Can Tech City Build Billion- Dollar Businesses?

Tech industry veteran Joanna Shields helped Google and Facebook grow their businesses in Europe but what really cemented her fame in London was an earlier career move: orchestrating the infamous sale of social networking site Bebo to AOL, the city’s largest consumer Internet exit to date. Shields’s experience at a high-growth start-up and her track record as a successful exec at some of Silicon Valley’s digital giants make her an unlikely draftee for a government post. But it is not hard to understand why she was wooed. She thrives on helping companies scale. “$500 million to $1 billion is my sweet spot,” quipped Shields, during a wide-ranging February 19th conversation with Informilo — her first one-on-one interview since taking over as Chief Executive Officer and Chair of the UK’s Tech City Investment Organisation and the UK’s Business Ambassador for Digital Industries. (Shields is a scheduled speaker at London Web Summit, taking place on 1 March 2013.)

It is one of the prime reasons she was tapped for Tech City’s top job. Over the past two years, the number of Internet-based companies located in the Old Street area of Tech City, east London’s technology quarter, has mushroomed. Now, the focus is on helping the best of the bunch become much bigger businesses.

Rohan Silva, Senior Policy Advisor to British Prime Minister David Cameron, tells Informilo he encouraged Shields to take the job for two reasons: Her leadership skills and “her brilliance in scaling.” He explains: “London is at that inflection point where we have gone from 200-1,500 digital companies or so and now we are going to see a lot of companies scaling. Having Joanna there to help provide advise and support companies at that stage is really important.”

London has a whole raft of so-called “category breakout” companies in the pipeline that are still private and growing fast, including Wonga (financial services), Mind Candy (gaming), Just Eat (e-commerce), Badoo (social dating), and Spotify (music). A few are expected to IPO soon and an even greater number may list in the next 18 months. (See the list of London’s Top 25 hottest start-ups on pages 8 and 9.) If the companies do go public — and especially if they do so locally — the city could start to see companies on the scale of Facebook and Google headquartered in London, cementing its reputation as a top tech hub and creating tens of thousands of jobs, says Saul Klein, a partner with Index Ventures, co-founder and chairman of the start-up accelerator Seedcamp, and a scheduled speaker at London Web Summit

But first a few things need to be fixed. London now has four times the number of companies with revenues in the $10 million range than it did five years ago, at the time when companies like Skype and ASOS were gaining traction, says Klein. The question is how do these companies get to the next step. “What is really challenging is how do you go from $10 million to $100 million and then to half a billion. Very few companies outside Silicon Valley reach that velocity,” he says.

One issue has been lack of access to public markets. Since 2010, no European technology company has launched an initial public offer on the London Stock Exchange’s main market. The Nasdaq is seen as more attractive than the LSE because its rulebook accommodates companies with a free float — the proportion of tradable shares — as low as 10%. Currently London’s main market requires a minimum free float of 25%. Index Ventures worked with 10 Downing Street to address the problem. As a result, the London Stock Exchange is launching a new niche High Growth Segment market in March that aims to attract medium-sized businesses in the tech and other sectors that are valued between £300 million and £600 million.

The change in public markets is an important step. “It means our most promising companies are no longer facing a trade-off between listing in the U.S. or not going public at all,” says Shields. (See the full Q & A with Shields on pages 3 and 23.) But, she acknowledges, there is still lots more work to be done.

Without an analyst community that can understand, judge and measure these companies, it is difficult for any British or European start-up to get the same traction as their Silicon Valley counterparts. Take the case of Just Eat. Although it is not a strictly apples to apples comparison, Klein points out that Just Eat is larger and more profitable and boasts bigger revenues than Yelp, another company targeting local commerce. (Yelp, which is based in Silicon Valley, is a publicly-traded local directory service with social networking and user reviews.) The difference? “Yelp is a Silicon Valley darling,” says Klein, so it gets lots of buzz. And a bigger valuation.

It is little wonder, then, that UK companies — and many elsewhere in Europe — still see Silicon Valley is the place where they are most likely to hit it big.

Shields is determined to change that. “Earlier (in February) we took 80 of our best and brightest from across Britain to Los Angeles to meet American media and entertainment companies and potential investors. All of them are as promising, if not more, as their U.S. counterparts. All of them want to succeed and most of them would love to do it without leaving the UK,” says Shields. “Soon they won’t have to. The UK now offers one of the world’s most ambitious packages of policies, business incentives, tax credits, tax rate reductions and visa support. One by one, the government has been removing the obstacles to success for businesses and the people building them.”

Building the Ecosystem

London has certainly become a more attractive place to raise seed money through to IPO. Venture firms such as Accel Partners, Atomico, Balderton Capital, Index Ventures, Advent Venture Partners, and DN Capital are playing a key role in developing the ecosystem along with early-stage funds like Connect Ventures and Hoxton Ventures, a growing group of business angels, and Seedcamp.

