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Tech City: The job’s only half done

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We’re only half way there, more needs to be done

The Labour government was too slow to recognise the build-up of tech startups in East London, leaving David Cameron and the Conservatives to seize the initiative, the result has on the whole been a success but the job is only half complete.

Without further funding the wave of new startups will not grow into the world dominating companies the UK craves.

Some commentators argue that the government merely jumped on ‘Silicon Roundabout’s’ organic growth but there can be no denying that recent initiatives to support entrepreneurs have resulted in an expanding ‘Tech City’ (government’s official name). The list includes: startup visas, Seed Enterprise Investment Scheme (SEIS), improving Entrepreneur Relief and opening up Government ICT contracts to SMEs.

The figures

The result has been impressive with the number of tech companies in London rising sharply.

A survey by UHY Hacker Young this week found that Tech City was home to more startups than any other area in the country. The postcode EC1V saw 15,740 startups created over the 12-month period.

An amazing number which was 3 times more than the next largest area. 17 of the 20 largest areas were in London.

A Deloitte report out earlier this month stated that technology, media and telecoms (TMT) sector accounts for some 650,000 jobs in London (600,000 in the rest of the UK) and around £125 billion in economic value for the UK (8% of GDP).

Tom Hopkins believes there’s more work to be done on Tech City

Cash before hype

So the infrastructure and funding is there for the startup community but the authorities, in the short term before the private investment market catches up, need to ensure the technology sector has the cash it needs to grow and thrive, and justify the investment, effort and hype.

This is at a time when Venture Capital firms are experiencing a difficult fundraising environment with many institutional investors leaving the asset class, burnt by the dotcom bust.

In addition the banks’ balance sheets mean they are shrinking the loan book not expanding lending, despite government’s best efforts.

Without follow-on finance the result could be a glut of startups stranded; unable to grow or develop their product further.

Funding needs to drive growth

To be fair, the government is trying but the money is not always going where it should.

For instance there have been positive changes to the Enterprise Investment Scheme (‘EIS’), the big brother of SEIS, over the last couple of years. It is a powerful private sector force of capital.

However of the c. £500m raised by EIS fund managers last tax year only a fraction was channelled to firms such as ours, MMC Ventures, who are looking to support growth businesses; much of the funds going into ‘protected’ products such as renewable projects which create little in the way of jobs or growth, although clearly help the ‘green agenda’.

The government must therefore look at ways of ensuring the money is better allocated directly.

The Enterprise Capital Fund (‘ECF’) program is a good example and we manage one such fund here at MMC Ventures where the government invests alongside private investors.

But the program is very small in the grand scheme of things and with a regional spread even less directed at London. Other policies such as the Angel Co-Fund are merely feeding the follow on requirement funnel.

Crowdfunding to the rescue?

The government and regulators have also embraced crowd funding which is filling some of the gap but the debt players (eg Funding Circle) are replacing banks and require profitable firms (unlikely for early stage tech businesses) and some equity players (eg Seedrs) are just expanding the list of startups in London.

So what can be done to ensure London continues to be an entrepreneurial powerhouse with an end product? Thanks to Boris Johnson and his colleagues at City Hall we launched the MMC London Fund.

It is only £14m and whilst we have already made 6 investments out of the fund the enormous deal flow London is providing justifies a much larger fund.

In addition funds of this size are not economical – a firm could not manage a fund of this size on a standalone basis. Venture Capital firms need larger funds to survive and recruit the required talent.

This talent is absolutely required going forward to de-risk public sector investment into early stage companies.

Tech needs better recognition

Public bodies need to recognise the importance of the TMT sector in London and start allocating greater amounts to the sector.

Yes, these are risk investments, but a greater risk would be that Tech City produces no world-beating companies due to a lack of follow-on money. There is no point on spending £50m on regenerating Old Street roundabout (recently announced) if these companies can’t be funded.

Certainly there is an element of ‘build and they will come’ mentality when it comes external investment but this will take time and in the meantime more must be done to support London’s rapidly growing TMT sector.

It is an economic engine for the UK as a whole and has the potential to be up there with the world’s best technology centres.


Tom Hopkins is a Director at MMC Ventures

image credits: flickr/Katchooo/dullhunk/chriskealyphotography

 

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