Can Tech City seriously challenge Silicon Valley as a hub for tech start-ups?

London’s Tech City, officially launched in Shoreditch in 2010 by UK Prime Minister David Cameron to support the East London tech cluster known as Silicon Roundabout, is naturally seen as the UK’s version of Silicon Valley.

But can Tech City really be mentioned in the same breath as a hub for tech start-ups in the way that Silicon Valley is? No, I don’t think it can.

Although it can be considered a hub – despite the term’s geography increasing to Greater London and other cities around the UK, such as Manchester – it’s very different to the way Silicon Valley is.

Yes, it offers plenty of support for wannabe entrepreneurs and start-ups. There’s a big network of incubators here that rival that in the US – especially in the financial tech space (supported by the City) – and marketplaces in general. Also, both sides of the pond see Chief Technology Officer’s job-hop easily and a good reservoir of developers.

Service model innovators

However, the key difference is that most start-ups in Tech City, unlike those in the Valley, aren’t so much technology and product innovators (such as Google, Dropbox, etc.) but are more business or service model innovators, such as JustEat and Zoopla.

In other words, they’re not producing a new technology but rather a new way of providing goods and services based on existing technology. We really need a different name for these types of start-ups, they’re not tech start-ups.

The attitude or philosophy in the Valley is very different to Tech City too. Most start-ups fail and in the Valley everyone expects you to fail a number of times before being successful. This philosophy which encourages entrepreneurs and investors to be bolder in their ideas – the true seed of start-up growth – isn’t really pre-eminent in Tech City.

Overall, Tech City, is rather conservative in its outlook and action, particularly in regards to valuations, so it’s not breeding an environment of boldness in the same way as in the Valley. For example, since 2010, the average London start-up valuation is $3m compared to $4.9 in the Valley. The conservative valuations, combined with the ridiculously high cost of living, office rents and staff – probably the biggest challenge to London start-ups – mean they end up being squeezed from both ends.

Indeed, the conservative nature means many UK start-ups actually find it easier to raise funds in the US. Take the example of Dattch (now rebranded as Her), a lesbian dating app founded by a Londoner who attended Bristol University, that found it fairly easy to secure investment in Silicon Valley.

The founder’s story is featured in Channel 4s excellent “How to Be a Young Billionaire” series which follows the fortunes of three young British entrepreneurs trying to get their ideas realised there. It’s well worth watching.

Cost of failure

High development costs and low valuations all, ultimately, boil down to the fact that the cost of failure in the Silicon Valley model is much lower than here.

Another big difference, of course, is the size of the funding network. Silicon Valley has a network of roughly 250 multimillionaire/billionaire business angels – far more than Tech City. In addition, the syndicates are simply much more developed in the US. All in all, this makes the crucial pre-series ‘A’ funding much easier.

As seed rounds tend to be much bigger than the US – VCs tend to go big when they make an investment rather than spreading investment around – it makes it easier for start-ups to attract better talent. It also allows them more time to assess market opportunities and timing so they can change focus or direction if necessary – a luxury rarely available in Tech City.

Also in the UK, there’s major fallout in big series B/C funding, particularly involving rounds in the $10m+ category. That strongly suggests it’s much harder to scale up a business to a billion dollar company in the UK compared to the US.

It’s also a simple fact that the market is much bigger in the US so a ‘marginal’ winner there can do very well but the same level of progress in the UK is much more likely to result in failure due to a lack of traction.

So, although there are obvious similarities, there are a variety of factors – the type of start-ups, the general philosophy, conservatism, a higher cost of failure and the funding network – which means Tech City really can’t be considered as a hub for tech start-ups like Silicon Valley is.

Maulik Sailor, founder and CEO along with Yoann Turpin, CFO of start-up foundry Innovify

Further reading: 25 of the most exciting tech companies in the UK