Tech London Advocates: Just what capital entrepreneurs need?

We consider whether a 150-strong group of advocates can have a serious impact on Tech City start-ups

‘Advocacy group’ – a term with the ring of a talking shop about it. Lots of well-intentioned chums from a cosy sector promising to champion a “veh, veh, important” cause, and enjoying each other’s hospitality while they’re at it.

Just another excuse to network with your mates while playing at making a difference isn’t it? A bit like a cynic’s view of corporate social responsibility. Not if ex-Skype international VP and Telefonica’s Global Innovation division director Russ Shaw has his way.

The UK-based American is very serious about the Tech London Advocates movement he launched this week. Technology start-ups in London and beyond have a genuine chance of profoundly re-shaping the British economy, but are too often hamstrung by a number of debilitating factors.

  • The entrepreneurs sell out too early to US companies higher up the food chain before realising their potential
  • The key influencers and decision-makers in the City of London don’t think internet first, so don’t fuel white hot prospects
  • And we’re so money, but don’t even know it! The insecurity complex common to so many Brits leaves too many fresh out of chutzpah when on the threshold of genuine global impact

Setting out his manifesto for Tech London Advocates (TLA) the angel and venture capital investor, member of Tech City Advisory Group, and pluralist non-exec, implored the advocates in attendance to change all that.

Storming the boardrooms

Shaw and his disciples, including Index Ventures’ Saul Klein, WANdisco founder David Richards, Wayra’s Simon Devonshire, will go forth to spread the Tech City gospel to the pinstripes running the nation’s largest hedge funds and FTSE companies.

They’ll cajole and encourage the brightest talent and open the doors that might otherwise remain decidedly shut. They’ll even “storm the boardrooms of the City” if Klein has his way.

For too long the UK has not fully exploited its status as the most internet-embraced nation in the world, Klein argued compellingly. That the UK generates the highest proportion of its GDP from the internet – 8.3% or £121bn according to Boston Consulting Group – against economic behemoths the US, India, and China is staggering enough.

It’s bigger for us than education, healthcare, construction and many other sectors the City and government hold so dear when it comes to major infrastructure projects and corporate backing. Admittedly, without investment in these areas the UK would descend into terminal decline, but the point is relevant.

The question is, even if the big money washing around was made available to fast-growing tech companies would they have the mentality to believe they really were the next Google, Facebook, Amazon or other? Could they and institutional backers live with years of haemorrhaged losses or at best negligible profits? Wayra’s Simon Devonshire (pictured above, far left) picked up on the “insecurity” he’s witnessed.

It’s never really been tested. Skype, which situated in London at the outset, was perhaps the closest the UK has come to really testing the theory. And it was run by fiercely ambitious Scandinavians Niklas Zennstrom and Janus Friis, who carried none of the British baggage or self-deprecation.

In 2005, the year the company was sold to eBay, Skype generated $71.8m in annual revenues and loses $47.61m. Even after selling to eBay for $2.6bn in 2005 Zennstrom and Friis engineered a deal to wrest back control before the consortium they’d assembled sold it again to Microsoft for a far tastier $8bn slab. Outside London, Autonomy’s Mike Lynch, who emerged from Cambridge’s tech cluster, was perhaps another to take his company closer to the pinnacle.

And there have been many others with London roots that broke through the magical $100m valuation barrier, such as Bebo, Last.fm, Lovefilm, ASOS, Wonga and perhaps most notably today, Moshi Monsters vehicle Mind Candy. It was telling that Michael Acton Smith, in an exclusive interview with Startups.co.uk  said this:

“Every entrepreneur is different and people build businesses for different reasons. There’s a huge concentration of power in the West Coast, with giants like LinkedIn, Google, Twitter and Facebook, so I think it’s important to double-down and try and create something huge in the UK, rather than selling to the US at the first opportunity.”

Tech London Advocates will do well to make Acton Smith a roving ambassador (his absence from the initial list was duly noted). The much-anticipated IPO will happen at some point, Acton Smith confirmed , but there’s some maturing to be done first.

