Candy, Monsters, Monkey Ninjas: How to Build the Next Great Tech Capital

Where will it be?
Dec. 4 2013 1:40 PM

Candy and Monsters

These are just two of the key ingredients in London’s recent technology surge.

Michael Acton-Smith (R), the CEO of Mind Candy, meets fans of Moshi Monsters in a pop-up shop selling merchandise from the children's online game in February 2011 in London, England.
Mind Candy CEO Michael Acton-Smith meets fans of Moshi Monsters in London. Mind Candy is a key player in London's burgeoning tech startup scene.

Photo by Oli Scarff/Getty Images

Located above the Old Street Underground Station, London’s “Silicon Roundabout” is a concrete eyesore. Beyond the asphalt and exhaust fumes, motorists will likely remember the circular traffic junction for its flourish of urban sculpture—essentially two arches supporting a four-sided billboard. The rather uninspiring scene does little to signal to commuters that they are entering the epicenter of the United Kingdom’s burgeoning tech sector.

In recent years, startups have proliferated throughout the city, helping turn London into one of Europe’s digital capitals. “A few years ago, all of us were saying that Berlin would become the leading European tech hub, not London,” says Stian Westlake, the head of research at the innovation foundation Nesta. “I don’t think that is the case today.”

London’s bid to elbow past its rivals began to take shape around Old Street in the mid-2000s. It did so without formal government support or straightforward university anchoring. Creative people—including Mick Newton, CEO and founder of Livemusic, and Richard Moross, CEO and founder of custom-card service Moo.com— gravitated to the area of their own accord, drawn by cheap rents, lots of office space, and a plethora of pubs. Proximity to world-class universities gave startups easy access to programming and engineering talent: Imperial College and University College London are a short Tube ride away, while Cambridge and Oxford are both within 60 miles.

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The scene hatched and nurtured businesses that later sold for millions. In 2007, CBS Interactive purchased music website Last.fm for $280 million. Two years later, Nokia bought Dopplr, a now defunct social networking service ($20 million), and in 2011 Twitter acquired TweetDeck, the social media dashboard application ($40 million). By 2008, 15 tech companies had clustered near the roundabout. In subsequent years they spiraled outwards throughout East London, or, as the government now likes to call it, “Tech City.” In 2010 the area could claim 200 tech companies. Today it is home to more than 1,500.

In November 2010, the British government decided it was time to dive in. Prime Minister David Cameron announced plans to transform East London into a tech hub that could steal some of Silicon Valley’s thunder. It would stretch from Old Street to ultra-hip Shoreditch—the Williamsburg of London—and on to the Olympic Park. “We are firmly on the side of the high-growth, highly innovative companies of the future,” Cameron said. In April 2012, the Seed Enterprise Investment Scheme launched, giving investors a 50 percent tax reduction on the first 100,000 pounds of seed investment and exempting their profits from capital gains tax—making it one of the most generous early-stage tax breaks in the world.

That measure, along with generous R&D tax breaks and a streamlined entrepreneur visa process, has fueled growth. Today digital industries in the U.K. generate 86 billion pounds every year, or about 11 percent of Britain's gross domestic product. According to a report from the Boston Consulting Group, the U.K. is the world’s most “Internet-based major economy”—one that is growing at a rate of 10.9 percent a year, which outpaces a 5.4 percent projection for the U.S. and 6.9 percent for China.  

Alastair Mitchell can see change unfolding around him and not merely because his office overlooks Old Street station. Six years ago he co-founded Huddle, a cloud content collaboration service. Since 2007, more than 100,000 businesses, governments, and federal agencies—including Kia Motors, Panasonic, NASA, and governments in Belgium, Greenland, and Italy—have adopted his software. Year-on-year revenues are up 100 percent, and he no longer faces the funding crises that nearly shut his business in its early days. “We would hit the summer and wealthy venture capitalists would go on vacation,” he says. “That’s fine if you’re an investor. But if you’re a small business you could go bust.” Fortunately Tech City has created a center of gravity that keeps the suits in orbit. Now, Mitchell says, money is chasing good ideas rather than the other way around.

Yet compared with Silicon Valley, Tech City is still a bit player. According to Dow Jones VentureSource, startups in London raised about $350 million in the first six months of 2013, which is just 10 percent of the money invested in companies in California over the same period. But that lopsided comparison may actually encourage more investment. Patrick Chung, a partner at New Enterprise Associates in Menlo Park, Calif., has been investing in London tech startups for six years and understands the dismissive attitude of some American VCs. “People do look at Tech City as small fry, if they have even heard of it,” he says. “Therefore it is a big opportunity because it is simply less well-trod ground.”

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