Successful entrepreneurs, such as Skype co-founder Niklas Zennström and Brent Hoberman, co-founder of Lastminute.com, have started their own funds while others are enriching the ecosystem by launching new ventures. (Hoberman has done both and he helped Shields arrange the recent trip to the U.S. with the 80 start-ups).

“The very fact that Accel set up shop in London in 2000 was a big statement,” says partner Kevin Comolli, a partner in Accel Ventures’ London office. “Accel was sitting in the Valley — it didn’t need to come to London and Europe. It was a big acknowledgement that recognized that Silicon Valley did not have a monopoly on innovation and there was indeed an opportunity here even if the ecosystem was less developed. In the 13 years we have been here we have witnessed a sophistication of the ecosystem, including second- and third-time entrepreneurs and the recycling of valuable relationships.” For example, Accel was an investor in Playfish, which was sold to Electronic Arts. People who worked for the London office of Playfish have either started or are now working at 20 other start-ups in London.

To be sure, London has competitors. The Valley continues to drain Europe of some of its best companies and entrepreneurs. New York has similar strengths in retail, advertising, finance and media. And other European capitals, such as Berlin and Dublin, are stepping up efforts to attract start-ups.

But Klein, who has played a key role in helping build up London’s ecosystem, as the co-founder of Seedcamp, as a direct investor in some of the city’s tech stars, and as the first CEO of Lovefilm (see the story on page 2), likes to point out that London has a number of advantages over other hubs. “There still isn’t an entrepreneur’s visa in the U.S. nor the same incentives for angels and founders,” he says. What’s more, the Internet accounted for more than 8% of UK GDP, more than any other G20 nation, including the U.S. and China. The country spends three times as much on e-commerce as any other and double the amount on online advertising, one of the reasons why the online economy in the UK is predicted to expand more quickly than in the world’s two biggest economies, says Klein.

Since 2005, when Bebo was launched, London has been considered a social media hub. Today it is the only English-speaking city in the top 10 global cities for Facebook users and the number one world city for Twitter, says Klein.

And then there is the government, which, says Shields, is doing more for start-ups than just about anywhere else in the world. “Since kick-starting Tech City in 2010 there has been a huge amount of progress in turning East London into Europe’s digital capital,” she says. In December the government announced that it is putting £50 million towards regenerating the Old Street roundabout, to transform it into Europe’s largest civic space, dedicated to start-ups and entrepreneurs in East London. The new building will host classrooms, working spaces and workshops equipped with the latest 3D printing technology, for use by both the local start-ups and the wider community.

It is not all just show. Key changes in government legislation are attracting talent and money. And Internet giants such as Google, Amazon, Microsoft, Intel and Yammer have set up operations in the capital, further enriching the ecosystem.

East London has, in fact, come a long way from the days when Moo launched the first collaborative working space, playing host to a few future tech stars like Tweetdeck.

In the first nine months of 2012 the telecoms, media and tech sector acquired almost one million square feet in the City, an increase of 39% over the same period in 2011— and more space than the financial and insurance sectors combined, says Shields. It now has over 30 co-working, accelerator, and incubator spaces, and dozens of networking events and conferences are held every month.

Expect that number to increase substantially this April, when the Google Campus — a bustling seven-story building that is currently the key gathering place in Tech City — celebrates its one-month anniversary, says Ezequiel Vidra, manager of the Google campus. The campus regularly organizes about 40 events per week. It plans to go into overdrive for its anniversary. “It will be epic,” promises Vidra.

Vidra, who has lived and worked in Tel Aviv, New York, San Francisco and London, says he believes the campus has helped bring needed density to the tech networking scene in London. He likens the campus to the real estate equivalent of open source software that is there to power the ecosystem. “When you get all the smart people in one place you can succeed in creating lots of magic,” he says.

One of the positive impacts of the Google campus is that it is bringing start-ups together with a variety of big corporates.

Changing the equation

Connecting corporates with start-ups is key. If the Internet economy is worth more than 8% of UK GDP then the big corporates and the government ought to be doing at least that much of their business over the Internet, says Klein. He wants pressure brought to bear both by stockholders and business editors because if London’s start-ups can’t sell their wares to big European companies they will be at a disadvantage. Some are stepping up. British Gas, for example, was one of the first utilities in the world to embrace smart metering, buying technology from Alertme, one of the UK’s tech stars. And advertising giant WPP has been snapping up young companies as part of its quest to go digital (see the story on pages 10 and 11).