Next big things

What about the rest? There are over 1,300 digital and technology-based businesses in Tech City, rising from just 200 in East London in 2010. So many are now clustered on one another’s doorsteps or housed in the environs of places like Google Campus, Tech Hub, Central Working where the Tech London Advocates launch took place.

There’s some good risk capital specifically going into early stage technology companies in the area via funds such as Passion Capital, EC1 Capital, Playfair Capital, Hoxton Ventures, MMC London Fund, plus the likes of Albion Ventures and Octopus Ventures.

NESTA reported that those high growth smaller companies that grew 20% are responsible for 55% of the net new jobs in the UK and one look at the BuiltinLondon.co  site shows a good proportion of those listed are currently hiring.

Klein though looked to Israel, which has turned an agricultural economy 25 years ago into the thing most closely resembling Silicon Valley this side of the Atlantic. And this is where one of the problems lies.

London institutions have £700bn of funds under management, he said. “The job of fund managers is to invest in growth and make money. The internet is one of the biggest opportunities for growth. So why is it no major investment fund manager has an analyst for this sector? Why is it analysts in the retail sector do not understand the underlying metrics of etailers? Why are we not asking the boards of FTSE 100 companies what their percentage of sales are on the internet?”

He continued: “It’s great that we celebrate Moshi, Playfish etcetera. The internet’s the new rock and roll – but that’s bullshit. Ring a CXO from the FTSE 100 or fund manager and ask ‘what are you doing when it comes to the internet?’. Unless we can create a sector where companies create thousands of jobs then it’s just another sector where a few people get rich.”

Speaking to one tech CEO in the Big Data arena once the formalities were over, she said she was heading to the US to secure $5m for growth as that’s where she stood the best chance. The Rowlands Report identified an equity gap of between £2m and £10m for fast-growth companies. The government responded with the creation of the Business Growth Fund.

The problem is there’s still not enough venture choice at that level. As Ariadne Capital and the ACE Fund’s Julie Meyer (pictured above, far right) said the City “doesn’t know how to deal with ‘small money’. It’s got big money”.

Super Angels such as the White brothers, who started Messagelabs and used the proceeds of their sale to start Notion Capital, PROfounders led by Brent Hoberman (Lastminute.com) and Michael Birch (Bebo), the founders of Skype with Atomico, plus various others are doing their best to accelerate high potential start-ups. But as Shaw and Klein would undoubtedly contend the entrepreneurial ecosystem can only do so much.

Finding technology IPOs

Beyond venture, London’s best destination for technology companies – the Alternative Investment Market (AIM) – has not seen the activity the economy needs. Head of AIM Marcus Stuttard was present at the launch and asked by compere Oli Barrett where all the tech IPOs are. Stuttard suggested the economy was the cause, but then admitted there are not huge numbers of companies straining at the leash to go public on AIM.

Anecdotally, WANdisco’s David Richards, who successfully floated last summer raising £15m and has seen his share price rocket from 180p to 800p, told me he’s aware of a handful of entrepreneurs keen to follow. Yesterday, he said AIM is “seen as a funny looking little market. That’s how people see it in Silicon Valley”. WANdisco’s fundraising has helped, but what transpires in 2013 and beyond will be crucial to the success of Tech City.

If Tech London Advocates achieves anything it will be ensuring some of the brightest, most vibrant entrepreneurs stay rooted in the UK and take on the world, without selling out at the first sight of a placard-sized cheque. But it will need to be far more than a talking shop.

Russ Shaw wants deliverables and has set the group the first assignment before it reconvenes in the Autumn: double in size. Through personal recommendations the 150 will build it to 300 and beyond. Dots will start to connect.

Government will continue to open up its procurement to digital alternatives (in 2010 just 6% of contracts went to small and mid-sized businesses, but has grown to 16% in April 2013). Shaw will need to demonstrate the advocates’ influence in job creation, funds raised and corporate venturing partnerships. How significant Tech London Advocates proves to be will, for some, be heavily scrutinised. For what it’s worth, I give it my advocacy.

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