Is IT ripe for consolidation?

If talk at the tech industry's bellwether - the UK Partnering & Investment Forum - is anything to go by, venture capitalists are circling and we're in for a major round of mergers and acquisitions

If you had walked into the UK Technology Partnering and Investment Forum in London this week, you could be forgiven for thinking you'd stepped back in time a few years. Talk of venture-capital money looking for companies filled conversations peppered with references to M&As and, to a lesser extent, IPOs.

In fact venture capitalists, it seems, have come out of their long, three-year hibernation and are even now circling some of the more interesting tech start-ups. The mood at the Forum -- an ideal touchstone of the tech industry -- was distinctly upbeat on previous years. Joe Schoendorf, a well-known VC with Accel Partners, was there in motivational-speaker mode, stepping out from behind the podium to predict in a way that few British speakers would dare that we're in the very early stages of another gold rush.

Although predictions in this game are notoriously unreliable, Schoendorf, who invested in Macromedia when it was just Authorware, in RealNetworks when it was just Rob Glazier, and in UUNet when it was nothing to people who were not geeks, has made a few good calls in his life.

Schoendorf believes that the bubble we all thought had burst in 2000 has not finished its cycle. He likens the businesses that were just being built back then to bread that needs seven or eight years to bake but which was taken out of the oven early because we all got just a little too greedy.

When that bread is finally baked -- and that is still a few years away -- it is likely, says Schoendorf, to contain ingredients from the world of ultrawideband ("if this works the way we think it will then all cables will go away"), pervasive computing, home entertainment, mobile devices, e-commerce and Web services.

There does seem to be plenty of evidence, even if it is just anecdotal right now, to back up Schoendorf's view. Other venture capitalists at the conference noted that much of the money going into early-stage tech companies during the past few years has been in the range of £1m to £2m -- just survival money to keep alive the companies that had already used up too much dough to be allowed to die just yet. The hope in such cases, of course, is that if a company can survive its lean years, and its investors have enough faith to see it through those years, then those investments will be worth something again some day.

So where does that cycle go now? Well, many venture capitalists appear to agree that the past month or two have seen a marked increase in activity, with more money being raised to invest, and more companies looking for investment.

But, they say, there's a hitch. Tech companies in the UK are -- how can I put this -- just too small. John Moulton, founding partner of the well-known VC firm Alchemy partners, made no bones about his opinion of the market when presenting his keynote at the awards dinner on Tuesday evening. Vast amounts of money, he said, are being poured into useless companies. VCs need bigger and better companies to invest in, and that is just something that the UK does not do well. His was a scathing attack on the state of the UK tech industry.

Corporate financiers in the audience agreed with this prognosis, saying that too many small UK tech firms bumble along, making small profits. Many of these, they observed, make half a million one year, overextend and lose half a million the following year, and then retrench into their half-million profit comfort zone.

The problem, say the financiers, is that the tech industry is not a lifestyle choice: you have to be in it for a reason and this means growing. The only real alternative is to shrink: just bumbling along is not good enough. Corporate financiers blame everything from lack of vision to poor management.

Bringing in a new management team that not only has vision but can execute on it is a skill that every self-respecting VC firm should have -- but that is only half the battle, they say. The rest comes in building businesses: after all, this is where VCs get their pay day.

Of course most of us couldn't give a vulture's gizzard whether VCs get their pay day or not, but like it or not, we are affected by their whims, and if the talk at the P&I Forum was anything to go by, effects are about to be felt as consolidation hits small UK tech firms.

Key targets will be those companies that are perceived to own a loyal and substantial customer base. This can come in many forms, from maintenance contracts, to customer support, to licensing and integration. What the M&A men are looking for above all is a steady flow of revenue. Actual products are often just a secondary consideration -- after all, these people tend to look at the world in a very different way from the rest of us. They believe that companies exist to sell shares, not products.

While we can argue the wisdom of that line of thought until the vultures fly home, there seems to be little doubt that a major round of M&As is on the way. So, do you think consolidation in the UK tech market is a good thing? Talkback below and give your opinion.