On start-up ecosystems
What are the necessary elements for start-up ecosystems to become successful? Nic Brisbourne looks at how London could become a breeding ground for billion-pound companies.
The relative strengths of the world’s various start-up ecosystems is a topic that everyone loves to talk about (or at least everyone outside of Silicon Valley). It’s easy to understand why: start-ups are sexy and and everyone wants to be associated with the successful ones.
This obsession with start-up centres has hit fever pitch since the 2008 financial crisis, as governments – in a desperate search of jobs – have become more active in trying to develop ecosystems, and internet company valuations have skyrocketed.
However, until the Startup Genome Project released a report earlier this month, the topic has been largely data-free. Their latest report, The Rise of Startup Ecosystems, is the first to consider geography as a factor in why start-ups succeed.
According to their assessment, the Silicon Valley ecosystem is still three times bigger than New York and 4.5 times bigger than London (which includes the surrounding areas of Cambridge and the Thames Valley, equivalent to Silicon Valley stretching north and south of San Francisco to Berkeley and Palo Alto):
Silicon Valley also does better on other key start-up ecosystem metrics. The start-up success rate in the Valley is 54 per cent better than London and job creation in larger start-ups is proportionately 38 per cent higher. New York scores lower than the Valley and higher than London on both metrics, and it’s reasonable to believe that both of these metrics correlate with the scale of each ecosystem.
The study also covers variations in risk appetite by geography. Disappointingly, London start-ups are much lower risk than their Silicon Valley and New York counterparts. Appetite for risk increases with the scale of the ecosystem, as bigger funds look to get more money to work and their companies need to sell for larger amounts to generate venture capital multiples.
It’s hard to quantify, but it seems to me that, as the investor base grows and matures, the appetite for risk is increasing in London. But we would all make even larger and riskier investments if there were more capital in the market that could help support our companies.
The conclusion, therefore, is that we need to grow the start-up ecoystem in London, which would improve success rates, create more jobs and increase appetite for risk. The defining characteristic of a great ecosystem is that it produces great companies; by great, I mean multi-billion dollar global leaders that stay on top of their markets for years.
Unfortunately, there is no silver bullet. While the situation is improving, building an ecosystem takes time. Companies are growing faster and faster, but building great businesses is still a process that takes years, not months. We all need to be patient.
The good news is that there are now a few great companies in the London area, including ARM and CSR (it was a shame to lose Autonomy), and there are an encouraging number that are strong contenders to become great over the next few years, including Mind Candy, Spotify and Wonga.
That said, there are some things we can all do in the short term to help speed things up:
- Avoid selling out too early
- Think a little bigger
- Continue to lobby the government to support the startup ecosystem with tax breaks and other practical measures
- Stay confident and celebrate our successes
Ultimately, though, all of these are secondary to building successful businesses and making money.
As more entrepreneurs and investors make money, more people and capital will be drawn to the ecosystem. The more scale we have, the more great businesses we be generated; and hopefully, it won’t be too long before one of them is a monster success like Facebook.