This year delivered a whole host of body blows to the UK's thriving startup sector. There has been an investor slowdown, few notable IPOs, increased market volatility and shining lights sold abroad. Then there was the biggest punch of them all, the Brexit vote to leave the European Union and all of the issues this brings up for a sector reliant on foreign talent.
So what can the UK tech startup scene expect in 2017? It will no doubt be a year of further turmoil, and startups will need to be prepared for the worst, but there are also green shoots of hope for smart founders and investors who are focusing on the right areas. Here are Techworld's predictions for startups in 2017...
AI and machine learning are the buzzwords du jour
Like it or not machine learning and artificial intelligence (AI) will be the defining technology of 2017.
Even if your startup isn't specialising in developing general artificial intelligence or machine learning algorithms capable of detecting fake news, elements of these technologies are finding their way into growing numbers of startup pitches as investors expect at least some level of baked in AI from any technology company worth its salt.
TechCrunch Disrupt's startup battlefield often gives a good snapshot of the startup landscape, and in London last month four of the six finalists (InsideDNA, LiftIgniter, Oxehealth and the winner Seenit) mentioned machine learning as part of their pitch. This will be the most talked about technology in 2017 and the key will be working out who is doing it right and who is peddling it as just marketing.
Bots are the new apps
This year saw some of the leading lights in the tech industry predict a shift in consumer habits, including Microsoft CEO Satya Nadella famously saying "bots are the new apps". The theory goes that as chatbots and AI assistants like Microsoft Cortana and Amazon Alexa mature, people will start to use bots instead of mobile apps to get stuff done.
As Frank Lansink, European CEO of business automation specialists IPSoft puts it, 2017 will be the year the chatbot dies, as they evolve towards being smart assistants that can understand conversational cues rather than being preloaded with set responses to prompts.
He said: "The chatbot may have been novel in the past, but in 2017 it will become a stagnant piece of technology that will either fade into mundanity, or improve so much that it can no longer be classified as a ‘bot’ and will instead resemble an AI."
Anna Boffetta, an associate at London-based VC firm Balderton Capital, predicts that 2017 will be the year of new interfaces.
She told Techworld: "New interfaces - such a voice, audio and messaging - will become far more mainstream. Today, the vast majority of human-computer interaction is still done on screen. The new interfaces will become a part of everyday life for all users, not just early adopters. This is a result of the vast amount of data that is now being collected, structured and analysed by machines - the results of which are being delivered via conversational interfaces."
Jeffrey Ng, chief scientist at the startup accelerator Founders Factory sees the same thing. He told Techworld: "AI assistants are going to become cleverer with natural language advances and customer intent engines (an engine that can determine the customer’s immediate circumstances and intent).”
Deep tech not dating apps
This move towards machine learning and away from simple app-based user experiences means 2017 should see the best startups trend towards 'deep tech'.
As Entrepreneur First's (EF) Alice Bentinck wrote for Techworld in 2015: "This means startups that are producing defensible technology that can usually be patented. They don’t use off the shelf tech solutions and the value of the company is often built on their technological developments.
"At the moment this means anything from new approaches to artificial intelligence, such as deep learning and computer vision, or new approaches to virtual reality or cyber security."
While EF has been at the forefront of this approach for a while, 2017 could be the year that deep tech goes mainstream, particularly as investors look to focus on startups with strong intellectual property and smart founding teams. Which leads neatly on to...
More university spin-outs
Brexit may pose a threat to talent fleeing to fellow EU hubs like Paris and Berlin, but it can't remove the science, technology, engineering and mathematics (STEM) talent coming out of top UK universities.
Research data by the Higher Education Funding Council for England shows that UK universities increasingly draw income from intellectual property (IP), rising by 18.5 percent year on year and pulling in £155 million during 2014-15.
The findings show that UK universities are becoming savvier than ever when it comes to licensing IP, with income from licensing deals alone rising 25 percent YoY to a total of £103 million. This compares to the £53 million made in shares from the sale of spinoff companies over the same time period. The key though will be keeping this talent in the country after they graduate.
Brexit concerns become a reality
The second half of 2016 has seen a lot of hand wringing from the startup sector over what impact the UK's decision to leave the European Union will have.
In 2017 we will find out, and contingency plans will need to be put in place. Last month we saw that access to talent remains the biggest fear for founders. Founders and investors are keen to see the government put forward clear plans for retaining talent in the UK if there are any changes to the freedom of movement following Brexit, keep tax rates low for entrepreneurs and continue investing in the tech sector as a whole.
UK poised to become a health-tech hub
This year saw some impressive UK biotech and genomics startups take their product out of the realm of academia, and the major pharmaceutical firms are even starting to shout about their own genomic research and technological advancements.
Boffetta from Balderton Capital predicts "that 2017 will see more funding into agri-tech and health-tech businesses".
"As software continues to eat into health-tech and agri-tech, these sectors, that were previously outside of the scope of VCs like us, will start to look very interesting for investors. Predictive analytics and automation will optimise aspects like diagnosis and treatment in healthcare."
No more burning cash
The days of startups spending on extravagant offices and parties may come to an end in 2017 as we heed cautionary tales like the downfall of UK tech unicorn Powa. This could be the year we see startups focus on being lean and profitable rather than the traditional Silicon Valley model of growing fast and worrying about monetising later.
Azzam Sheikh's blog post on the subject for the Huffington Post reads: "The newer breed of businesses and business owners are focusing on staying lean and efficient; this is a shift in the right direction."
After letting go of 10 percent of his startup's workforce earlier this year, Damien Kimmelman, founder of London based Fintech-startup DueDil told Techworld: "It’s never a nice thing to have to do but I want to build a business that can weather anything and part of that is having to really focus on things that are core to that mission and not things that are auxiliary.
“If you are too lean you can hire more” he said. “But if you don’t pre-empt then you don’t have many options in the future and it is my fiduciary responsibility to make hard decisions like this to focus on being a strong businesses."
Similarly, Robert Tregaskes, who cofounded startup Shnergle told Techworld: "In your personal life you can waste money going out to dinner or to parties and burn through cash quickly. Now imagine not just personal expenditure but running a company paying salaries, paying for services, paying for lawyers and so on.
"You can start burning through some serious cash extremely fast. It doesn’t matter how rich you are, you can burn all of it if you're not careful. Even if you're minted I'd take a very cost conscious approach. Because if you don't you are either reckless or you're an arsehole," he says.
Watch out for RegTech
Beyond fintech, RegTech is poised to be the hot area for the lucrative financial services market. As the payments and fintech bubbles have deflated somewhat the next area appears to be the unglamorous but highly important regulation technology (RegTech) sector.
In short, RegTech startups tend to focus on helping financial institutions contend with growing regulatory requirements after the 2008 financial crash, including automation of compliance tasks, mitigating operational risks and improving risk assessment through smarter use of data and more intuitive software.
This requires intensive data work on the back end but opens up a lucrative market that is always looking for an edge over its competition.
VR will continue to be a tough nut to crack
Virtual and augmented reality have been much hyped technologies for some time now, and even as 2016 brought good progress from big companies like the launch of commercial VR headsets from Facebook's Oculus to Microsoft's HoloLens, there has not been a huge deal of progress from VR/AR startups.
This could lead to simplistic predictions of a 2017 boom in VR/AR, but the recent revelations from The Information (summarised here) about much-hyped mixed reality startup MagicLeap shows that while it is easy to make snazzy promo-films, making the technology affordable, compact and powerful is no mean feat.
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