London is a hub of tech talent, but it needs a better funding infrastructure to create international superstars
Where is London’s Facebook? Its Google, Twitter, or eBay? Why were Jeff Bezos or Mark Zuckerberg funded by angel and venture capital (VC) investors from Palo Alto and not Eaton Square?
At first glance this appears a curious anomaly. London boasts the largest financial sector the world has ever seen. So why hasn’t it managed to fund and nurture a smattering of global technology superstars?
Well for a start, London has developed its fair share of modern internet-era brands. Lastminute.com, founded by Martha Lane Fox and Brent Hoberman, became the pin-up model of Britain’s technology boom in the late 1990s.
Moshi Monsters, the online children’s game owned by Mind Candy, is in the vanguard of a new generation of British tech success stories. Founded by Buckinghamshire-born serial entrepreneur Michael Acton Smith, it is valued at £120m. Another, Tweetdeck, founded by Iain Dodsworth, was recently sold to Twitter for £25m.
London also attracts its fair share of foreign-born technology wizards, just as it sucks in banking talent from across the world. Take Vladimir Oane and Dragos Ilinca, a brace of Romanian entrepreneurs who relocated to London in 2008, setting up social media monitoring site uberVU.
Most of these firms are based in a few acres surrounding an area called “Silicon Roundabout” encompassing über-fashionable and (relatively) low-rent Shoreditch, Old Street and Brick Lane.
Private and public money is rolling into the area. Prime Minister David Cameron wants the so-called “East London Tech City” that links Old Street with the Olympic Park in Stratford to eventually rival Silicon Valley.
TechHub, a cheap-and-cheerful flexible working space part-funded by Google that hosts tech entrepreneurs, sits right on Silicon Roundabout. Nearby White Bear Yard provides funding and office space to start-ups.
So far so good. Yet London has yet to fully bowl over the technology world. Why?
Well, for one thing, it still lacks – despite the vast store of wealth managed by the City – a genuinely deep pool of investable capital.
There is some money if you look around. Seedcamp, a London incubator, pumps around £45,000 into chosen start-ups in exchange for up to 10 per cent of the firm’s equity.
Seedcamp’s imprimatur is the tech equivalent of winning the lottery. “Once you are in the Seedcamp network, you can reach customers, technologists or investors, from London to Palo Alto far easier and that is what makes it so special,” says Brett Putter, managing partner in London-based executive search firm Forsyth Group. (Forsyth has invested in 33 Seedcamp-promoted firms since 2007).
But London still falls short in three key areas: the depth and strata of funding, communication and risk appetite.
Communication is, it seems, a uniquely British weaknesse. Bill Morrow, founder of Angels Den, which connects start-ups with business investment, says London tech entrepreneurs are “really, really bad” at pitching
Taking the last issue first, investors in London lack the appetite for risk embraced by our American contemporaries. US investors, notes Michelle Dewberry, a serial entrepreneur and founder of the Groupon-esque website likebees.com, don’t do self-doubt. “They believe they can do anything.” To be fair, this is a pan-European malaise. Our VC and private equity (PE) firms, in the main, would rather exit a £100m firm than sell out after a £1bn flotation. It’s the short view of life.
Communication is, it seems, a uniquely British weakness, and one for which there is no simple cure. Bill Morrow, founder of Angels Den, which connects start-ups with business investment, says London tech entrepreneurs are “really, really bad” at pitching.
“You have to be able to talk English, and the majority of London ‘tech geeks’ we meet just can’t speak the language. If you can’t get your point across, no one is going to invest in you.”
Funding is a bigger problem. No tech start-up develops in a linear fashion. Each gets built in stages that depend on the availability of funding and investor perception of the firm’s future.
So the tiniest start-up will need “bootstrap financing”, from the founder or their family and friends, followed by a potential second round (between £10,000-£100,000) of angel investing. Then come the likes of incubators such as Seedcamp and VC funding, pumping in up to £5m. After that the big PE firms enter the fray – typically leading to three stages of increasingly sizeable investment, followed by a stock flotation.
The problem in London is that we lack enough hefty investors. “London is around five years behind America,” says Forsyth’s Putter. “There is just not enough VC money here and valuations are much lower. That’s why I don’t believe you could build Facebook in London.”
To be fair, there are enough would-be angel investors. Angels Den’s Morrow reckons his firm receives £10m in potential capital commitments every working day. But after that the trail tends to run cold. “There is very little VC capital running around at the moment because there are very few exits, and so there is very little money coming onto the scene,” he adds. “So comparing London with the US is like comparing apples and pears.”
This is bad for the entire sector. Partners at VC and PE firms, as well as company owners exiting investments, circle back again as angels – just as Lastminute.com’s Brent Hoberman is now doing in London. If that loop isn’t closed, angel funding also drops off, or ceases.
Why is this happening? To a large extent, London lacks a history of investing in technology. Venture capitalists tend to be tech luddites. By contrast, Silicon Valley succeeded because company owners, right back to the early days of innovators like William Shockley, pumped profits straight back into new ideas.
So London needs to build its own funding base. We need more VC and private equity investors with deep pockets – people with a long view of life and capital – and we need to learn to embrace risk. Otherwise investors, engineers, ideas people, and technologists, will continue to relocate to Palo Alto and the rest of Silicon Valley. Then, and only then, London might one day get its own Facebook.