Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP.
London Tech Week, a terrific initiative that illustrates the vibrancy of the London and broader UK tech scene. UK tech is its own thing, which inspires me to turn to one of my pet peeves.
I keep seeing articles saying that City X is the new Silicon Valley, or that City Y is better than the Silicon Valley, or that City Z will supplant the Silicon Valley. No they aren’t. No they won’t. It’s silly. So let’s stop it.
The Silicon Valley is Unique
There is no place on earth like the Silicon Valley. There is nowhere that has the high concentration of venture capital, nowhere that has the community of entrepreneurs who have exited businesses previously and are available to build and invest in new ones, nowhere with as developed a support network, nowhere that has the concentration of startup scaling skills that are particularly important for scaling B2C businesses, and nowhere that puts the same valuations (overvaluations?) on innovative startup businesses. All of this results from the development of a complex ecosystem over 40 years – 40 years of initiating, building and exiting startups, and then initiating, building and exiting new ones.
Conversely, however, there is no other market where the costs of building a startup are so high, none where the battle to secure and retain talent is so difficult, none where the high level of startup activity makes it so difficult to achieve visibility, and possibly none where the level of self-centered arrogance and unhealthy macho culture is so high.
So the Valley is unique. But so what! We in the rest of the world will go our own way.
Development of Non-US Startup Markets
Startup markets have now emerged in a number of areas around the world. I’m mainly familiar with those in Europe and Israel. However, Asia is critically important as well, and outstanding companies are also coming out of Australia and New Zealand, Latin America, Africa and elsewhere.
These markets have benefited from a number of developments that put them in a position to build great startups, while still facing certain challenges.
Speed of market development. Because these markets have had the benefit of the Valley’s example, and also of Valley alumni who have moved to other markets, some of them, like London, have managed to develop faster than the Valley at comparable stage. This has been assisted by targeted governmental support, including through tax incentives for investors, grants, and scale-up programs.
Great universities, great tech and great talent. Some of these places, like the universities and research centers in Cambridge, Oxford, London and elsewhere in the UK, have always had outstanding innovation. What they have lacked is the ability to turn these innovations into commercial businesses. Others, such as in Germany, have had the ability to develop outstanding R&D into middle-sized businesses, but have been less successful in turning those businesses into global enterprises, not least due to the fragmented nature of European markets. Those barriers are breaking down at a variety of levels – the startup teams increasingly are multinational, their business aspirations are global, and they are successfully turning European innovation into successful businesses.
Additionally, there is outstanding tech talent in many of these non-US markets, and the cost of that talent is materially less expensive than it is in the Valley, or indeed in the US generally. Furthermore, it is substantially easier for startups to retain talent in many of these non-US markets simply because the alternative opportunities are more limited. Thus, an increasing number of London based startups are doing some or all of their tech development in Central and Eastern Europe or in southern Europe.
Capital. Availability of risk capital is still an area where Europe lags significantly behind the Valley and the US generally. However, that situation is improving, both because more venture capital is becoming available locally and also because venture capital is increasingly a global business. In particular, US VC’s are discovering the quality of startup businesses that are available elsewhere, and at lower valuations. Additionally, significant amounts of capital outside the United States is becoming available for venture capital investment, from China, the Middle East and Europe. As noted above, governments also are helping to make capital available.
While the difficulties in securing investment and lower valuations remain a key barrier for European companies, the impact of that is not entirely negative. European companies are forced to bootstrap for longer, and get by on less. As a result, they may spend money more wisely, and may be at less of a risk of experiencing a potentially-fatal “down round.”
That being said, many non-US companies do expand into the US, and while that is generally market driven, it is also in order to secure access to US venture capital (in New York, Boston, Los Angeles and elsewhere as well as in the Valley).
- Outlook. Non-US startups have needed, from the very beginning, to design their offering with a cross-border outlook in mind. While their founders, who may be building their first startup businesses, may lack the scaling experience of some of their US competitors, they tend to have substantially more experience operating in an international context. While the US is a very important global market, there are other markets that are becoming increasingly critical to business success. The international experience of these entrepreneurs is exceedingly valuable as they go about building cross-border businesses.
Additionally, as I have written before, the startup markets in these countries have the ability to operate on a cross-border basis. The VC’s themselves generally also have significant international backgrounds, and the governments (at a European Union level and national) are accustomed to pursuing initiatives on a cross-border basis. There is not as much of this yet as there needs to be, and issues within the European Union, as well as the dislocation associated with Brexit, are slowing up the process. However, cooperation between these startup markets, potentially extending to New York and Boston, have the capacity to create significant competition for the Silicon Valley.
We will go our own way
In short, comparisons of London and other non-US startup markets (or, indeed, other cities in the US) with the Valley are false and really miss the point. The issue for these markets is how they can continue to build supportive environments for growing startups. In doing so, they are likely to follow a different path than the Valley followed 40 years ago.
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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected] or via LinkedIn here.
You will find Bob’s other weekly blogs for emerging and growth companies on US issues, international expansion and early stage financing here: http://bit.ly/StartupGuides