London’s lead in tech is at risk, warn start-ups
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK tech sector reacted with shock at the demise of Tech Nation, an industry body once regarded as key to nurturing British start-ups, until the government withdrew its funding.
For many entrepreneurs who had passed through its programmes, the move in January to instead hand grant money to Barclays bank after a competitive tender felt out of keeping with the stated ambitions of Downing Street.
These had been all about fostering a vibrant tech scene that would underpin British successes in industries such as life sciences and fintech. Now, founders are concerned that warm words over the importance of tech from chancellor Jeremy Hunt are not being backed by policies and financial incentives, at a time when they face post-Brexit challenges over staffing and EU market access.
Many are uneasy over government plans to scale back the R&D tax credit support that has been widely used by British start-ups, and warn that funding gaps exist when companies reach a certain size.
The UK public market is also seen as less attractive than that of the US when tech companies seek to list. That was demonstrated earlier this month when SoftBank opted against a dual listing for its Cambridge-based chipmaker, Arm, and chose a single primary flotation in New York.
The worry is that London will begin to lose its edge at a time when rival cities are doing more to nurture start-ups and fast-growing companies.
Tim Levene, chief executive of the publicly listed venture investment company Augmentum Fintech, says London has proven to be “extraordinarily resilient” since Brexit. But he notes that other cities are becoming more of a “competitive threat” and, as a result, “there needs to be a recognition that others are catching up.”
Tom Wehmeier, partner at venture capital firm Atomico, agrees “London is not the only game in town”. He says: “Other tech ecosystems have flourished across Europe. The data shows that talent and founders have more choice than ever to pick the most favourable conditions to start and scale their companies. This creates huge incentives across the region to build an attractive offer.”
London’s current standing as a European tech hub is clear in the FT1000 ranking: it is home to almost a tenth of the region’s fastest growing companies and more than twice as many as its nearest rival, Paris. But, in a blow to the British government’s levelling up ambitions, the UK itself trails behind Italy and Germany in terms of numbers of fast-growing companies, emphasising the importance of the capital to the country’s tech sector.
Hussein Kanji, partner at Hoxton Ventures, which has invested in British start-ups including Deliveroo and Darktrace, says that London in particular had become the “de facto centre for tech in Europe”. The worry at this point, according to investors and founders, is whether the UK capital can maintain this position.
Atomico research shows that the 352 “unicorns” — tech companies worth more than $1bn — that have been founded in Europe were created in more than 120 different cities across 29 countries. Wehmeier says this illustrates how tech companies no longer need to be rooted in a single centre, and are quickly establishing themselves in cities such as Milan, Madrid, and Bucharest.
Paris has emerged as a leading rival centre for tech in the past few years, he says, spurred by recent efforts by the French government to attract business to the country’s tech hubs.
“London is dominant in terms of the number of tech companies — and especially if you look at the number of ‘unicorns’,” says Manish Madhvani, co-founder at tech investment group GP Bullhound. “But France really is getting its act together.”
Voicing fears held by many in the UK capital, he says there are bigger problems for London in sustaining companies at the latter stage of their growth, when they are seeking to list on public markets.
“There is a dramatic change at the £5bn-10bn mark, when the UK really plateaus out,” says Madhvani. “The UK needs to get better at creating companies of scale. At the moment, a lot of our best companies go to list in the US — it shifts the centre of gravity from the EU to US. It’s the missing piece of the jigsaw.”
Other tech investors have told the FT they would not recommend listing their portfolio companies in the UK, where there is not as much analyst or investor support as in the US.
“We need to get the public markets working, and that means a lot more investor expertise, a lot more analyst coverage and emphasis on risk,” says Madhvani. “We are matching the US for growth funds but the UK lacks a deep understanding of tech.”
The UK government has launched a series of reforms to its financial services rules that are designed to add to plans already being put in place to streamline the listings regulations, under a review by Lord Hill.
Still, some worry that these are moving too slowly, and will not address the problem of a reluctance among public investors — such as overly conservative pension funds — to back fast-growing firms.
Tech entrepreneur Brent Hoberman says the government — as well as opposition parties — are “very attuned to the fact that London needs to be made more attractive for growth companies”, but he adds: “There is a ship to be turned around. The structural reforms proposed are all positive but we don’t have enough growth investors in public markets.”
However, he says the fact that Westminster stepped in quickly to resolve the UK situation around the failed Silicon Valley Bank “helps with the perception that the government is ready to add action to its supportive words for the tech sector”.
Madhvani says “the UK now leads a European growth equity scene as strong as the US, but too few of Europe’s most successful companies choose to list here. It’s still too difficult to list in the UK, and companies can’t currently achieve the valuations they can in the US.”
The US simply has the scale needed by successful tech groups, says Kanji. “The growth market is the US,” he stresses. “You won’t become the next Google by ‘winning’ in the UK.”
Brexit also remains an issue, with entrepreneurs raising worries over their ability to attract talented staff from the EU, despite a tech visa scheme that had been overseen by Tech Nation. Executives question who will take on this responsibility.
Not everyone is pessimistic, though. Many regard the UK’s exit from the bloc as, at worst, a “slow puncture” rather than a “cliff edge” — although there are signs that business, people and assets are shifting out of London.
Ministers are confident that they can use their ability to set laws and regulations outside of the EU as a chance to streamline onerous rules and free investment into tech. But, for many in the sector, the time has come for Westminster to deliver positive reforms. “There is a friction from Brexit without seeing the benefits yet,” says Hoberman. “That’s the challenge — turning it from a headwind to a tailwind.”
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