At first glance, less investment in UK startup technology firms may look like nothing more sinister than market forces at work. Increased wariness among venture capitalists (VCs) may be a return to realism, a move away from the frenzied assumption that anything new and technology-based must be worth a punt.

The decline may even benefit the economy, with fewer, more judicious investments yielding a greater return than a multitude of failed ventures generating nothing but red ink. But market forces are not a perfect mechanism, as the dot com boom and bust amply illustrates.

A report on research and development (R&D) published this week by consultancy Booz Allen Hamilton (BAH) provides a useful parallel.

The conventional wisdom that investment in R&D translates into higher profits is not borne out by analysis of the 1,000 firms that spent the most last year.

R&D in itself is not enough. Lack of focus leads to repetition, irrelevance and wasted effort. Companies investing in R&D need to be ‘smart spenders’, concludes BAH.

In the extremely risky world of technology startups, VCs need to be smart investors, putting in more than just blunt cash to ensure success.

It is vital that the UK secures its position at the forefront of technological innovation.

With growing competitive pressure from Indian and Chinese economies, the next generation of high-tech businesses are more important than ever. Nurturing innovation means not only a suitable education system, but also ensuring a commercial climate that provides every possible opportunity for exploitation.

Without such an environment, tomorrow’s world-leading innovations and their potential economic contribution will follow the money abroad.

That VCs have been burned before does not mean high-tech startups are necessarily a bad investment. But it is not just about money being spent, there is also a compelling case for improved focus and applied business expertise.

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