The UK's new TechCity policy is great – but we'll also need the TechPeople

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This is a guest post by Tom Allason, founder & CEO of Shutl, a web-service that enables retailers to offer shoppers immediate/convenient delivery of online purchases. In 2003 Tom also founded eCourier.co.uk – the online courier company with the purple vans. In 2009 eCourier.co.uk reached #6 on Deloitte’s list of UK’s fastest growing technology businesses with 5291% growth since ’04. Tom is currently the Shell LiveWIRE Young Entrepreneur for London.

Yesterday I had the curious pleasure of being invited to join a panel at an event put on by No.10 to announce the launch of Tech City and the Government’s commitment to supporting technology based innovation. If I am honest, the highlight of the event was undoubtedly Bookingbug’s Glenn Shoosmith giving a forceful pitch/lecture to David & Boris, seated only a few yards in front of him, encouraging government to open up procurement to start-ups with his proclamation: “There is no tender process for innovation.”

The PM made a slew of announcements – all of which can be found in the government’s blueprint for technology… including a pledge to consider start-ups for government contracts. Job done Glenn! Not to be out-done, Mayor Boris took the podium and made several announcements too. Notably that the new cable car to connect O2 & Royal Victoria dock would be named after the coalition’s treasury secretary (Vince Cable – I think he was joking, just a guess) and that London would be the first European city to have 4G mobile networks (if you were to ignore those cities that already have it, of course).

All spin you might say. Well, perhaps. However the Government’s ambitions certainly seemed both sensible and genuine. Diversifying the UK’s economy away from financial services and toward the industries of tomorrow is not something to sneer at. It should be encouraged, and with the momentum East London is gaining we also have a unique opportunity.

In 2003 when I embarked on my first London start-up, East London was a very different place. For starters our rent in Brick Lane’s Truman Brewery was £6 per sq foot per annum (its now closer to £30). This was all the incentive needed for a startup short on capital. Back then there were not very many others- a far cry from the ‘ecosystem’ that we now hear so much about. Today you can’t swing a cat in Shoreditch without hitting a dozen start-ups. And even with current rents, I would not have considered starting my second startup anywhere else. I really do believe that we have the makings of something very special here and I am not alone. It is palpable. Hyperbolic politicians aside, we have a unique opportunity to create an environment worthy of being mentioned in same sentence as Silicon Valley. Let’s just try to make sure that we don’t cock it up.

My biggest concern is that too much attention is being given to solving the wrong problems. If you have spent any time around the UK’s tech entrepreneurs you would think that the single matter holding back start-ups is lack of access to bank debt and investment.

I disagree.

London is now the world’s financial capital. Banking and insurance aside, we even have the right kind of capital. After Silicon Valley, we have more VCs here than anywhere else on the planet. Financial capital is liquid and it goes in search of wherever it can make the best return. If UK start-ups are short on capital it is not due to lack of proximity to capital but because they are short on the risk/reward dynamic that creates a worthwhile return for financial capital. Making more capital more available to start-ups wither directly or by underwriting risk will not make a difference – if anything it has potential to push risk/reward even further out of kilter and make investing in UK start-ups even less attractive. What we really need to focus on is what makes UK startups more risky and less rewarding than their Californian counterparts.

Of all the announcements made by the PM the one that I believe has the capacity to be the most significant is the new Entrepreneur Visa. If implemented correctly, this could provide a major competitive advantage over our trans-Atlantic cousins. Silicon Valley luminaries have for years, and without success, been lobbying for a founder visa. Technically an entrepreneur visa is nothing new in the UK, however in its current form it is all but useless as evidenced by the low numbers granted. In addition to attracting more entrepreneurs to UK, the new visa may also give UK entrepreneurs access to the single most valuable ingredient to a startup’s success- talent.

For both my start-ups I have had to look overseas to hire the best technical talent – without these key hires these businesses, which have created hundreds of jobs – would not exist. I am not saying we don’t have good technical talent here – we do. There just is not enough of it, which means that that which does exist commands far too high a premium.

Start-ups are competing with banks for the best local talent, and its rarely the start-ups that win – London is, after all, not a cheap city. Since start-ups cannot sponsor overseas candidates his has meant going down the frustrating route of the highly skilled migrant visa. Visas which as of Monday became lot harder to obtain.

