Tech City UK can't produce billion dollar firms without the venture capitalists
Critics warn there is a lack of later stage funding in the UK for fast-growing firms
Tech City is three years old today and to coincide with the organisation’s birthday a report has been released showcasing just how far the UK tech scene has come since the government-backed organisation was born.
While there is clearly a lot to celebrate and there’s no denying that Tech City UK has done some great work, it’s important not to get carried away.
There’s no doubt that the number of tech start-ups in London has boomed in recent years but many people are all to aware the city is yet to spawn a company on the same scale as the billion dollar firms in the US, such as Google, Amazon or Facebook.
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Critics put this down to several reasons including: a lack of venture capital funding in the UK, (particularly when a company gets to the later stages); less attractive stock markets; and a different entrepreneurial mindset.
There are early signs that some of these issues are being resolved through initiatives introduced by Tech City UK, the government and the London Stock Exchange. They include changes to legislation and new policies such as the Entrepreneur Investment Scheme, the Patent Box scheme, the Future Fifty programme, and the London Stock Exchange’s High Growth Segment.
But when it comes to producing billion dollar tech companies, how much can the public sector really do?
Will Franks, CTO and co-founder of Ubiquisys, a smart cell company that was snapped up by American networking giant Cisco for $310 million (£189 million) in April, said last week that the VC community in the UK tends to focus on strategic exists rather than building a billion dollar company.
“There are very few ballsy later stage growth venture capitalists in the UK compared to the US,” he said. “There’s very little discussion [in the UK] about building this wonderful company. Founders in US want world domination, which is a good thing. You need ballsy CEOs, founders and investors to do that.”
Meanwhile, Lars McBride, chairman of pan-European engineering firm Calder Group added that “funding in large amounts in the UK is still not plentiful.”
“If you want more than £5 million in equity there aren’t that many places to go for it,” he said. “We don’t have benefit of large US market which has enabled funds to reach critical mass and the funds can become more specialist.”
McBride believes that Europe-wide venture capital funds should be established if UK companies are to get access to a similar funding pool to American start-ups.
Just this week a new European venture capital fund was announced by Hoxton Ventures to the tune of £24 million but large and rapidly growing companies often require over £100 million.
“We need bigger funds with more expertise and ambition,” said McBride. “I think they’re coming. I hope I’m right.”
He also believes that shareholders must not rush an exit and suggested that some straight forward incentives could be put in place to achieve this.
Ophelia Brown, an investor at Index Ventures, one of the "big four" venture capitalists in London, said: “In 2012, VCs invested over €6.5 billion [in Europe]. €2 billion of which was in the UK alone and 2013 looks to be another record year.”
While those figures may sound impressive, the reality is that the venture capital community invest in hundreds of firms so each individual start-up only gets a relatively small chunk of the overall funding pot.
On Tech City, Brown said: “I think Tech City has rapidly evolved over the past couple of years and I think London has really proven itself as a tech hub. If you look at the opportunity, founders now have access to about €5 billion in early stage capital in London alone and that’s just from four funds (Index, Accel, Balderton, Wellington).
“The belief that we hold at Index is if you are going to go on to build a market category leader you probably will need to go and launch in the US at some point in the businesses life. But that doesn’t mean that in the early stages, when you need to get to £10 million, £20 million, £30 million, you can’t stay in London.”
Alastair Mitchell, CEO of Huddle, was quoted earlier this year saying: "There is one building on Sand Hill Road where there are four VCs, and they control more money in their funds than all of the VCs in London do, and that really affects B-C-D [funding] rounds."
So while much of the work being done by Tech City UK is being well received, it’s important to realise that the start-ups in Shoreditch won’t grow to the same size of the tech behemoths of Silicon Valley without the help of some really big investors and possibly a slight change in the mindset of UK entrepreneurs.