Continuing from part 1, https://medium.com/@dimist/on-london-startups-d66c508b3e70, this post will concentrate on high growth startups. I believe this is where we as the UK startup community suffer. It is not going to get better soon but perhaps eventually. I advise against starting doing a high growth startup in London/UK for reasons why that have to do with the structure of the British society and the investor’s mentalité.
Disclaimer: The intention of this post is to express my opinion, not to rant about the country that I live and care about (and hope to become naturalised soon) or be negative. Most of all I wanted to provide constructive criticism and offer an additional approach.
Let’s consider an observation before presenting my thesis: How many companies of the likes of Amazon, Google, Microsoft, Paypal, Salesforce, Twitter have started or grown in UK? None. Even in the not so big startups that are part of our everyday life at least in IT: Twillio, Github, Heroku, Spotify (note: I’ll come back to this). The answer is: not many… So something is not happening and we need to find out why.
From what I have read about and seen by living here, four factors influence the situation considerably:
- Aristocracy/Class system.
- “City”mentality — financial sector.
- Inherent european arrogance.
- UK market size and introversion.
A big portion of country’s wealth and money supply is still concentrated to old school aristocrats or people with similar mentality. When these people invest, their approach is that a company receiving their investment works for them, not with them. Also higher classes having been raised with a sense of entitlement, and it seems that sometimes they can’t believe how you are not generating money for them on the spot.
I have no other explanation then to answer how when a US based startup announces their seed round, it is usually in the $300,000 area, while a UK startup that raised £150,000, which minus legal fees fast becomes £120,000 is treated as a success. It seems that when you receive seed or other capital you should be more happy that you are working for the “master”, who will take you under “his wing” and “introduce you to his network”, all that while receiving minimum wage. At the same time you read that a competitor doing the same thing in Silicon Valley got funded with double or triple the amount of money, in a city with a lower cost of living and a decent salary to for the founders so that they can “concentrate on expanding the business”.
The class mentality does not apply only to the people from the upper classes who possess capital and are usually the investors part of the deal. It equally affects the middle and working class as well: Most founders I have met are short-sighted. They do not want to expand to the whole world, just level up. Please allow an anecdote: In a youtube video, one of Google’s VCs shared a story: It’s end of the 90s or very early 00s, there is a party where the spotlight is on Napster’s founder, he’s just had a cover on Wired. At that party Google’s founders were a bit blue: “will we ever be as famous as him, all over the world?”. Almost none of the people I have met in London share the same ambition, myself included. An feature in the “Evening Standard” and have enough money to buy a property is more than enough.
City (financial sector) mentality
The financial industry is dominant. It absorbs lots of talent and resources, while at the same time it is generally going well, which is good for the country. The problem is that people in the investment community usually have some “city” background, which determines or heavily influences how they approach the whole startup “thing”business?: It’s a value vs risk proposition… only. I realised this when I was talking and meeting people when I migrated and was bootstrapping my first startup: London is a place where you come to grow, usually from big to bigger, not a place where you start from scratch to do something.
As a consequence the investor community has little or no know-how on how things start from scratch. They almost only understand small companies that want to expands. So when you talk to them, they allow themselves to treat you seriously with you only when you have become a small company that grows, with an established business model and a proper revenue stream. After that point, they know how to optimise it and “take it off the ground”. Everything before this point is treated as “magic” or a responsibility of the founding team. Using a Peter Thiel analogy: “Getting from zero to one” (from concept to something) is something that they do not know and want to stay away from.
Another consequence is risk aversion: High growth startups have this all or nothing approach, which would make all those risk management jockeys flip. I have asked some people off the record the following question: “Suppose that you are at the end of 90s and two students tell you that they want to crawl the whole internet, would you give them 100,000 USD?” Or “some guys get to you later in the 00s and say that they want to build a platform that will dispatch messages whose length would be at most 140 characters, would you fund them?”. The answer is always negative, because there is no way to measure risk… At the same time we have the contradictory demand for high margins. They want high margins, without high risk and they’d love to get Google’s profits, but would not invest in 1998. Am I the only one being annoyed by this?
I have seen it around Europe, it also exist in UK. People here refuse to learn from others, mostly Americans and their achievements. They passionate believe that they can do things in their own way. That’s why some times terms such as “British startup”, “French startup”, pop up in discussions. Of course if you cross the Atlantic the term used is just “startup”.
Because of the unwillingness to adapt and learn, this leaves for a number of people no other option than to believe that Silicon Valley or similar places are something like a casino “… where we would throw money on every crazy idea that pops up from a geek’s head”.
UK market size and introversion
This was an observation of a previous co-founder of mine. The UK, unlike Denmark or Estonia (say Skype), Latvia or Sweden (say Spotify), Greece or Israel, is big enough to sustain very big companies (Tesco, Innocent Drinks, Virgin), which will can get people rich and famous. This is another contributing factor for not expanding globally: if you make it here, you are well off.
All of the above — a hate for the low margin
An initial draft of this post was written on the day that Facebook acquired WhatsApp. Needless to say nobody would ever make an application like WhatsApp in UK, even if they had revenue integrated to their model from early on. Last time I checked by paying it was something like £1/$1 per year per person (placed figures here, in case they change in the future).
I believe that this illustrates all the points made: Class system: you are pushed to do things that generate high margins, usually aiming for the wealthy. City mentality: too risky (easy to switch, no lock-in etc etc…) European arrogance: Can’t you just sent a text? That’s a toy. British twist: This service is for the second and third billions, we don’t want it here.
Probably a combination of what happens when you combine something novel hence difficult to comprehend with the analysis on the high growth sector.
Thanks: Ankit Mathur for editing and proof reading.