A commitment to making it easier for entrepreneurs to attract and retain the world’s top talent, which adding senior talent to the entrepreneur visa would achieve will make a world of difference. A fish without bicycle is nothing compared to an entrepreneur without a team.

In an ideal world we would not have to go abroad for the talent we need – it would be home grown. This is where the government should be focusing maximum effort.

The UK’s best and the brightest need to be attracted to the industries that we need nurtured: engineering, design and computer science. This means luring them away from financial services. They need to be aware of opportunities at primary and secondary schools. There also need to be opportunities- they need to know that if they are making a significant investment in studying these subjects at higher education that there will be the payoff at other end. Right now top computer science graduates must leave UK if they want to perform at the top of their game, unless they want to work in financial services. There has been much celebration of Apple’s British design team however I find it worrying that they do not have opportunities here. And it’s not just the successful talent that leaves, that is where our successful start-ups go too. Our startups do not have the same capacity to grow into home runs like those in California. The ambitious ones either move there or exit early. The real reason you could never start Google in UK has nothing to do with IP laws – where would we find the thousands of engineers required to create it?

If we are serious about creating a competitor to Silicon Valley we need to make it easier and more attractive for the hirers of the talent we need. Lets face it these employers are for the most part these are not going to be start-ups but instead mature and maturing technology businesses. This means we need to ensure that the Apples, Googles, Microsofts, Orcales, Intels, Ciscos and Facebooks of today and tomorrow have reason to hire those employees here. This will require ensuring our technical universities have the funding and incentives necessary to develop the talent these businesses need. It should also mean incentivising businesses that are hiring in fields determined to be of strategic importance to the future of our economy. This would benefit all UK’s tech start-ups.

I am heartened by the signalling of intent, which is undoubtedly what yesterday was all about. It is great that David Cameron and his team have recognised the strategic value of the technology industry to UK. Lets hope they can also recognise exactly what kind of commitment will be needed to fulfil their ambition. As evidenced by Ireland’s treatment of the world’s F.ounders last week – the UK should expect competition. It’s good for innovation after all.

  • http://calameda.wordpress.com Francesco Masia

    I like the idea of involving startups in government contracts but another way of making things easier could be that of having the government acting as a mediator: startups could sell their skills while bootstrapping in their first 2-3 years and customers could have some tax reductions in order to be attracted by this new marketplace.

  • http://www.innovatrs.com Alan W

    Getting behind the Internet Economy in London through funding is a great first step, but many other cities around the world trying the same plan failed spectacularly.

    London needs to attract ambitious, smart entrepreneurs with big ambitions from other countries as well giving the talent we already have here a reason from leaving talent we have from leaving. Until then, the draw of Silicon Valley might be to strong for the most promising ventures.

    Until we see London generate the buzz, energy, risk taking with venture financing culture of the Valley this is all nice but small step-change stuff.

    It is going take more than money and investment. The UK media, money, people and system need to get behind our entrepreneurs to start the real path to putting us in a meaningful way on the global Internet map.

  • Flemming

    Spot on, Tom

    Banks are sucking the talent pool dry and that’s one of the reasons the initiative will fail.

    Cambridge is already steaming ahead and that’s is where the tech-cluster will eventually be.

    London’s cluster is finanance and media.

  • http://www.shutl.co.uk Tom Allason

    Thanks for the comments. Don’t get me wrong- I do believe that (East) London has what it takes. I just think that if the Government is serious in its ambition (and I hope it is), investment will have to be refocused into areas less PRable than TechCity. Most of the results will not be visible during this Government.

  • http://www.skimlinks.com Mark Macdonald

    Tom, great post.

    I heartily agree that one of the biggest problems startups face in the UK is attracting the brightest grads.

    Unfortunately, when the Coalition’s recent policy changes regarding tuition fees kick in, the next generation of graduates will be saddled with yet more debt.

    Cameron’s policies seem contradictory, and certainly won’t help us pry the best techies away from the golden grasp of the PWCs and Deutsche Banks of the world…

    • http://www.shutl.co.uk Tom Allason

      Thanks Mark.

