BLaO was commissioned by European Commission and Cluster 55 to study characteristics of why London attracts talent and investment and makes it a dynamic hotspot for future mobile investment from the EU. We have had discussions with important and influential people behind the tech scene in London to understand and analyse:

What makes London a ‘hot spot’?

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

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 in Silicon Valley has been collaboration between Universities, startup 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.

Tech City map by Trampoline Systems 10 years ago Hackney and Shoreditch were a ‘no go’ area. The area around Old street was cheap to live in and therefore attracting a young creative crowd. They turned the area into a fun place to hang out, home to the coolest pubs and clubs. Start–ups spotted the opportunity of getting a cheap desk space. Shoreditch soon started to attract other crowds with money and gentrification is now transforming Shoreditch 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 it with other cities such as Berlin.

Co-working spaces and accelerator programmes

To meet the demands of start-ups who can’t afford to pay for their own office, the concept of co-working space has been proven successful. Co-working offices are offering affordable desk space in a shared collaborative environment. Entrepreneurs are not alone anymore and can support each other. Examples of co-working spaces are: The Hub, Tech hub at the Google campus, Central working and Rainmaking loft. 

Accelerator programmes are designed to rapidly grow new start-ups through support via mentorships and seed money. Examples of accelerator programmes are: Start-up boot camp, Seedcamp, Wayra, and Tech stars. Tech stars U.K is the Techstars U.S first establishment outside the U.S, based at Warner Yard, who also hosts an angel investor network and UKTI. Clusters and co-working spaces have to a degree managed to bridge the gap between entrepreneurs, investors and potential customers and made it easier to access key people who normally are difficult to reach.

Angel investors have also started to collaborate. Warner Yard has an angel investor floor. Federico Pirzio-Birolli, Founder at Playfair Capital says ‘It has simplified the communication between angel investors and sometimes makes it easier to syndicate. Business angels might think it would be competitive but it 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’.

New clusters

The London Silicon roundabout effect is starting to spread and spillover 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 an artist dense area is a strong candidate. The area around Greenwich, recently rebranded as the “Greenwich Peninsula” with Ravensbourne College as a driving force, is another candidate.

Collaboration between start-ups and big companies

It has been proved that clusters increase the value for both start-ups and big 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 fortune building it in-house. This may explain 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.

There is still much to do in terms of getting early start-ups in front of big companies, with access to customers. Big companies still sometimes have an arrogant 80’s corporate attitude, thinking they are too important to speak to a small player in the market and are also moving slowly on innovative opportunities from start-ups.

User-friendly technology attracts a new breed of entrepreneurs.

Mobile apps have become part of everyone’s life and the market is growing exponentially. Web and mobile technology have become easier to understand and more user-friendly, and are therefore attracting a new breed of people, without previous tech expertise to explore the tech start up scene. This brings more of both good and bad entrepreneurs to the digital playground, sometimes with more quantity than quality. The focus has probably moved slightly from innovative  technology based solutions, to innovative niche marketing solutions. 

Bridging the skills gap

It is very difficult to find skilled tech talent who are willing to take a risk, such as senior developers and CTO’s. They are often picked up by established companies who can offer great salaries and benefits. Silicon milk roundabout, a matchmaking event for start-ups who need developers, is one attempt to bridge the skills gap. 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 volunteering programmers teaching primary children to code.

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 to 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 seem to be taking calculated risks before starting up a new venture. It comes sometimes 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. 

Government support

The Government has realized 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 such as SEIS (Seed enterprise investment scheme) and EIS (enterprise investment scheme) allowing private investors to invest in start-ups and get substantial tax breaks has given access to more investments for seed and early stage companies. The downside is that it also attracts less experienced or not so passionate angels, who are just interested in the tax break. 

Lack of support from the financial market

There is a positive spirit in the London tech start up scene, but the start-up space is also crowded with many startups in need of getting to the next level, attracting critical mass, acquiring enough paying customers and/or being able to raise enough Series A investment to be sustainable. The start up boom needs to see IPO’s soon. Leading up to the IPO’s there will be a huge demand for substantial investment. London is a global financial powerhouse, but 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. In the U.S the culture of taking risk has fostered an appetite for risk and high ambition. 

Importance of success stories and new learning

Success stories contribute to building 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 example how new business models work, how to distribute a new software service or how to raise investment. The London tech scene has seen success stories such as Last.fm, Tweetdeck, Songkick, Last minute.com, Mooshi monster and Love film. We need to see more of those success stories and create an arena to share the new learning back into the start-up community for it to become a new Silicon Valley. 

Thank you to all the interviewed:

Federico Pirzio-Birolli, Founder at Warner Yard and Investor at Playfair Capital. 

Simon Devonshire, European Director of Wayra and Angel Investor.

Christian Ahlert, Founder of the Tech Community Minibar. 

Trevor Dorling, Assistant Director Employment & Skills, Greenwich Council.

Russell Buckley, Advisor for the UKTI and Investor at Ballpark ventures.

Carsten Kølbek, Founder, Rainmaking Foundation.

Additional input has been given by:

Mike Bradley, Business Innovation, Implementation and Optimization Consultant.

David Cobb, Partner, Deloitte.

Karen Drake, Finance Manager at Spike Island Artspace.

Tom Tomkinson, Creative and Business Mentoring Consultant at Keywork design. 

Richard Adams, Senior Academic Programme Manager at Microsoft Studios.