London’s Tech Boom Is More Than Just Hype, The Hard Numbers Say So

While London Technology Week may not yet rival last week’s London Fashion Week for glamour, there is real substance to the capital’s tech boom. This is why, for the first time, TechCrunch is bringing its Silicon Valley conference, Disrupt, to London this October.

A number of things are driving it. London has long acted as a “bridge” both to US tech companies entering Europe, and for European companies scaling their proposition before expanding into the US. At the same time, its proximity between the US and Asia makes it a natural home for international expansion for Continental European startups

US Investors looking to pick up cheaper bargains than in ‘bubblish’ Silicon Valley much prefer to invest in UK businesses which have all their documentation in English. One Delaware company later, and a US expansion can beckon at any time in a company’s lifecycle.

But geography is only one aspect. Another is London’s potential for tech company M&A and flotation.

There have been 92 European tech “exits” in the second quarter of 2014, of which 10 were IPOs. This is up from 54 deals tracked in Q1 2014, an increase of about 70 percent, according to European tech blog Tech.eu.

And London is leading the pack for exits.

Already this year, two London companies have been sold for some £1bn – Artificial Intelligence startup DeepMind was bought by Google while Zynga bought games company Natural Motion.

In 2013, 22 technology companies, the largest number since 2006 according to Dealogic, raised $795 million in equity funding on the London Stock Exchange’s main market and on Aim, its junior listings venue.

This year the IPO on the London Stock Market of property portal Zoopla attracted blue-chip investors to its £900m / $1.53m flotation, and the share price has gained since then.

At a result, the London investors that took the plunge on investing in Zoopla won out, including Atlas Ventures, Octopus Investments and Silicon Valley Bank.

Meanwhile, Israeli digital advertising group Matomy Media floated on the LSE’s High Growth Segment after raising £41m in an initial public offering.

The recently introduced High Growth Segment is gradually attracting tech flotations.

The first to use the market, Just Eat, saw its shares soar on the first day of trading – pushing its valuation above £1.5bn. It joined Markit and Zoopla as marking the tech biggest IPOs in Europe for Q2. With other IPOs arriving over the next couple of years, London will attain its own set of founder ‘mafias’ just as the ‘Paypal Mafia’ gave rise to many other serial entrepreneurs.

London could of course work harder to attract more tech IPOs. Rocket Internet’s Amazon clone Zalando is reportedly looking as a €5bn IPO in Frankfurt, largely because the brand is better recognised in Germany.

And it doesn’t work for everyone. The most highly valued British company to emerge from the technology boom has been King Digital Entertainment, makers of smash hit smartphone and tablet game Candy Crush Saga. But after a great ride towards a Nasdaq IPO it endured a torrid stock market debut in New York, a performance which has only worsened. Fickle casual gamers are exactly that, and there remains a question mark of gaming company flotation built on single breakout hits.

However, the wider market for tech stocks appears healthy, in large part because tech companies these days are built on actual revenues, as opposed to the hot air of the late 1990s dot com boom which turned into bust.

Meanwhile, the underlying strength of the market in London is continuing. The proximity of the Square Mile to the Eastern Tech City Cluster is obvious, but there are real numbers behind this.

According to Bloomberg, London now has more jobs in FinTech than New York (44,000 versus 43,000), and FinTech startups are blooming in London’s shadow.

Bloomberg also reported this year that in the South East of England there were now 744,000 working in tech companies, versus 692,000 in California, with tech jobs growth up 11%, outstripping both California and New York in growth.

This growth has not been lost on FinTech accelerators, like that run by Level 39, part of the Canary Wharf Group, which recently released research revealing that London has more Fintech startups than anywhere else in Europe.

While proximity to the City has made the capital a hub for financial technology, its creative spark is at least as valuable. Lyst, an online retailer in London’s Hoxton makes most of its sales in America. Editd is a VC-backed startup selling big data to the fashion industry. Indeed, ‘vertical industry’ startups are booming in the capital because of their closeness to these large, incumbent industries like fashion, media, advertising and music.

Geography also comes into play when dealing with VCs. London’s Tech City startups are a 20 minute Tube ride away from London’s equivalent of the Valley’s “Sand Hill Road” an area populated by VCs. Mayfair, St James and Victoria play host to Index Ventures, Accel Partners, DFJ Esprit and Balderton capital, all major investors in UK and European tech startups, just to name a few.

At the same time, smaller funds such as Passion Capital, Octopus Ventures and Techstars London, have created a ‘bridge’ cluster in Farringdon between the East And West of London. And the main ‘venture accelerator’ Seedcamp, is based in the heart of Tech City at Google Campus. The new partners of Google Ventures Europe, a $100m evergreen fund form the search giant will also be ordering their Flat Whites in offices close by to the Tech City cluster.

Those VCs are opening their wallets like never before.

According to data from Dow Jones VentureSource European startups have raised more than $2.8 billion (€2.1 billion) from VCs in the second quarter of 2014, the highest quarterly total since that iconic dot com bust year of 2001.

Out of the whole of Europe, the UK remains the gang-buster country, where companies have raised 28% of the total amount in the second quarter, followed by France with 19% and Germany with 15%.

And amid this activity it’s London VCs that have been the most active, such as Index Ventures, Accel Partners and Balderton Capital, according to CB Insights.

London-based Index Ventures was the busiest VC firm in Europe over the last 5 years, with 16 deals completed, according to VentureSource. On the back of that activity, Index Ventures raised a new fund of $550 million this year, while Balderton Capital raised $305M earlier this year.

London has done a great job of wooing foreign investors, who have made noteworthy incursions into UK companies include US-based Accel Partners, Greylock Partners and Spain-based Nauta Capital.

For the first half of the year, investors have poured nearly $1 billion into UK-based startups. In all $911 million has been invested in the UK, up from $362 million in the year-ago period, according to data from TechCrunch’s data arm, CrunchBase.

The data comes at a time when US investors are taking an increasing interest in European companies.

The UK’s Kobalt raised €84.4 million in June, with the help from its London VCs, Balderton Capital and Spark Ventures, but also with Michael Dell, of Dell fame, who’s New York based fund also invested.

More broadly the UK government has given a big boost to tech entrepreneurship. It introduced entrepreneur-friendly Startup Visas, created new tax breaks for angel investment (EIS / SEIS), added Entrepreneur Relief, a 10% CGT rate for employees who joined start-ups; abolished stamp duty on the AIM market; opened up Government ICT contracts to SMEs; created the UK’s open data agenda; reformed the UK IP regime; and created several other initiatives like the UK’s Life Science Strategy.

And London itself has become a great test-bed for apps. You can’t move for advertising hoardings promoting startup apps at Old St station, at the heart of the Tech City cluster.

It helps that the Mayor has committed to creating 46,000 new jobs in the city over the next decade, but the desire for skills is aided by EU membership as startups can hire genius developers from across the whole continent.

While the rising cost of office space risks is affecting young startups, many are avoiding the long-term contracts demanded by London landlords, in favour of subletting from one of London’s 70+ co-working and office sharing spaces such as TechHub, Central Working and Innovation Warehouse.

And new legislation allowing the creation of businesses from private rented homes is likely to see the rise of the kinds of “Hacker Houses” that Mark Zuckerburg worked out of in the early days of Facebook.

It is this kind of activity that is making the Tech City hipsters smile, and perhaps what will make the supermodels of London Fashion Week flock to London Technology Week next year instead.

A shorter version of this article first appeared in City A.M.

Image courtesy of Keepcalm-o-matic.co.uk