A version of this article appeared in The Telegraph, 9th October 2017
Scan down the rankings of tech startups with coveted “unicorn” status and you’ll see familiar names that dominate the headlines – Uber ($68bn), Didi Chuxing ($50bn), WeWork ($20bn), Flipkart ($12bn). You’ll also notice that the list is dominated by US, Chinese and Indian companies. In fact, you have to get down to the late teens to reach the first European name, Spotify ($8.5bn, founded in Stockholm), and even further to get to a UK name - Global Switch - a data centre developer. At almost 20 years old it doesn’t quite fit the unicorn mould, but thanks to a minority stake sale at the end of 2016, it boasts a $6bn valuation. Ok - it’s a stretch - so let’s look further – there’s Hut Group ($3.25bn), then Benevolent.ai, Oxford Nanopore Technologies and now Deliveroo in the $1.5-2bn range, and OneWeb at $2.5bn, although they’re technically headquartered in Virginia…
In short, it’s slim pickings, and not just limited to the private side – take a look at the S&P - half of the top 10 constituents are tech companies, and 30% of the weighted top 100, compared to roughly 5% of the FTSE 100, since the £24bn sale of ARM to Softbank in 2016 – the UK’s largest ever tech deal.
So why are we so bad at scaling technology companies? London has the 4th largest startup output in the world, and leads Europe, with around 5,000 currently active tech startups – so what’s the missing piece? Access to funding? Talent? Brexit? The weather??
On the surface, European seed and expansion capital is as readily available for the budding entrepreneur as in any other hub, but there is one notable exception – the mega-round. Over the last 12 months, there have been 61 $100m+ rounds in the US, 72 in Asia and just 17 in Europe. Why? Because European investors don’t invest mega-money. Take Improbable’s $502m Series B in May – not a single listed investor was based in Europe. AUTO1’s €360m round was led by San Francisco-based Princeville Global. Farfetch’s $397m? Chinese JD.com. Delivery Hero’s €387m? South African Naspers. Add to that Softbank’s 23 $100m+ investments this year and the European picture looks decidedly lacklustre.
Since 2015 the investment game has changed – with frothy tech skewed to the upside, it’s about backing clear winners, not making small bets. And in order to win in today’s hypercompetitive market, a startup needs to be armed with enough capital to blow its competition out of the water, not just enough to keep the lights on. It’s about piling in, and European investors don’t seem to have got the memo.
In the wake of Slack’s recent $250m round (and accompanying $5bn valuation), it’s worth revisiting co-founder (and Brit) Cal Henderson’s words from last year – “It probably would have been impossible to start Slack in the UK… Because of the way we built the company, and the money that starting the kind of company like Slack requires, it’s just not possible anywhere outside of the Valley”. Unfortunately that statement is still true – European investors just don’t invest at the scale required to cultivate the supersonic, market-bending growth that we’re used to seeing from the US (and now Asia).
It would be easy to point to scarcity of capital as the driving factor, and that’s only going to get worse post-Brexit. The European Investment Fund (EIF) has historically been one of the biggest contributors to the UK’s technology sector, accounting for over a third of investment into UK-based VC funds (over half a billion a year). That has dried up since Article 50 was triggered, and the British Business Bank will need to step in to fill the gap (as pledged in the Conservative Manifesto).
But funding isn’t the biggest resource that’s lacking: It’s appetite for risk, and fundamentally, confidence. And the effect is two-fold – firstly, if you prioritize minimising risk over growth, you don’t end up with a Slack, you end up with 100 mini-Slacks, 5 of which will most likely be acquired by Slack. And secondly, your home-grown talent will eventually relocate to sunnier shores. But with the Trump Administration’s block on startup visas putting the brakes on the latter, the UK now has a unique opportunity to create a haven for European entrepreneurs -- if it can fix its relationship with risk.
Having worked in the tech industry in both London and San Francisco, I’ve been a part of two very different startup communities. Roughly 3 out of 4 VC-backed businesses fail, but in America a failed startup can be a badge of honour - Evan Williams (Twitter), Reid Hoffman (LinkedIn) and Jeff Bezos (Amazon) all have failures on their CVs. In Europe, it’s a long walk of shame with your tail between your legs, and when your startup is capital-starved, failure looms closer than ever. Sure, there are things about the Valley that we can’t replicate – access to a much larger, more homogenous test market being one of the biggest, but there are plenty that we can, and a lot of them come down to confidence. For founders, the confidence to turn down the first exit, and for VCs, confidence in the halo effect of capital deployment at scale, and the risk profile that that entails. After all, if we don’t embrace the downside, we’ll never see the upside.