Business Analysis: Hi-tech sector proves that there is life after Marconi

There is much hand wringing about Marconi's decline and the prospect of another centre of UK technological excellence falling into foreign hands, but using Marconi as a bellwether for the rest of the UK technology sector would be highly misleading. Technology in the UK has never been in better health, creating businesses worth billions of pounds and producing genuine world leaders in new technologies that enjoy much better economic prospects than those endured by the likes of Marconi.

At the centre of this is Cambridge, the fenland city where an estimated 900 technology companies - 700 of which are privately owned - have formed a financially vibrant cluster. Last year, that cluster attracted 25 per cent of the £800m invested by venture capital funds in the UK and more than 8 per cent of the £2.1bn of venture capital money spent across Europe.

"The reason Marconi failed was not because of the technology but how the company was run," said Mike Lynch, a mathematical engineering graduate from Cambridge and the chief executive of Autonomy, one of the city's most successful corporate progeny. Now a software company worth $680m (£381m), it floated in 1998 at 35p a share and is worth 315.5p.

"UK technology companies are very healthy and the healthiest they've been for a very long time,"Mr Lynch said. "I think the UK is turning a very interesting corner. We have always had some of the best and brightest brains, you only have to have lunch in Palo Alto in Silicon Valley and listen to the accents to know how many great companies have been made by English and Scottish people.

"The problem historically in the UK was that we didn't have any venture capital industry. After graduating, I started a business and tried to raise money but there was none. I met an English eccentric who was well gone in a Soho wine bar. He lent me £2,000 there and then. That's now changed. There is easy access to capital."

Financial investors have flocked to Cambridge in the past few years looking for the next big thing. UK venture capital funds such as 3i, Advent and Amadeus have been joined by US counterparts from Silicon Valley including Oak Investment Partners and Atlas. There have been plenty of turkeys but the failures have been outweighed by start-up companies that have delivered their backers big gains.

Alongside Autonomy, Arm Holdings, a microchip company, and Cambridge Silicon Radio (CSR), which specialises in wireless technologies, have reached the No 1 spot in their global industries. Arm, which floated in 1998 for £264m, recently turned the tables by paying $1bn for its US rival Artisan. Arm is now worth £1.7bn. CSR floated at 200p a share in March last year and is worth 502p.

"What these companies are managing to do is show that you can reach global No 1 status out of the UK. That has a positive effect on venture capital funds ... because it means they will invest in the UK. That leads to an interesting effect. People ... start setting up businesses here," Mr Lynch said.

Warren East, the chief executive of Arm, said: "Companies like Arm and CSR are producing components that are going into real products. Ordinary consumers don't necessarily know what's driving the devices they are using. These companies are at one end of the spectrum but I'm on the board of Reciva, a Cambridge start-up involved in internet radio which one day will be common and manufactured by big-name brands, and it will be this little company's technology doing it."

But what is it about Cambridge that has led to such a concentration of technology companies with total revenues of more than £4.5bn employing in excess of 35,000 people and which, as the middle chart shows, attract higher levels of investment than other venture capital-backed businesses?

Charles Cotton, the chief executive of Library House, a consultancy that uncovers innovative companies, reckons comparisons with Silicon Valley are valid. "In the case of Silicon Valley you have a principal university, two if you include Berkeley, but principally Stanford. You've got Cambridge university at the epicentre of the Cambridge cluster. What both Cambridge and Stanford have generated is a whole raft of people who are entrepreneurial, who are innovative and who have gone into successful business that has acted like a magnet to attract other people to create an increasingly vibrant ecosystem."

In its Cambridge Cluster Report, Library House found that of 43 start-up companies in 2004, 14 had their origins within the university, most of which were start-ups by university personnel, showing the strong indirect impact the university has on the city's economy.

John Houston, the chief executive of CSR, said: "You have to look at what it was that started Silicon Valley off in a way so few areas have succeeded in repeating. Cambridge and Tel Aviv have succeeded, everyone else has failed in comparison. You have to have a good university and a good supply of people."

Mr Lynch said: "The quality of the research at Cambridge university makes it one of the leading technological research institutions anywhere, although there's no reason why an Imperial in London, for instance, couldn't replicate that."

But there is much more to the city's attractiveness to entrepreneurs than the university's influence. Laurence Garrett, an investment partner at 3i, believes Cambridge would have struggled to spawn so many successful businesses without the role played by a handful of consultancy firms, including PA Technology, with perhaps the most important being Cambridge Consultants formed by Tim Eiloart in the 1960s with the mission of "putting the brains of Cambridge university at the disposal of the problems of British industry".

"These people are not management consultants, they design products at the cutting edge of intellectual property. They form a nucleus and they bridge the gap between academia and the real world," he said.

These consultancies have incubated successes such as Domino Printing, CSR, which recently bought Ubinetics, another product of PA Technology. Meridica came from the same stable and was snapped up by Pfizer, while Alphamosaic was bought by Broadcom.

What Cambridge has as well is entrepreneurial lineage. Herman Hauser, who started Acorn Computers, and Sir Clive Sinclair represent the aristocracy of the city's technological entrepreneurs.

After Olivetti bought Acorn in 1986 it started a research laboratory, which spun out Virata, a semiconductor company that became Cambridge's second $1bn company after Arm.

That laboratory was run by Andy Hopper who is now professor of computing technology at the university in a city that is still attracting research and development money from abroad notably the likes of Microsoft and Intel. "I would say there is nothing in Europe that is comparable to Cambridge," Mr Garrett said.