      I agree with you entirely. In order to attract the brightest grads into relevant courses the Government could subsidise their tuition. They could also give qualifying businesses hiring these graduates a tax-break for doing so. A qualifying business would be any business not in financial services!

      • http://www.skimlinks.com Mark Macdonald

        Innovation on capital gains wouldn’t hurt either. The one element of compensation packages where startups have an upper hand is equity.

        Elements of yesterday were encouraging, but Cameron failed to see the bigger picture.

    • http://hauntingthuder.demon.co.uk Neuro

      mark the brightest grads go for very high paying jobs in the city and “Engineering” is a very low status job in the UK.

      Having said that if there is a job shortage more 18/19 year olds might choose technology as a carrear maybe forgive 50% of the tuition fees for engineering degrees if you work for a tech company (but that would be open to abuse)

      • http://Www.Shutl.co.uk Tom allason

        I don’t mean getting the brightest graduates, it will be a long time before we can tempt them from financial services. I mean the best engineering and cs students… Who currently getting snapped up as programmers by banking

  • http://www.thebluedoor.com/blog/uncategorized/innovation-key-topic-at-techcity-media-event/ Innovation key topic at #techcity media event | thebluedoor PR Blog

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  • http://smarkets.com Jason Trost

    Great article, Tom.

    The Entrepreneur Visa is a great idea. However, Hunter and I (Smarkets founders) are American with Tier 1 visas. It’s a fantastic programme that’s not celebrated enough and is available today. The current rules allow most entrepreneurs/tech people to get a 3 year UK visa for about £1k. Very cool.

    Speaking as an American, tuition hikes are not that troublesome. University over here, after paying higher tuition, is still a bargin. As an investment in ones future, even increased tuition will pay for itself.

    The UK should definitely encourage more students to study computer science. There is not enough supply. Finance does employ a disproportionate amount, but startups can compete by being more interesting places to work with options as a kicker.

    • http://www.shutl.co.uk Tom Allason

      Thanks for this Jason, appreciated.

      I have used tier 1 visas for both my CTOs.There is much uncertainty around tier 1 after the Government’s announcements earlier this week. If they crack down as promised- will be a real problem.

      Having gone to university in USA myself- I agree with you that UK students receive fantastic value even with tuition increases. The problem is that the perceived cost is too high because for far too long they were used to free.

      Startups are certainly more interesting places to work- no argument there. Options are also great incentive… however for entry level graduates who need to worry about making ends meet 1st- they are simply not an viable consideration.

      You either have to hire tech talent at a stage of their career when they can afford to take a risk (and give up more equity)… or have the backing to pay market rate- or at least close to.

  • http://www.nanodome.com/ Nick Pelling

    Tom, I have to disagree with your comments about access to finance & risk/reward.

    “If UK start-ups are short on capital it is not due to lack of proximity to capital but because they are short on the risk/reward dynamic that creates a worthwhile return for financial capital.”

    Nonsense: proximity to capital means absolutely nothing if all routes to it are barred.

    “What we really need to focus on is what makes UK startups more risky and less rewarding than their Californian counterparts.”

    In my opinion, the biggest barrier facing UK startups is low valuations and low round sizes. In the hands of sensible management, raising more money sharply reduces the risk of running out of cash in the first 24 months. Raising too little money pegs the curve too low, such that everyone loses out.

    • http://www.shutl.co.uk Tom Allason

      Hi Nick,

      Thanks for your comment.

      It would be great if you could explain why you believe that routes to capital are barred in UK. I could not disagree more. There are no shortage of venture investors looking to invest in start-ups. The venture landscape has changed dramatically in the 7 years since I first started raising startup capital.

      I do agree with your point on “sensible management” which is really the direction I was going… Low valuations are a function of risk/reward… and the greatest risk is that of team.

      Best,

      Tom

      • Richard

        The challenge isn’t at the venture stage. It’s at the seed stage. Very little access to capital at the seed stage in London cf Silicon Valley.

        I am talking the first 250k in convertible notes to get the company through it’s customer discovery phase and move towards the kind of traction (and valuation levels) that the VC funds can digest.

