Silicon Valley is so crowded and overvalued that appetite is growing to look overseas
©Bloomberg London’s Silicon Roundabout
This week Boris Johnson, mayor of London, has been banging his drum in New York. He is not, however, promoting his ideas about Europe, the Conservative party or Winston Churchill, the subject of his latest book.
Instead, Mr Johnson is doing the cyber version of taking coals to Newcastle: telling American tech entrepreneurs that London is a cool place to work and invest. Never mind Silicon Valley or New York's Dumbo (Down Under the Manhattan Bridge Overpass); US entrepreneurs and investors should head to Shoreditch and Bournemouth. Or so Mr Johnson's sales pitch goes.
It is something of a quixotic mission but is nevertheless notable for at least two reasons. First, it offers a useful reminder of how fashions in the political economy can change. A decade or so ago, when British trade missions tried to "sell" London to New York, they talked more about banks than computer bytes. Back then, people such as Ed Balls, when he was a Treasury minister, were keen to extol London's light touch, "principles-based" regulation as a competitive advantage versus New York.
These days no British politician wants to talk too much about banks, or wave a light touch regulatory regime as a lure. Memories of the 2008 crisis are too painful. Instead, the politically correct message for politicians is to extol the digital start-up scene. These companies are often small and create relatively few jobs — although the bigger tech picture is good, with a report this month suggesting that the tech industry in London employs more than 250,000 people (against almost 350,000 in financial services in Greater London). This is cheering.
The second reason why Mr Johnson's visit is striking is that it inadvertently shows the distortions that still haunt the financial world. In some ways — as the British trade team point out — London has attractive features for entrepreneurs. It is, for example, a truly international centre and the government is (belatedly) trying to make the visa regime more liberal. British officials told New Yorkers this week that some visas will be provided for the employees of digital start-ups and they promised to fast track other applications. British labour costs are lower than those in San Francisco, say, and there is scientific innovation aplenty spreading out to the regions outside London. Cultural attitudes towards entrepreneurship are becoming more welcoming. Tech clusters are emerging, too.
But the rub, as so often outside the US, is cash. If you look at the raw data in isolation, the trajectory seems cheering. Last year $ 1.4bn worth of new funding was invested in digital ventures in London, while $ 2.1bn was invested across the UK as a whole. That is twice the level of 2013 — and, strikingly, 20 times higher than five years ago.
Half of that money was supplied by US venture firms, such as Accel Partners and Union Square Capital. The Silicon Valley-based Andreessen Horowitz, for example, recently put $ 58m into a financial technology company called TransferWise. Indeed, foreign direct investment (FDI) into London is now rising faster than in Berlin and New York, according to Gerard Grech, chief executive of Tech City UK.
But the sums remain modest compared with the US. Since 2012, American venture capital companies have invested around $ 70bn in Silicon Valley and $ 160bn overall, according to the National Venture Capital Association. Last year, several billion of this went to New York.
The real issue for London tech companies is not so much finding seed capital but the finance to enable successful businesses to scale up. London-based companies can only dream of having even a fraction of the type of financial power of a company such as Uber.
Of course, if you are an optimist — as the bouncy Mr Johnson undoubtedly is — you can argue that this change will come. The Silicon Valley tech scene is now so crowded and overvalued that there is growing appetite among US investors to look overseas.
And European investors are desperate for productive places to put their cash; this is a region, after all, where $ 2 trillion-worth of bonds have negative yields. The continent's banks are also keen to jump on the bandwagon.
But the fact that half the start-up money raised in 2014 was from America, not Europe, shows the challenge. London financiers are better at devising complex derivatives trades than organising a sensible way to fund entrepreneurs on the scale that is needed. If Mr Johnson's mission to New York helps to change this, he will deserve a rousing cheer. But it will be a slog.
gillian.tett@ft.com
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