Yesterday morning I was invited to do a radio interview with a BBC Business Daily reporter on the subject of London’s prospects of becoming the next Silicon Valley, which was good fun and a first for me on the radio (though it was pre-recorded).
It was broadcast live this morning at 8.30am and you can listen to it here (I am in the great company of Michael Moritz, Suranga Chandratillake and others):
>> BBC link
I thought I’d summarise our thoughts on the matter in a longer and more structured post, where I touch about a lot of what we talked about and a bit more that I didn’t get the chance to cover given time constraints.
So what are London’s prospects of becoming the next Silicon Valley?
My answer to that question was that this is not the right question we should be asking ourselves: should we really be comparing ourselves to Silicon Valley? Are we going to get to the right outcomes by trying to emulate the success of Silicon Valley?
I used the analogy of a young startup founder trying very hard to become the next Steve Jobs, dressing up like him, talking like him, acting like him etc. That’s not going to work. I also mentioned a great book called Outliers by Gladwell, that claims how a lot about success stories comes down to a very unique combination of events and set of circumstances that is very hard to replicate. A number of historians have written great literature trying to analyse how Silicon Valley came about, which is interesting per se, but should not be main topic of discussion here.
I didn’t say we should not admire and learn from what tech companies in Silicon Valley have managed to achieve, but we should stop trying to replicate it over here. We are a different continent, we have a different history, a different structure so what worked for Silicon Valley does not necessarily work over here. I suggested we should just drop that comparison to start with, and focus on what we have got and what we are good at.
The right question we should be asking ourselves is how do we create an ecosystem that maximises creation of value for all stakeholders, given what we have. How do we create the best possible environment for tech startups to grow big?
I then talked about what I think the ingredients of such ecosystem are: capital, talent and regulatory environment, are all very much inter connected.
So what have we got over here?
1) A very favourable regulatory environment for startups
- UK and London in particular have some of the most favourable government policies for startups in the world, take SEIS and EIS for example: US startups and angel investors literally cannot believe we’ve got such schemes in place over here.
- Support for venture funds from the likes of the British Business Bank, who are behind some of the best and most active UK funds.
- The availability of government grants and incentives such as Innovate UK, TSB smart grants, R&D tax credits. Initiatives like Tech City, who started in London and are now operating across multiple UK cities.
- More generally the fluidity of the LTD company structure. Setting up and closing down a LTD takes a few minutes online and costs a few quid, the ability of LTD companies to raise capital seamlessly. This is something that should not be discounted when comparing the UK to other European countries, where it still takes human intermediaries, time and a lot of money to do that.
2) Increasing access to capital
- Europe has historically been plagued by lack of capital for the venture asset class.
- If you ask UK entrepreneurs and venture capitalists, about why the UK is yet to produce a tech company of the scale of say Google or Facebook or Uber, the majority would probably claim this is down to the fact that UK companies aren’t able to raise the same amount of capital as their US counter parts. There may be some truth in there.
- The source of the structural problem tends to be at the exit i.e. in the capital markets and M&A markets. Many IPO candidates opt to list in the US, mainly down to the fact that markets get those businesses over there. We have here a cronic shortage of analysts covering tech stocks, so as a result retail investors don't understand the tech sector as well as they do across the pond, which leads to lower liquidity and ultimately lower valuations. This is changing fast though. We have seen the IPOs of Just eat, Zoopla, AO, boohoo, Sophos with many more to come. This is just the start. And secondly, a lot of the M&A consolidators tend to still be US-based. Again, a healthier IPO market should drive more M&A activity as public stocks can act as M&A currency.
- As far as private markets are concerned, I really wanted to avoid the use of the word “unicorn” during the interview, but miserably failed: we have seen the rise of very large businesses coming out of Europe, specifically from the UK. 17 at last count (as many as Sweden, Germany, Netherlands and France combined). These are obviously all paper valuations, and we all know that we will have to wait until exit to see if they can live up to their promises, but it is certainly indicative of the fact that Europe actually can generate very large and valuable businesses. There have been questions about that until not so long ago.