        You know that the VC investment profile has as certain shape – in terms of stage, traction, valuation etc. For capital efficient early stage startups that get funded day-in day-out in Silicon Valley there is much less route to early first-money-in capital in the UK. Given the additional costs and overhead in the UK this is a double whammy to startups – cannot be as capital efficient as Silicon Valley competitors (need more money) but cannot get money as early and in as large quantity, nor with the sort of smart value-adding angels behind it.

      • http://www.nanodome.com/ Nick Pelling

        Hi Tom,

        The number of UK angel investments fell dramatically in 2008 (by 35% or so?), and then yet further in 2009. The first half of 2010 was no less barren: in the last couple of months, there’s been a touch more action but next to nothing.

        Also: the number of “latent angels” (i.e. attending meetings but yet to make a single investment) has apparently shot up over the last year.

        Finally: the time it takes for entrepreneurs to close an angel round seems to have gone from ~6 months to 12+ months over the past few years.

        So, while I agree with you that there is “no shortage of venture investors looking to invest in start-ups”, the reality is that very few of them are going beyond the looking stage.

        As for your claim that “Low valuations are a function of risk/reward… and the greatest risk is that of team”, this remains just plain wrong.

        Because there are so few UK lead angels able and/or comfortable with doing due diligence, it is rare for UK startups to have more than one full angel offer on the table. Unsurprisingly, this lack of competition then yields low valuations. And this then leads to low funding rounds, which further leads to short term cashflow problems, however high quality the team in place.

        This is the UK startup funding (anti)pattern that recurs again and again, so I don’t know which part of it you’re not seeing. None of it is particularly mysterious, sadly. :-(

        Cheers, ….Nick Pelling….

      • http://www.shutl.co.uk Tom Allason

        Nick,

        Your assumption is that more angel investments is “better”. I would assert that there were way too many businesses getting funded that should not have been funded in ’07. Any drop off is a much needed correction.

        Angel investors being more selective about their investments is a good thing for UK start-ups as a whole. When bad businesses get funding, they bring down returns for investors and encourage other similar businesses to seek funding.

        What I am not seeing, is a good business not getting funded. What makes a good business from an investor standpoint is first of all team & execution- that is where I believe the deficiency to be.

        It seems like this is a subject close to your heart- what business in particular are you referring to that you believe should have received funding but has not been able to as a result of market conditions? Is it http://www.nanodome.com

        Best,

        Tom

      • http://www.shutl.co.uk Tom Allason

        Nick,

        Your assumption is that more angel investments is “better”. I would assert that there were way too many businesses getting funded that should not have been funded in ’07. Any drop off is a much needed correction.

        Angel investors being more selective about their investments is a good thing for UK start-ups as a whole. When bad businesses get funding, they bring down returns for investors and encourage other similar businesses to seek funding.

        What I am not seeing, is a good business not getting funded. What makes a good business from an investor standpoint is first of all team & execution risk- that is where I believe the deficiency to be.

        It seems like this is a subject close to your heart- is there a business in particular that you believe should have received funding but has not been able to as a result of adverse market conditions? Is it http://www.nanodome.com ?

        Best,

        Tom

  • http://www.shutl.co.uk Tom Allason

    I can only speak from my own experience. Both my start-ups began conventionally with angel investment. I found there to be a considerable number more angel investors active in ’09 than there were in ’04.

    You should also be aware that UK angel investors are not inclined to invest via convertible notes since it invalidate EIS- the very reason many of them are investing.

    Regardless as to whether UK start-ups are less capital efficient than those in Silicon Valley (having not set up a business there I cannot comment), UK start-ups are certainly more capital efficient than they were 5 years ago.

    This has led many VCs to start making smaller seed investments often with far less term complexity, in order to get access to deal-flow. Shutl happened to take seed investment from a VC who came-in along side angels with a £150k investment. I could name 10+ additional VCs that are now making seed investments.

    Obviously taking investment early results in more product/sales risk… which makes team all the more critical.

  • http://www.nanodome.com/ Nick Pelling

    Hi Tom,

    Actually, I think angels and startups have both improved a great deal since ’07: and so would disagree that less angel funding is a good thing. Yes, “when bad businesses get funding, they bring down returns for investors”: but when no businesses get funded, the whole country loses as well. And that’s how it seems to me right now.

