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CASE STUDIES:

London – What makes London a ”hot spot”? 

Martin Malii Karlsson

London is attracting people from across the globe. Some factors that are contributing to the London status as a World city and making it a good place to be are:

• it's location in the centre of the world's times-zones.
• it's leading global financial centre.
• it's high density of multi national companies.
• it's English-speaking language, the language of the tech industry.
• it's rich mix of different cultures- it's many renowned universities.

Mapping of the London technology scene

The London Silicon Roundabout

   Strategic organisations in the U.K have undertaken research to understand what is happening in Silicon Valley and how to replicate and adapt a Europe­an model that would work for London. A recipe for success, has been collaboration between universities, start up communities, mature businesses and VC's.

   The London tech scene have recently seen a number of clusters emerge, the most prominent one, the 'London silicon roundabout', is located around the old street roundabout, in Hackney in East London.

   Rewind 10 years and Hackney and the Shoreditch area were a 'no go' place. Christian Ahlert, Founder of Minibar, U.K's largest tech communities with 7,000 members, says that area around Old street was a cheap place to live and therefore attracting a young creative crowd, who could afford to rent a place in the area. They turned the area in to a fun place to hang out, home to the coolest pubs and clubs. Start-ups spotted the opportunity of getting a cheap desk space. The area started to become attractive and other crowds with more money who invested in the area. Gentrification is now transforming the area into a very expensive area. Google is currently developing a plot of land in the Kings cross area for $ 1 billion to establish their new office. This operation inspires others to follow, such as Amazon, Salesforce, Microsoft, Twitter and Facebook. Facebook set up their European development office in London after comparing with other cities such as Berlin.

Co-working spaces and accelerators

   To meet the demands of start-ups who still want to be in the area, the concept of co-working space has been proven successful, offering affordable desk space in a shared collaborative environment. Startups are incubated at co-working spaces and accelerator programmes such as Tech hub at the Google campus, White bear yard, Central working and Tech stars the U.S accelerator programme.

   Tech stars U.K is the first establishment outside the U.S, based at Warner Yard, who also hosts an angel investor network and UKTI. These hubs are entrepreneur friendly, adding more value to the start-ups by offering mentorship and incubator services for a small member fee and sometimes seed money in return for equity.

Access to key people

   Clusters and co-working spaces have managed to bridge the gap between the start-up community and big companies, making it is easier for key people to meet. Regular events are organised around themed topics such as innovation within specific industries; mobile, advertising, music, tv/film, big data, how to raise investment, how to find the right skills and how to protect IP.

Collaboration between corporations and start-ups

   It is proved that clusters increase the value for both start-ups and established companies. London has a very strong TMT industry and in a fast paced digital market big companies are struggling to innovate and adapt fast enough to satisfy the market need for new products and services. This is a brilliant opportunity for innovative lean startups that can quickly adapt to changes and build products fairly cheap to meet this demand. Big companies with the financial power are looking to acquire products and solutions at the right stage, rather than spending a fortuně building it in-house. This explains why some startups are building products without making revenues, with the aim to make an exit/buyout from a financially strong company. This strategy comes with a very high risk, very few startups actually succeed being acquired, leaving them often in cash flow problems because of the lack of a sustainable business model.

   Angel investors have also started to collaborate, Federico Pirzio-Birolli, Founder at Warner Yard share his view on the benefits of clusters and being around the silicon roundabout. 'It has simplified the communication between angel investors and sometimes makes it easier to syndicate. Business angels might think it would be competitive but is has actually become more collaborative; we are not alone in investment rounds anymore. It works well as an angel cluster, but I think bigger VC's or traditional investors are still afraid of this'.

Importance of success stories and new learning

   Success stories contribute to build up confidence and a 'we can do it attitude' for new ventures. It also contributes by feeding back new learning to the start-up community, for an example how new business models works and how to distribute a new software service etc. The London tech scene has seen success stories such as Last.fm, Tweetdeck, Songkick, Last minute. com, Mooshi monster and Love film. There is still need to be more of those success stories and an arena to share the new learning, for it to become a new Silicon Valley.

New clusters

   The London Silicon roundabout effect is starting to spread to other locations in London, who are jumping on the trend of building clusters and setting up hubs for entrepreneurship and innovation.

   When rental prices are rocketing in the Shoreditch area, people are speculating where the next hot area will be. Hackney Wick, close to the Olympic Park with new infrastructure in place and the most artist dense area in Europe's per sq meter is a strong candidate. The area around Greenwich, recently re-branded as the "Greenwich Peninsula" with Ravensbourne College as a driving force, and the 02 centre is another candidate.

