London as a Start-up Hub: Moving in the right direction
This week Nesta released Unchaining Investment: a report that looks at the state of the UK venture capital market, how it has evolved and how it compares to the market in the US.
As well as empirical analysis of VC performance and investment trends, the report also explores investors' and entrepreneurs' views on the UK internet and digital space in particular. With the sector being concentrated in London, those who were interviewed tended to speak more about the capital rather than the country, and its strengths and weaknesses in comparison to other areas. Given the hype that often surrounds the Tech City cluster in East London the research aimed to speak to those investors that had experience investing in London as well as in other cities in order to attain more balanced views. Views were sought on the cluster's current standing and the potential for growth as well as meaningful comparisons to other areas.
Increase in funding activity
Both in the UK and globally there has been a shift in VC investment into the Internet and digital space. While US market still invests more into the sector than the UK (both as a % of GDP and as a % of total VC investment), the gap has closed somewhat in recent years. From 2008-2012 about a third of UK venture investment went towards Internet and digital companies whereas in the US this was almost a half.
Performance still lagging the US
Previous Nesta research showed that while the US venture firms significantly outperformed their UK equivalents in the 90s, this gap had decreased significantly in the 00s as the global VC market struggled. An update of this analysis showed that there are signs of the gap opening again as VC performance shows signs of improvement. This was also true when looking only at those funds that had invested in the Internet and digital sector.
However the performance of venture capital of funds in a given location is far from a perfect proxy for the performance of the businesses there. Funds investing outside of their home location are common and US firms in particular are quite active in the UK with some of the top US funds having backed high profile London startups.
Doing well in some areas
Some specific factors were identified as making London a good place for Internet and digital startups. The SEIS and EIS tax incentives were widely acknowledged as helping supply much needed seed capital to the sector. Regarding funding in later stages of development, while the data shows that relative to the US there isn't as much investment into the sector here, investors were of the opinion that good companies tended to be able to access the funds they needed.
Interviewees also spoke of the increasing maturity of London as a startup hub. Early successes from a few years back were believed to be driving the development of the hub as entrepreneurs and employees from successful companies were circulating back to start, or work for other promising ventures. There was a strong sense that London is moving in the right direction and producing more excellent businesses.
But more to do
While London and Tech City are moving in the right direction, there were some factors that were believed to still be holding progress back. Achieving a profitable exit is crucial to drive investment into the sector and reward entrepreneurs for their efforts. Poor exit markets, in particular the ability to have an IPO in the UK, was seen as one area where improvement was needed as many investors spoke of moving businesses to the US to have them float there.
As ever when UK or European entrepreneurship is compared to the US, the topic of risk tolerance comes up. Again, US interviewees spoke of many European entrepreneurs and investors lacking the ambition and risk appetite to drive companies to achieve global success.
On talent, while finding good entrepreneurs was not seen as an issue by many (with the Entrepreneur visa commended as a positive initiative), the skilled employees necessary to expand a business was. Here issues around visas for skilled staff and the availability of large corporates as poaching grounds for employees during a startups' expansion were raised.
On the whole the responses were generally positive with respect to the direction that London was heading in and there was a feeling that some big successes in the coming years could act as a catalyst for further increasing the reputation of London as a startup hub.