    You say: “What I am not seeing, is a good business not getting funded”: double-negatives aside, are you seeing ~any~ businesses getting funded? In the first half of 2010, it’s a fact that some UK angel groups made no investments at all. Zero.

    UK angels are now thinking about investing for the first time all year: but the odds are it’ll still be a while before they start writing cheques, whether that’s for Nanodome or for any other global-industry-changing startup that just happens to be out there. ;-)

    You say: “It seems like this is a subject close to your heart- is there a business in particular that you believe should have received funding but has not been able to as a result of adverse market conditions? Is it http://www.nanodome.com?”

    I’m sure anybody pitching a startup holds some of it close to their heart – nobody but a masochist would put themselves through that inevitable serial rejection process for fun. I’d guess you were/are just the same.

    Cheers, ….Nick….

    • http://www.shutl.co.uk Tom Allason

      The fact that some UK angel groups did not make an investment, does not mean that start-ups did not get angel funding. It is all too easy to blame market conditions for a startup failing to obtain funding… and it happens all too often on UK tech scene.

      Look through the Europas finalists this year and it is pretty clear that a lot of UK business have taken on seed funding (be it from angel & vc) in the last 12 months. As it happens my start-up has taken on seed funding from angels in the last year… and from a VC too.

      • http://www.nanodome.com/ Nick Pelling

        Tom,

        Bless: you think I’m looking for blame, when I’m just looking for opportunity. ;-)

        I’m very pleased for you that you were able to get funding for your ventures: all I’m really saying here is that your experience of angels is not really representative of what I’ve heard from countless entrepreneurs and angels over the last year. I’ve backed up everything I’ve said with figures and evidence: apologies if that’s not enough for you.

        As for The Europas lists: in my ‘home’ category (hardware / gadgets), much as I applaud AlertMe I do wonder whether they are perhaps somewhat beyond a mere “startup”. In the same way, could it be that a lot of your ideas about the state of play of UK funding aren’t really about seed rounds?

        Cheers, ….Nick Pelling….

  • http://www.theequitykicker.com/2010/11/08/great-to-see-the-government-actively-supporting-the-startup-ecosystem/ Great to see the government actively supporting the startup ecosystem « The Equity Kicker

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  • http://financegeek.com/great-to-see-the-government-actively-supporting-the-startup-ecosystem/ Finance Geek » Great to see the government actively supporting the startup ecosystem

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  • http://www.shutl.co.uk Tom Allason

    So what you are really saying is that angel funding for seed stage manufacturers of security cameras has dried up? Sounds like UK Gov needs to set up a specific fund…

    The fact is that there are a number of seemingly good start-ups that have received seed funding angel funding in UK this year. There are a number every year. It is a matter of opinion whether that number is enough… you obviously believe that it is not.

    My opinion is that the real problem with UK start-ups is not what is entering the funnel, but what comes out and what stage it comes out at. My evidence are are the small number of home-run style exits that give angel & VC investors the incentive to continue to invest at all stages of lifecycle- including seed.

    • http://www.nanodome.com/ Nick Pelling

      Tom,

      I’ve spent the last year talking with angels, angel network gatekeepers, HNWIs, and other entrepreneurs: I’ve also read reports from academics, the BBAA, and others.

      They all say two things: (1) the numbers of UK startups getting seed funding from UK angels is extremely low; and (2) that this low level of investment is not enough to sustain the sector. Drips do not fill a funnel.

      Though you happen to disagree, the government also thinks that this is a problem; which is why part of David Cameron’s recent announcement specifically mentioned angel co-funding – though because it was looking to raiding the Regional Development Fund for its £200m kitty, it may well prove to be no use to UK startups operating outside of deprived areas.

      Because this is such an important policy area (not just for “me plc”, but for “UK plc”), I contributed to the recent BIS call for comments on this area – I advocated angel co-funding, which BIS appears to have taken on board to some degree. What do _you_ think should be done now to help change this difficult situation for the better?

      Oh, I forgot: you think it’s just second-rate teams that are the problem. No, wait: you now say that it is the back end of the funnel that is indeed “the real problem” for UK angels.

