Olympic legacy to accelerate UK venture

"This is a unique opportunity to create the most exciting new start-up hub in Europe," said BVCA chairman Mark Florman in a statement in response to the announcement that the Press and Broadcast Centres at the Olympic Park is set to become a tech hub.

iCity, the sole preferred bidder for the site, will bring together start-ups, more established companies, venture investors and social enterprises, and host a data centre, media studios, a university and a business incubator. "We look forward to collaborating with the iCity team, venture capital houses and individual entrepreneurs to realise this ambition and to provide the London Olympics with a legacy to be truly proud of," Florman added.

Building a network

These spaces foster what Kleiner Perkins Caufield & Byers refer to as keiretsu, a Japanese concept referring to a network of companies grouped by intertwining business relationships and shareholdings. Symbiosis and development drive these spaces, which range from incubators for early-stage companies prior to seed investment to accelerators for more mature companies.

"Accelerators are about what economists call externalities," explains Nicolas von Bulow, partner at Clipperton Finance, a financial advisory firm that works with technology companies and investors. "Some kind of help or value is added to a business from the environment in which they live. When you start a business in Silicon Valley, you have great externalities," he adds. "The whole system in the US is an accelerator."

Cheap infrastructure and services, mentoring and knowledge transmission bind companies in an accelerator. Many have selective entry, involving a rigorous selection process, while others are open entry. They can be with or without walls, designating a certain area such as Silicon Roundabout or a defined building. Most have links with venture investors able to provide financing in a crucial stage of a company's development. And crucially these spaces create networks of like-minded individuals able to share knowledge, services and products. Such a web of knowledge-sharing though must have a downside for IP infringement.

Second place

"They are basically about tightening the ecosystem," says Nenad Marovac, founder and managing partner of DN Capital, a pan-European venture investor focused on software and digital media in Europe and the US. "I think they are helpful, but they are not the critical factor in the success of a start-up. But improving the ecosystem is important," he adds. "A lot of new jobs are going to be created by new companies in Europe, and it's about time the government took note of that."

Despite the rise of venture powerhouses in Berlin, Paris and London, the emerging tech business scene in Barcelona fuelled by a shrinking banking sector and the opening of Istanbul as the tech gateway to the east, the European venture ecosystem pales in comparison to its stateside counterpart. In addition to the fact European venture left the starting blocks roughly 50 years after the US, lower levels of capital available are usually cited as one of the primary reasons behind its lower ranking. "Europe does lack capital," says Marovac. "And one of the reasons for that is that returns haven't been that good. But I do think that is changing now and the guys that are still playing are seeing good returns," he adds.

But these returns are of paramount importance. Not only do they keep investors happy and coming back for more, but they sustain the ecosystem itself. "One of the things that sets Silicon Valley apart from the UK (until relatively recently) is that their returns have a multi-generational impact," explains James Clark, policy manager at the BVCA. "Each generation of firms will exit, make money for each founder and shareholder, whether they be investors or staff members, and that money will be reinvested into a new generation of businesses. Silicon Valley has a constant flow of experience and capital from one generation to the next, and has done since the 1950s," he explains. Silicon Valley is self-sustaining.

What's more, the returns that bolster the herculean Silicon Valley ecosystem are of much larger stature than those in Europe: "About 10–15 years ago in the UK, for example, typically only 10% of equity was put aside for share options. In the US it was 20–25%," explains Clark. "Of course not every company will have the returns of Facebook, but if you do have enough businesses exiting with reasonable returns, and there is enough shareholding within senior and experienced people, then that will flow on into the next generation," he adds. The multi-generational flow of capital in the ecosystem is its lifeline, and a sizeable one at that.

Hurdles ahead

"I'm not sure we will ever catch up with Silicon Valley per se because the US market is so different," says Marovac. "The size of the market, the single language... the legacy is so strong. But I think we can do something different, which is also very good," he adds. With rigid labour laws making hiring and firing unattainably expensive for a start-up and the stigmatised repercussions of bankruptcy, which often resonates long after the event, European and American venture ecosystems compete on an uneven field.

But several European heads of state have focused on driving innovation through accelerators in an attempt to lower the hurdles and close down Silicon Valley's lead. Former French president Nicolas Sarkozy created 70 clusters across France, in a move that saw these spaces swing from few and far between to abundant and, arguably, unscalable. UK prime minister David Cameron has stretched the Silicon Roundabout from Shoreditch to Stratford and made the initial calls to create an accelerator in the Olympic Park. But with power changing hands in European states on average every five years, continuity of governmental policy is a challenge.

"It shouldn't have an impact, but it does. That five-year period is too short, so we need politicians with a vision," says von Bulow. "To make companies large enough to rival Silicon Valley giants, we need to put together the conditions in which they can emerge. That is something you can start in five years. You won't see these companies mature, but you will see them begin to emerge," he adds.

"We come from a continent where until recently people focused on polishing old businesses. So we need to replicate what Americans do but in our own way. We won't be able to replicate what they do in the next five years in terms of intergenerational transmission. It's just going to take much longer," says von Bulow. The announcement of the iCity development at the Olympic Park may quicken the pace of venture, but the finish line remains a long way off. The US reigns at the top of the podium.

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