Still, U.S. corporations are far more likely to buy from start-ups and so is the U.S. government, thanks to the Small Business Act, a U.S. law which has been on the books since 1953 that aims to insure that a fair proportion of government contracts are placed with small businesses. The law has helped American companies, which already benefit from a larger, more uniform market, to scale more quickly, giving them the ability to outgun their European rivals and eventually buy them.

The UK government is doing its part to try to change the equation, says Silva. For starters, it is opening up government procurement. Until recently 95% of government contracts went to companies with more than 250 employees. The percentage of UK government contracts going to small companies has already moved from 5% to 15%. The goal is 25%, to try and match the U.S., says Silva.

Silva says cabinet ministers are now being put on the spot at weekly meetings and asked what proportion of the government contracts in their departments are going to small business. “If it is going in the wrong direction they are told they won’t be allowed to come back to the meetings until that changes,” says Silva. “We are being absolutely ferocious on this point.”

The government is also changing the way it buys technology. Instead of issuing multi-billion-pound IT contracts it is now biased towards giving smaller contracts and giving smaller companies the chance to bid. It is also seeking the input of start-ups before it even issues tenders. For example, the National Health Service has five big contracts coming up involving an IT system that will help people choose their doctors. “We are going out and asking SMEs how they would do it and what products they could come up with,” he says.

The challenge facing the NHS is how to improve patient care while reducing costs. The answer may lie in connecting the millions of pieces of patient data that are stuck in silos. Using linked data sets to create a holistic view of patients’ needs across health and social services could allow the NHS to pinpoint groups of patients who would benefit from preventative treatments, significantly cutting costs by reducing the number of patients who get sick, turn up in accident and emergency rooms or require long-term care. It also represents a huge opportunity for entrepreneurs.

What’s more, under the government’s “digital default” program, government transactions are moving online, presenting what Silva portrays as yet another “massive opportunity for innovative companies, particularly small companies, to sell stuff into government.”

The government is listening to the tech sector, says Silva. “The big push was on growth capital two years ago,” he says. “It was hard to come by in the UK but thanks to tax breaks that have been introduced that is no longer a problem.” Now the UK government is fixing the public markets and procurement, and bringing in Shields to help figure out other ways to help more companies become global powerhouses.

Klein says he is confident that the goal is attainable, if the tech sector and government focus on how to scale up. “What we need to do now is to place the most focus on growth and later stage,” he says. “We have an incredible crop of growth companies that could become true global leaders. The potential is there,” he says. “Now we need to make it a reality.”

The  Evolution of The London Tech Sector

1993 – 97 1998 – 2002 2003 – 2007 2008 – 2013
Great companies started 1993 – Moneysupermarket founded

 

1994 – Demon largest ISP with 5,000 subscribers

 

1995 – AKQA launched

 

1996 – Multimap launched

 

1998 – Lastminute.com launches

 

2000 –Net–A–Porter founded; ASOS founded; Rightmove founded

 

2001 – Betfair founded; Ocado founded

 

2003 –Lastfm, Lovefilm, Mimecast & King.com founded

 

2004 – Skype moves to London; Mind Candy & Moo.com founded

 

2005 – Bebo founded

 

2007 – Seedcamp & Songkick founded

2008 –Graze founded; Huddle founded; Wonga founded;Just Eat and Spotify move to London; Tweetdeck founded; Shutl founded

 

2009 – Housetrip founded. Onefinestay founded

 

2010 – Funding Circle founded

 

2011 – Hailo founded

Notable Exits and IPOs 1997 – Amazon acquires Bookpages which became foundation for Amazon in Europe and UK

 

1999 – QXL IPOs

2000 – Lastminute goes public

 

2001 – ASOS IPO in AIM

2005 – Lastminute bought by Travelocity

 

2005 – Skypesold to eBay

 

2006 – Rightmove IPO

 

2007 – Moneysupermarket IPO

 

2007 – CBS acquires Lastfm

2009 – Playfish sold to EA

 

2010 – Betfair goes public; Ocado IPO; Bebo bought by AOL

 

2011 – Twitter acquires Tweetdeck; Lovefilm sold to Amazon

 

2012 – AKQA acquired by WPP

Media & Community 1994 –Electronic Telegraph becomes the first major newspaper to go online

 

Cyberia – UK’s first internet café opens in Charlotte Street area

1998 – Freeservelaunches – UK’s first free ISP

 

2000 Boo.com goes bust

2003 – MySpace opens London office

 

2005 – Founders Forum launches

2007 – Facebook opens London office

 

Googleovertakes ITV in ad revenue

 

2009 – Silicon Roundabout is born (named by Moo tenant Matt Biddulph of Dopplr)

 

2010 – Silicon Milkroundabout developers’ job fair launched by Songkick

 

2012 – Daily Mail becomes world’s biggest English-speaking website

 

2011 – Silicon Drinkabout started by Michael Acton Smith; Jimmy Wales moves to London

 

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