London has many of the ingredients required for becoming the next startup hub. But it also has many structural problems that will prevent it from growing as fast as other centers, such as Tel Aviv.
I moved to London in early 2013 excited about creating a strong product development centre for Yahoo, in one of the hottest startup cities in the world. I am still hopeful we can still shape London to become such hub. But it requires a significant and non trivial amount of work from the UK government. This is a critical issue for the future of any economic power in the world that wants to be a global leader in the 21st century.
Since I moved to London, now over half a year ago, I have been talking to entrepreneurs and investors about London, and not just London folks but also investors in Israel, the East Coast and Silicon Valley. I have also met with many companies across Europe in the context of corporate development at Yahoo. There are two large themes that shape why I think London requires substantial investment in order to become a leading startup innovation center.
First, technology is eating the world and software specifically is creating a revolution of how we understand the agricultural, industrial and services sectors. Software has the ability to disrupt existing business models, and rather often also to create new ones, much faster than ever before. The type of innovation possible with only software is unprecented and the speed at which a new disruptive business model can be scaled today compared to 15 years ago is at least one order of magnitude bigger. In fact, the boundary of innovation is now becoming the availability (and scarcity) of data and scientific modeling to structure data, and not necessarily software itself. Large amounts of data and powerful software computing platforms, a combination popularly coined under the term “big data”, is allowing humans to change the face of the earth as we know it today.
Second, startup companies are the engine of the economy. They create true, i.e. non-speculative or financially engineered, new wealth and drive the GDP growth for countries in the mid to long term. Any economy that wants to grow fast globally now needs to consider how to enable a powerful world of innovation with startups as the root ingredient. Innovation from large multi-nationals is still very helpful, since the scale of these companies amplifies the impact of new ideas when put into the right environment. But in general most large companies fail to cannibalize themselves in order to create “the next big thing”, and only startups are naïve enough to dare and perhaps even sometimes crazy enough to try.
The UK government is asking how they can help get onto this engine of growth for the 21st century. We hear surprise and see puzzling faces when I mention that London is not working out, followed by questions as of how London could become the next Silicon Valley. The best UK engineers and entrepreneurs leave to go to the Bay Area. Honestly, nothing else matters, tax, funding, etc. Whilst such talent exodus continues to happen, the ecosystem will never work. I hear reports of great successes in London, but little is spoken of the larger structural challenges we face. I am not arguing that I have all the answers, not even part of the answers. But it’s clear that we are at a point where there are still more questions than answers, and we need to start the social debate from entrepreneurs, investors and citizines formulating those questions, around talent, funding, market, exit, …
Specifically, to spark the debate, these are macro issues that I am seeing:
- Small funds, small bets, none really significant enough and driving the cost of capital to be higher, especially during early stages.
- Investors reward average returns and lack the risk profile for early startups. Therefore there are no big runs.
- Entrepreneurs, if they are good, they are no longer in UK. If they succeed, they build lifestyle businesses. Again, no big runs and VCs are in fact happy that their money is not lost.
- Talent is not just raw talent. Not even academia. Large corporate technology companies are training grounds for the next gen of startups. But London does not attract the right target companies with the best tax incentives available in the world. Socially, giving such advantage to large foreign corporations is not accepted.
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