There were two contradictory reports last week: Brexit is making UK start-ups move to Europe. And London will remain the tech hub of the world. They cannot both be right: so which is it? Will Brexit and the UK’s increasing isolation from Europe mean that the brightest and best choose to start their businesses in Berlin, Paris or Lisbon? Or will the UK’s pool of talent and access to capital see it remain the very best place to start a tech business?
According to a story in City AM last week, increasing numbers of tech start-ups are planning to set up a European operation as the UK moves closer to Brexit. One in four UK companies plans to launch their business outside the UK – up from one in five this time last year. In addition, 14% of entrepreneurs are considering moving their headquarters to Europe, compared to 11% a year ago. The figures come from an annual survey of more than 1,000 start-ups, carried out by Silicon Valley Bank.
“Reading between the lines and what we have heard anecdotally,” said Erin Platts of SVB, “Many start-ups are looking to expand further away. [It would be] rare to see a UK-only company.”
The UK branch was the first that SVB had opened outside the US – and advocates of London argue that it is this access to capital that makes London the place for start-ups and tech companies to thrive.
London is the place to find money
What tech start-ups need more than anything is money – very often, lots of money. And for a millennial entrepreneur who does not have any security – and whose parents may understandably be unwilling to put the family home on the line – that means finding outside investors. UK clearing banks do not lend money against the security of an idea, or an app that has lost £100,000 in its first year of development and now needs another half a million.
Last Autumn we reported on an article about Europe’s tech capital being ‘Balkanised’ – it rarely crossed political borders. Investors were happy to fund projects in their own countries, but rarely funded projects in other countries. As the article shows, the UK attracts far more overseas tech investment than Germany or France, notably from the US and Asia.
Access to capital is the key reason why London retains its place ahead of cities like Barcelona, Paris and Berlin as the number one place to start a tech business. The UK is home to 58,000 technology firms, with a new technology company founded every hour. Perhaps more importantly, London has seen more direct investment in venture capital than Germany, France, Spain and Ireland combined. Foreign investors want to invest in UK technology – London attracts three times more foreign investment than Paris and four times more than Berlin.
But surely any tech start-ups should move to Silicon Valley?
According to Marten Mickos, a Finnish serial entrepreneur who founded MySQL in his garage and sold it to Sun Microsystems for $1bn, the answer is simple: forget about Europe and move to Silicon Valley. “The market is there, so are the investors and firms who are willing to experiment with new technology.”
According to the figures, one in seven European technology companies who have raised between $1m and $100m since 2010, moved their headquarters to the US. But that still means that six out of seven stayed in Europe and for now, London is their preferred destination. After all, both Google and Facebook have recently committed to major new office buildings in the capital.
Long-term threats to London
There are two potential long-term threats to London’s pre-eminent position in Europe (let us ignore the Government’s fanciful talk about London being ‘the tech capital of the world:’ it is not going to overtake Silicon Valley).
The first is the developing world – and in particular, the Far East. The International Monetary Fund predicts that over the next two decades 90% of global growth will be generated beyond the borders of Europe.
Next month will see the GREAT Festival of Innovation in Hong Kong. Many UK business will be represented there – but they will clearly be outnumbered and over the next 10 to 20 years it is not hard to see the focus of innovation and technology outside the US moving to cities like Shanghai or Hong Kong – or Delhi or Bangalore.
The second threat is taxation. We have written previously about a 20th Century tax system trying to cope with a 21st Century economy. If the UK seeks to impose draconian taxation and restrictive working practices on tech companies with worldwide earnings, they will simply pack their bags and move elsewhere.
London does not have a divine right to remain the ‘tech capital’ of Europe. It will need continuing support from the government and local authorities to make sure the UK continues to prosper as the future of technological development moves increasingly to the developing world.
Meanwhile what about the tech giants?
…Those companies that were once tech start-ups and are now an integral part of everyone’s life. Amazon, Apple and Google are locked in a tussle to become America’s first trillion-dollar company. They have come a long way since they were founded in the proverbial garage. But who will get to a trillion dollar valuation first?
For Amazon, much depends on the success of the iPhone X: Amazon may be held back by its continuing huge spending – $4bn this year on Prime TV as it continues to battle with Netflix – while Alphabet (Google’s parent company) needs to do more than simply rely on advertising. Opinions differ on which of them will reach the ‘trillion dollars winning line’ first – but all analysts agree that one of the companies will do it, and probably this year.
They are all approaching a trillion dollars thanks to continuing investment in innovation and technology and, for many of us, nowhere has this been more evident than in ‘Alexa,’ Amazon’s voice-activated home assistant.
Jeff Bezos, the founder of Amazon, was full of praise for the Alexa technology. “Hmmm… I’m not sure about that,” as the Alexa in our kitchen says all too frequently. Yes, she can indeed tell you the distance to the moon but we have had her six months now and – bluntly – she has been more difficult to train than the dog. Like, I suspect, the majority of people who now use Alexa as nothing more than a flashy timer. “Alexa! I’m cooking chips. Timer, 22 minutes.” But maybe there is light on the horizon. Amazon has just e-mailed me. Apparently, if I ask nicely Alexa will pay me a compliment. Just what I need! Cleary Alexa knows I have been married for 20 years and have teenage children…