London Tech City
In a recent European Digital Index survey by NESTA, the independent British charity that works to increase the innovation capacity of the UK, London has topped the list of other EU cities for starting up or scaling a technology business and currently represents the third largest start up cluster in the World behind only New York and San Francisco. The team at NESTA consulted entrepreneurs, investors, government and academics to come up with 10 criteria to measure the EU’s top tech destinations, including digital infrastructure, culture and skills.
Central to London’s success was the development of an innovative cluster in the Shoreditch part of East of London known as Silicon Roundabout. Until 2010, this area had been a relatively run down and had historically had much lower rents. Digitally focused start-ups began to gravitate to the area encouraged by the low rental costs after the 2008-2009 recession. As the cluster developed, more support and encouragement by both local and national Governments appeared. Since then Cisco, Facebook, Google, Intel and McKinsey & Company are among the companies that have invested in the area, with City University London, London Metropolitan University, Imperial College London, Loughborough and University College London becoming academic partners of projects based in and around the cluster. Critical to the development of technology firms’ incubation in London has been the engagement of Government. TECH City UK is a government supported, publicly funded, non-profit organisation tasked with supporting the incubation of the digital economy in London and beyond. It was officially launched in Shoreditch in 2010 by the UK Prime Minister David Cameron. The organisation provides support to technology companies in the guise of coaching and advice on raising capital and liaises with the UK government on policy initiatives to support the UK’s digital economy. Its chair, Eileen Burbridge, has worked at technology companies such as Apple, Yahoo, Sun Microsystems, and Skype and then moved into the Venture Capital sphere as a partner in the early stage tech focused investment house Passion capital. In its 2016 report entitled Tech Nation 2016, TECH City UK gave an overview of how the digital economy was developing in the UK. In terms of employment, jobs in the digital tech economy grew by 11.2% between 2011-2014, almost three times faster than the rest of the economy. Currently there are 1.56 million jobs in the digital tech economy and London is home to 251,590 digital employees. Furthermore, the UK’s digital tech industries are growing 32% faster than the national average of the rest of the economy (on the basis of turnover).
So what does London look like as a `Technology city` and how does the digital economy in London differ from the World famous and World class leader of the pack, Silicon Valley? There are some key differences.
Firms in the city, unlike those in the Valley, aren’t so much technology and product innovators (such as Google, Dropbox, Snapchat etc.) but are more business or service model innovators, such as JustEat and Zoopla. In other words, they’re not producing a new technology but rather a new way of providing goods and services based on an existing technology. As such many London start-ups are digital but cannot be really be classified as technology companies in the true sense of the word. Despite the proximity of London’s financial centre, London is rather conservative, particularly in regards to its company valuations. For example, since 2010, the average London start-up valuation is $3m compared to $4.9 in the Valley. Another big difference, of course, is the size of the funding network. Silicon Valley has a network of roughly 250 multimillionaire/billionaire business angels – far more than London. In addition, the syndicates are simply much more developed in the US. All in all, this makes the crucial pre-series ‘A’ funding much easier to raise in Silicon Valley. That strongly suggests it’s much harder to scale up a business to a billion dollars, the so-called Unicorns, in the UK compared to the US. And when we look at Forbes list of the top ten global Unicorns which features, Uber, Xiaomi, Didi Kuaidi and Air B&B, not one single UK digital company features in the global top ten. So clearly London is quite different and although it may not be able to compete with the Valley, it still outperforms all its European rivals as a digital hub and has discernible competitive advantage, in a number of areas and for a number of reasons.
According to Eileen Burbridge, London is probably the world leader in Financial Technology, known as FINTECH and Britain is leading the way in this sector across Europe. London’s pedigree in finance has combined with the booming technology scene of the last few years has turned the UK’s capital into a growth sector for financial innovation. Total investment in London-based FINTECH companies in 2015 has already hit £357 million ($554 million), according to London & Partners, the organisation set up by the Mayor’s office to encourage investment into the city. This is more than the total invested in similar ventures in Sweden and Germany put together and higher than 2014’s total of £314 million ($487 million). Early emergent leaders in the field have been the crowdfunding platforms. The equity crowdfunding platforms Funding Circle and Crowdcube have become the country’s biggest equity crowdfunding platforms matching vetted investors with companies seeking to raise smaller amounts of start-up or growth capital all through a digital market place. Others firms like Transferwise, with a potential billion-dollar valuation and hence a prospective unicorn, allows for money transfers overseas at more competitive rates thus challenging the banks and other international payments companies like Western Union. Even portfolio management services have gone digital with Nutmeg.com. With an aspiration to have 100,000 users by Q2 of 2015, Nutmeg builds investment portfolios based on customer’s attitude to risk on its digital platform. Research by Oxford Economics supports Burbridge’s assertion that London has become the FINTECH capital of the World, at least in terms of employment, with more people employed in this sector (44,000) than any other city worldwide. So whereas London may not be as liquid (cash rich) and as risk tolerant as Silicon Valley, the digitalisation of finance is more comprehensive in `the city` as opposed to `the Valley.`
There are also a number of accelerators that have been put in place by the UK government to encourage investment in London’s digital economy. The introduction of R&D tax credits the entrepreneurs’ VISA system have been supportive as well as the exceptional talent VISA designed to entice tech workers to the UK although the latter has come in for criticism as being too stringent.
But perhaps one of the most important factors in making London a brilliant technology city is something that makes any city vibrant and that is its people. And in the case of London it is the diversity of its people and its multiculturalism that contributes to the city’s attractiveness as a destination for digital start-ups. The amazing ethnic diversity that London offers is a key differentiator to almost any other global tech hub. Data from the 2011 census paints the picture of a city where 40% of the population classified themselves as an ethnicity other than white, where 12% of the population stated their religion to be Muslim and where 30% of the population holds a passport other than British. A report conducted by Wayra UK surveyed 240 start-up founders or management team members about their backgrounds, team composition and personal views. 82.5% of individuals surveyed agreed that diversity helps teams bring new thinking to their firms and 97.1% of the same individuals are open to working in diverse teams. Senior members of UK venture capital (VC) funded start-ups are “10 times more likely to be from any another heritage other than white or Asian than similar VC-backed companies in the US. This diversity is qualitatively reflected in London’s tech ecosystem. From high-profile entrepreneurs like Ismail Ahmed, the Somali-born founder of WorldRemit, now valued at $500m (£315m), and Jose Neves, Portuguese-born founder of the $1 billion-dollar fashion unicorn Farfetch, to the Honduran and Indian-born partners running the start-up capital company Seedcamp, Carlos Espinal and Reshma Sohoni. Like with the rest of the city, the tech ecosystem has a blend of British, Italians, Turks, Nigerians, Indians, Pakistanis, Brazilians and Romanians in its mix. And this level of multiculturalism is a key contributor in making London a global technology hub a view supported by Christian Hernandez Gallardo, co-founder of White Star Capital when he noted in a recent interview, ‘The level of entrenched diversity in London is an attribute that few other major technology hubs across the world can easily emulate.’