Too much money is pouring into tech funds

Just what would they do with it all?

Too much money is pouring into tech funds

There has never been a better time to be raising a few tens of million for some whizzy new app or sharing technology in London than right now. Money is literally swilling around the City, looking for a home, and a lot of it is coming from some very big companies. EasyJet is just the latest to make a move, putting a "multi-million-pound sum" into Brent Hoberman's Founders Factory, aiming to back four or five new businesses, and create a couple itself, mainly focusing on the opportunities in the travel industry.

It is not alone. Insurance giant Aviva has done something similar for the finance industry, and French cosmetics firm L'Oréal for the beauty business. Some of the biggest banks in the world are investing in fintech disruptors – Goldman Sachs has bought online retirement specialist Honest Dollar, for example. The major US investment banks have made more than 30 investments in start-ups in the last year.

The big daddy of them all is the $100bn fund being created in London by Saudi Arabia and SoftBank – a giant of a beast that could spawn thousands of new businesses. No doubt we will see many more investments like that over the next year. Pretty soon, every big company is going to be pouring a few tens of million – or billion if they are Saudi – into a tech fund. No annual report will be complete without one.

But hold on. What will they do with all that money? You can see what the companies are doing. It is perfectly understandable that companies feel they need to be a part of digital innovation. If your industry is about to get blown up by a bunch of young entrepreneurs with a whizzy app that does everything you did, but twice as fast and at half the price to the customer, then it is probably best if you have a stake in them even as they turn you over.

It is going to happen anyway – but it will be a heck of a lot less painful if you are among the shareholders in the start-up. Newspapers would be feeling a lot better now if they had been shareholders in Google or Facebook, and the hotel chains would be more relaxed if they had got in on Airbnb's first funding round.

The trouble is, it might not work out as planned – for two reasons. The first is there is an avalanche of cash that is now chasing very few genuinely profitable opportunities. That is most dramatically true of the Saudi/SoftBank fund. It is very hard to see how cash on that scale can be spent effectively on new tech companies, but as more and more corporate money also comes into the sector that is only going to make the problem worse. The fact is, most new tech businesses don't require vast amounts of funding. A million or two goes a heck of a long way.

The second is that picking winners is hard. EasyJet may want to back the next big thing in travel, and Aviva the next monster app in finance, but the reality is that dozens of new ventures will be launched, and of those only one or two will be successful. Most will fall by the wayside. What are the chances that it will be the one that Aviva or easyJet backs that turns out to be the major hit? It's possible – but not all that likely.

In reality, the one thing we know for certain is that big companies are remarkably good at wasting money. Sometimes it is on mergers – spending a lot of money on a takeover that doesn't work out. Sometimes it is on a doomed venture into new markets overseas. Right now it is tech funds. But most of that money will be wasted as well.

If firms have spare cash sitting around, they would be better off paying it out as dividends – and then letting their shareholders invest it in a tech specialist if they want to, or something else entirely. It wouldn't be as much fun for them. But everyone would be better off.