

19:00. Network. Madly. "For a start-up it's more important than the funding," says Jed Simmons, the boss of Excite UK who has seen entrepreneurial life on both sides of the pond. Tel: 0171-379 5040. "In Silicon Valley, everyone uses the word keiretsu (Japanese for a powerful and meaningful network of firms)."

You'll need to go to the really happening network organisations. There are two key people here. Rupert Hart is the ex-Silicon Valley operator who runs Digital People, "a volatile mix of convergence people." It has regular get-togethers for the cream of the UK's digiterati. Tel: 07050-138425. www.digitalpeople.org; e-mail: ruperthart@hotmail.com

The best-connected woman around is Julie Meyer of New Media Investors (julie@newmediainvest.com). She also puts together the First Tuesday networking events that bring together e-entrepreneurs, venture capitalists, bankers, advisers etc once a month. They are an impressive hubbub of deal-doing.

Your final call, the Cambridge Network. It "aims to create and support a community of like-minded people from business and academia in the Cambridge region and link this community to the global high-tech network for the benefit of the Cambridge region." Your lunch host, Sir Alec Broers, is the network's chairman. It's a small world. www.cambridgenetwork.co.uk

00:00 Zzzzzzzzzzzzzz.

Contacts
Alistair Blair won the 1999 Periodical Publishers' Association Business Writer Of The Year Award.ablair@pobox.com

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