January 28th 2016

London — the historical center of innovation is only now catching up

ngland is where it all started. James Hargreaves — a weaver living in Lancashire, had built was is now known as the Spinning Jenny in 1764. The device enabled its operator to spin eight threads at once, revolutionary at the time. Following on, in 1769 James Watt greatly improves the steam engine which makes it usable in trains, steamboats and factories. The industrial revolution is set in motion and the world starts moving away from hand production methods to machines. Whole industries are revolutionized, destroyed and created, millions are re-trained to adapt to the new technology and the foundations are laid for a modern civilization. Years later, Charles Babbage conceptualized the first designs for a general-purpose computer that could be described as Turing complete. Unfortunately, the British Government ceased funding and the project was never completed. In 1936 Alan Turing laid the foundation of the digital computer in his seminal paper On Computable Numbers.

Here we are today, at the cusp of the Information Age with the invention of the internet. History is repeating itself as IT has become an all encompassing part of every industry and our daily life. Tech has become one of the hottest sectors in the global economy, and there is no sign of it cooling down — Facebook’s earnings are beating every expectation and Apple is well on its way to becoming a trillion-dollar company.

London — the hub of the industrial revolution and the precursor of the information Age has seemingly lost its steam. Silicon Valley is now the poster child of the tech revolution. Silicon Valley works because there is such a high density of people working on start-ups and they are inclined to help each other, which is crucial. Other tech hubs have this as well but this is a case of Metcalfe’s law — the utility of a network is proportional to the square of the number of nodes on the network. Silicon Valley has far more nodes in the network than anywhere else. So what is London’s tech environment like?

London’s tech ecosystem is in its infancy. When compared to Silicon Valley, it has 20 years of catching up to do. In London the difference and risks associated between a brick-and-mortar business and online is still not fully understood. Furthermore, although being a large city, the tech ecosystem is relatively small — mostly found in Shoreditch. The world of start-ups benefits tremendously from network effects — to replicate Silicon Valley you would need an area where many ambitious people care most about start-ups and technology, and a focus on long-term compensation. In London, finance and real estate dominate the conversation. If start-ups are not the priority, it will be challenging to replicate the environment of Silicon Valley.

The focus in Silicon Valley on long-term compensation is also important. Nearly everyone wants to get rich but they’re willing to wait to do so. Conspicuous consumption isn’t that cool; not too many people drive Ferraris or talk about their vacation homes. Unlike London where people are mostly focused on cash compensation for this year, in Silicon Valley more people talk about equity than salaries. A focus on making a lot of money in the long term at the expense of short-term opportunities is essential to building companies that have a huge impact — they take a long time. On top of those ‘structural’ issues found in London, there are numerous other factors that play into the slow development of London’s tech scene.

Suzanne Noble, the founder of Frugl which is based in London is part of its tech scene and is able to provide valuable insight.

· Networking events — while useful elsewhere, in London it is rife with people pretending to be investors, giving advice, and then trying to charge a London-esque consultancy fee.

· Lawyers and accountants — having experience with mostly larger established business, know little about the intricacies, tax relief schemes and modus operandi of tech start ups. They end up charging exorbitant amounts, and you end up doing a lot of the leg work.

· Ageism and Sexism — both are rife in the city and attributed to the old-boys network that exists throughout most industries in the London. Women and younger entrepreneurs are looked down upon and not treated with respect- this directly reflects on their chances of getting funded.

· Accelerators and Incubators — London is full of them. Most are mediocre to very poor and may take equity or stock options out of all proportion to what you get in return. There just aren’t enough been-there-done-that people around to run all the incubators and accelerators that London offers. The ones that are any good are massively oversubscribed.

· Tech-talent — the cost of finding and hiring a good local team is very high as the demand significantly outweighs the supply. The government’s plan to loosen up visa requirements for suitably qualified candidates should help in the short and medium term, but only a greater emphasis on training will sort out the problem in the long term.

· Seed Enterprise Investment Scheme — This provides investors in early stage businesses with 50% tax relief on their investment, together with other longer-term benefits. The scheme has created a tech ecosystem that focuses on early stage revenue over innovation. It’s also capped at £150,000.

· Fundraising — It can be incredibly hard to raise funding unless you have a background in the city, or you have a close connection to someone who does. Closing a SEIS round may be relatively easy, but the funding gap that exists between £250,000 and £1 million in Silicon Valley is a problem — one that doesn’t look like it will be solved anytime soon, even with incentives such as the London Co-Investment Fund. With early stage investment based around tax relief, businesses struggle to find follow-on funding. There just isn’t the money to go around at that crucial time when most businesses need it to grow and achieve critical mass.

One thing is clear — London will never be able to emulate the success of Silicon Valley, nor should it try to. There are fundamental differences in the ecosystem, culture, focus — and London is very late to the race. Nevertheless, the tech sector is growing rapidly around the globe and that can be clearly seen in London too. Never mind all the comparative burdens that London’s start up scene is facing, it is growing at an increasingly fast pace and the status quo is shifting. With companies like CityMapper, TransferWise, Funding Circle and Deliveroo we are on our way of witnessing the birth of London-based unicorns. The growth and development that comes with these successes as they become household names in the UK is tremendous. It will be interesting to see how London’s tech sector develops, being the historical forerunner forerunner of innovation — it has a good track record.