      Right now, I can’t see enough UK angel investing going on to grace it with the term “funnel”: “straw” may be a little closer.

      Cheers, ….Nick Pelling….

      • http://www.shutl.co.uk Tom Allason

        I am sorry Nick but I have been consistant throughout.

        In summary: I believe the greatest problem in UK and indeed Europe is that startups here do not have the same capacity to become home runs for their investors as they do in Silicon Valley. Successful UK & European startups either exit for too little or they move to USA. The reason that they do not have this capacity is that we do not have the necessary human capital…

        The best way of stimulating seed funding is not to put more financial capital into the beginning of the funnel but instead to fix the structural problem that is preventing the requisite outcome at the other end.

        Forgive me for believing that UK Gov may not know what is best for startups. You would however be hard-pressed to find a serious angel, VC or entrepreneur that believes lack of exits is not greatest long term problem facing our industry.

      • http://www.nanodome.com/ Nick Pelling

        Hi Tom,

        On the contrary (and I’m honestly not contradicting you for the sake of it), I think that UK startups have no less an innate capacity for success as US startups. However, if the initial valuation and capitalization both come in too low (as happens all too often), the overall growth curve is set too slow, too shallow, too long: so then you get exactly the ‘exit for too little or they move to the USA’ syndrome you mention.

        For me, though, I’ve met so many bright, incisive, ambitious entrepreneurs and worked with so many talented, hyperproductive engineers over the years in he UK that I do struggle a bit to see what the UK’s human capital limitations are. Obviously this was a problem for you (after all, that’s what your post was about), but I’m far from convinced that this is the root cause of low startup valuations – in my opinion, that’s simply what you almost inevitably get without effective competition for funding, i.e. non-market pricing.

        As for exits: I completely agree that the lack of these is a major ongoing issue for angels and VCs. But then again, I don’t really see how 90% of Internet startups proposed could afford enough PR to get them even noticed (let alone substantial enough to exit in 3-6 years’ time) without US-style valuation and capitalization levels.

        As for exits: I suspect the current lack of exits is because angels and VCs have become too overfocused on Internet startups at the expense of every other kind of company – while entrepreneurs have spent far too long trying to construct matching Internet proposals. Yet even as people are busy pitching improved iPhone apps for dogwalkers, we’re in the middle of an immense design and manufacturing revolution that is going unnoticed and unfunded… but I’m slipping into my own pitch now, so I’ll stop right there. :-)

        Really, if I was the “Startup Czar”, I’d have it that for an Internet-heavy startup, the lack of a PR genius on board from Day One would make it ineligible for angel co-funding support. Might make me unpopular, but it would probably drastically improve the UK startup gene pool. ;-)

        And you’re absolutely right that the UK government doesn’t yet know what is best for startups. However, I do think that BIS is at least looking at the right problems, which is a good first step. And what is perhaps even more surprising is that it is listening to us right now – it is trying to learn from us what it can do.

        Really, I would be just as pleased as you if there were a way for the government not to put more money into the beginning of the funnel: but the moment that the banks left the stage, that extra funding proportion fell on angels’ shoulders… and I suspect they didn’t like it much.

        All the same, I think that the UK government’s putting equity funding into startups (via hands-off commercial funds etc) would be largely capital neutral over the medium term – they’re not grants, they’re equity investments.

        Of course, classical economists might well say “let the market decide”. But then again, classical economists haven’t really done us too proud of late, have they?

        Cheers, ….Nick Pelling….

  • http://www.shutl.co.uk Tom Allason

    We are going to have to agree to disagree here Nick. I know where my time is better spent… Good luck with your business.

    t

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    […] It seems as though the government is confusing patent with copyright. One deals with the innovation of ideas while the latter deals with the expression of it. David Cameron alleged, “The founders of Google have said they could never have started their company in Britain. The service they provide depends on taking a snapshot of all the content on the internet at any one time and they feel our copyright system is not as friendly to this sort of innovation as it is in the United States” (wired.co.uk). Online reactions continually claim that IP laws have nothing to do with Google not starting in Britain, rather, “where would we find the thousands of engineers required to create it?”(eu.techcrunch.com) […]

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