- It is also very encouraging that we are now starting to see morelater-stage investments in support of scaling more London tech businesses. Deliveroo, Made.com, Secret Escapes are just some of the latest examples.
- Moving down the funding chain, more towards the stage EC1 Capital typically invest at, we are starting to see capital being recycled (the emergence of so called “mafias”, like the Paypal mafia….): entrepreneurs and executives achieving an exit and then becoming angel investors, advisors, mentors themselves. This is great for the ecosystem.
- We are also seeing the emergence of crowd funding, with platforms like Seedrs and Crowdcube and many others raising £84m last year, and I am sure well on track to exceed that in 2015.
- We have come a long way from less than £100m being raised by London tech firms in 2010, we are now up to over £1bn so far this year. The trajectory is very steep, the momentum is strong.
- More funds are being raised locally (Octopus, BGF, Mosaic, Felix, 83North, Notion etc), more US venture funds (and LP's) looking across the pond. Salesforce Ventures just announced a dedicated $100m fund to back European cloud startups. And only in the last month a high profile US LP and one of the best US VC of all times have made public statements about how conditions in Europe are ripe. This is very exciting.
- Last but not least government intervention - LCIF, of which EC1 Capital is a proud new partner, is filling in the so called funding gap, intervening where the private sector can’t yet get to.
3) Availability of talent
- Despite having some of the best universities in the world, there still is still a chronic shortage of tech talent. When we talk to startups and portfolio companies the biggest challenge they have at any point in time is hiring talent fast enough. Universities are just not producing them at a rate that can keep up with the pace at which digital businesses grow.
- But again, the situation is improving and from a great starting point. Some stats were released recently showing how London is home to more software developers than anywhere else in the world.
- We are also starting to see 2nd, 3rd time entrepreneurs coming back, best practices being shared, talent being imported from countries that perhaps lack the capital and or the right legislation. 1 in 7 UK businesses is started by a migrant entrepreneur. If that’s not another testament that we are in a great place, we don’t know what is.
- We are then lucky to have the likes of Rocket Internet Group, local accelerators such as Seedcamp, EF, the US Techstars etc are creating a new class of entrepreneurs, again sharing best practices etc. almost 600k new businesses were create between 2014 and 2015 in the UK, all time record.
- Tech clusters are appearing in different places than just London and the Old Street round-about, and they are building on the skills and networks they have locally. Places like Bristol, Newcastle, Glasgow, and Dublin are all becoming hot beds of tech startups. We have investments in all those cities.
- Something that is playing in our favour over here in terms of talent and expertise is that we have a culture of building businesses with a strong focus on profitability and international expansion from day one. This is because capital as never been as abundant over here as it’s been in Silicon Valley perhaps, so our businesses have historically had to be more resourceful and capital efficient than their us counter parts, who have been flush with cash. This is a great asset to have, particularly if there is a downturn ahead of us, like many have been predicting (for a long time now…).
- Finallyfintech deserves a separate mention - we have a talent pool in this field that other ecosystems will never have. London is the financial capital of the world, that gives us a tremendous advantage. If Silicon Valley has been the epicentre of social media, creating giants like Facebook, Twitter, Instagrams etc we can can definitely be the epicentre of future fintech giants such as Funding Circle, Zopa, Wordremit, Transferwise, Crowdcube and many others.
More generally, abstracting one level further, the UK and London in particular has always been a natural gateway to a market of half a billion European consumers, as well as abridge to the US. No other country, no other city is so well positioned strategically.
So overall, I hope I made the point clear enough in the short interview: there is strong momentum on all fronts and solid fundamentals here in Europe, and in UK and London more specifically.We are maturing as an ecosystem, but still have a long way ahead of us of course. There’s certainly a lot to be excited about!