User-friendly technology attracts new tech entrepreneurs.

   The fact that technology has become easier to understand and more user-friendly, has attracted a new breed of people, without previous tech ex­pertise to explore the tech start up scene. Before the focus was more on the technical solution, today the focus has changed towards a broader perspective of problem solving for and example within health care or how to find new communication and analytic tools. Mobile apps have become part of everyone's life's and the market is growing exponentially.

Taking a planned risk

   People in London have previously been very risk averse, due to the high living expenses and the fear of failure. One factor that has contributed in the increase of start-ups has been the turbulent job market, where secure employment and permanent contracts are less common. This has forced people to adapt and become more flexible in their employability. More people decide to freelance as sole traders. The attitude towards entrepreneurs and being a start up has also changed to a much more positive view. London entrepreneurs still seems to be taking a calculated risk before starting up a new venture. It comes with the benefits of being more prepared as a start-up. Good planning gives a start up a better chance to survive the critical start-up phase and grow into a sustainable business.

   Simon Devonshire, European Director of Wayra, a start up accelerator programme owned by Telefonica, confirms that Ireland and U.K produce a lot more entrepreneurial talents, compared to for an example Spain. The current insecure economic climate in Spain can explain why less people are willing to taking a risk starting a business there. One of the benefits joining the Wayra community Simon says is that once your idea has a brilliant customer proposition, Wayra can offer access to a huge customer base.

Government support

   The Government has realised the value of the Silicon roundabout cluster and its positive effect on the London start-up scene. The new Governmental initi­ative Tech City is now supporting the Silicon Roundabout and has announced a £50M investment into the area to boost the U.K economy. Tech City's role is to promote the Tech City cluster and attract foreign direct investment. A vision is to guide a significant number of mature start-ups to IPO's.

Governmental support as SEIS (Seed enterprise investment scheme) and EIS (enterprise investment scheme) allowing private investors to invest in a start-ups and get substantial tax breaks has given access to more investments for seed and early stage companies. Federico thinks that SEIS and EIS have been great but also to a degree attracted not so experienced or passionate angels that just want the tax break.

The challenges

Support from the financial market

   There is a positive spirit in the London tech start up scene. To keep the competitive edge there are challenges that needs to be addressed. The market is crowded with start-ups in need of getting to the next level, attracting critical mass, acquire enough paying customers to be sustainable and be able to raise enough Series A investment. Federico confirms that there has been a start up boom that needs to see IPO's soon. Leading up to the IPO's there will be a huge demand for series A investment. At the moment there is a lack of investments in the region of £500K to £4M.

   London is a global financial powerhouse, but there are views that the wealth of the London financial markets doesn't support the tech sector in London and the U.K enough. In comparison to other countries such as Israel and U.S relatively small investments go to R&D, start-ups and early stage companies in the tech sector. The average M&A deals are much lower in U.K (£40M) than U.S (£160M) and rest of EU and Asia (£110M)

   Factors that could explain this is that for an example in the U.S the culture of taking risk has fostered an appetite for risk and high ambition. In the U.K there is still a degree of people being risk averse and afraid of failure. More success stories in U.K start-up scene will help to change this behaviour. Tech City is lobbying for Foreign Investments, Foreign investors. Wealthy U.S angels have started to look outside their own border for lucrative investments. There is a knowledge gap to bridge between new wealthy U.S angels and U.K tech start up's in need of investment.

Bridge the skills gap

   There are difficulties in finding skilled talents who are willing to take a risk, such as senior developers and CT0's. Senior developers are often recruited by established companies who can offer them great salaries and benefits. Initiatives such as Silicon milk roundabout, Minibar labs and Tech meetups. com organize match making events for start-ups who need developers. The need for new technology skills have been taken on board by the U.K education policy makers who are adding coding skills to the curriculum with initiatives such as the Code academy who has volunteer programmers teaching primary children to code.

Other

   UK companies may miss out of opportunities from EU because they are not aware of EU's investment schemes, perhaps due to the governmenťs resent-fulness towards EU and it's policies.

   Incubators and businesses that are offering to help start-up's, are flooding the market and it has become an industry of its own.

  Voices from other creative regions are worried to lose out on necessary investment opportunities if a number of exclusive hotspots are becoming the focus for European support initiatives.

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