Notes on Britain in the Entrepreneurial Age (Round 1)

European Straits | Work in Progress

Hi, it’s Nicolas from The Family. Here’s the first round of an ongoing assessment of how Britain is doing in the Entrepreneurial Age. I’ll launch similar series covering various countries in the coming months.

1/ As a reminder, my personal framework for assessing a startup ecosystem has two dimensions:

Let’s go through these two dimensions to assess how Britain, largely in London (but only largely, since there are startups outside London as well), has been faring so far.

2/ Let’s start with the know-how. In his remarkable Welcome to Somers Town — a New Palo Alto? (and the related deck), my friend Saul Klein of LocalGlobe makes the case that between Oxford, Cambridge, UCL, Imperial College, and the London School of Economics, England is perfectly positioned to attract and train the best talent that founders need to grow great startups. 

It’s true that all those universities are excellent and contribute to the prestige and attractiveness of Britain on the global stage. However, I’m quite skeptical regarding the idea that it still takes universities to build a successful startup ecosystem. I know Stanford has been the true heart and cradle of Silicon Valley, but I don’t think the conditions are the same these days. Here’s what I wrote in Startups Don't Need Universities As Much As They Used To (Forbes, September 2018):

There are many misunderstandings regarding the place of universities and public research laboratories in the daily practice of innovation. After the Second World War, only public entities held the intellectual resources and the equipment necessary to conduct cutting-edge scientific work—and those were at the heart of that era’s innovation process. But today, the context has changed. The resources needed to innovate are much better distributed, and so innovation has become more ubiquitous. As a result, universities are largely absent from the great waves of innovation of recent years, which are increasingly driven by large tech companies (Google’s self-driving cars, Amazon’s voice assistant) and developer communities (as in the cases of mass computation and cryptocurrencies, among others).

That being said, I admit those universities can serve as a magnet for foreign talent, but as such they contribute to attracting know-how from abroad rather than training the local workforce and funneling it toward startups. As often explained by the founders of Entrepreneur First (whose thesis is built on the idea of “talent investing”), there are numerous signaling problems in higher education and the labor market that lead the most talented and ambitious individuals away from entrepreneurship:

  • In France, many of these individuals go off to study engineering because that’s our tradition (as explained here), but they aspire to work in consulting, financial services, or the higher levels of the corporate world. And so while we might have (rather) good engineering schools, they don’t make a direct contribution to boosting the local startup ecosystem.

  • In Britain, despite the presence of the big universities that Saul mentioned, it’s even worse. Not only do ambitious individuals have aspirations that also lead them away from startups, they’re not even attracted to studying engineering in the first place! The voie royale in the British establishment is more about Philosophy, Politics and Economics (PPE) than STEM.

It took the financial crisis to change the situation in the recent period. So many bankers lost their jobs and were suddenly deprived of the perspective of getting rich quick that they had to consider founding a startup—which, although ridden with uncertainty, can generate great wealth. Hence a certain archetype on the London tech scene: the former banker attracted by the hype in financial services who then jumps to the next big thing (startups) and successfully raises capital from his (it’s almost always a “his”) former colleagues with a clean-cut business plan backed up by detailed spreadsheets 😅 (This is made all the easier because the infamous EIS, despite its obvious flaws, hedges angel investors against any downside.)

(About that, read my colleague Younès Rharbaoui’s Can bankers make good entrepreneurs?)

3/ As for capital, well, that’s a tricky one. On one hand, there is so muchmoney in London you would think it would be easy to allocate a tiny part of it to funding local startups. On the other hand, financiers are not particularly used to getting interested in new things when it comes to funding targets.

As told by Carlota Perez in her masterful Technological Revolutions and Financial Capital, the reason Britain missed the mark during the shift to the age of steel and heavy engineering is that financiers in the City were making so much money trading with the British Empire that they didn’t really see the point investing in this tiny, fringe thing that were the steel mills at the time.

That being said, I’ve already mentioned the fact that many former bankers are attracted to entrepreneurship because they’re obsessed with becoming wealthy. And so this is the specific channel through which, I think, London’s financial class has started expressing an interest in startups. It’s no surprise that Will Shu, CEO of Deliveroo, and Nikolay Storonsky, CEO of Revolut, both previously worked in the financial services industry (Shu as an investment banker and Storonsky as a trader).

In the end, there’s a lot of money flowing in the London startup scene. But it comes with a bias toward founding startups in financial services. And you might think that the presence of powerful incumbents in the industry would make it harder for startups to emerge. (Like, would you found a self-driving car startup in Detroit? I wouldn’t!).

But that’s not what’s happening. Again, one reason why FinTech forms the bulk of startups in London is that many founders are former bankers and they like to rely on their previous experience in the industry. Another reason, once told to me by a VC specialized in FinTech, is that founding a startup in this space legitimizes raising a ton of money: everyone knows that there are high compliance costs, and then part of that money can be used to pay the founders rather well, certainly compared to other startups in which founders have to cope with a lot of personal financial stress.

Finally, despite financiers not being interested in innovation when it comes to funding targets, they’re actually quite open to innovation within the financial services industry. You could say that an entire segment of the market, that of derivatives and hedge funds, is dedicated to designing innovative financial products on a daily basis. Here’s what I wrote in my 11 Notes on Goldman Sachs:

Investment banking is an industry that favors innovation for various reasons.

The first is that it is all about money—an asset that lends itself well to continuous innovation because, like software, it is what Venkatesh Rao calls a soft technology: “A general-purpose technology… that [has] impacted our world in the sort of deeply transformative way that deserves the description ‘eating’.

Another reason is the distributed nature of the financial services industry—a trend that appeared in the 1970s with the enlargement of leading investment banks and the spectacular progress in information and communication technology. Financial firms’ distributed architecture means that individual agents, notably traders, can take initiative and make bold decisions without necessarily having to wait for the approval of a committee: such a distributed system is entirely favorable for innovation.

Yet another feature that favors innovation is that finance is a world that is almost entirely devoid of intellectual property: if a particular firm designs a new product or a new process, soon enough it will be seen by the market and, if successful, imitated by competitors. All in all, the best way of seeing innovation in investment banking is that it is an ongoing process rather than a marginal exception.

4/ Then there’s the rebelliousness. On that front, Britain is a society that is so stratified from a social perspective that it’s prone to inspire rebelliousness on both ends of the spectrum:

  • The elite has to act in a rebellious manner if only to distract or to tame the masses, lest the latter erupt in anger and throw aside the established order, much to the detriment of those elites. This explains Boris Johnson’s messy hair and Jacob Rees-Mogg’s eccentricity.

  • As for the bottom of society, they’re rebellious simply because they don’t have much—they’re suffering and they have so few opportunities to climb up the social and economic ladder. That used to take the form of mostly music and football (read How England's first wave of heavy metal football conquered Europe). Then you could join the financial services industry (which, despite its many flaws, is one of the most meritocratic there is). And nowadays, well, you can found a startup—the rebels have found a new calling 😜

After all, the UK is home to the Beatles and the Sex Pistols; given the abundant know-how and capital, I don’t see why it wouldn’t give birth to exceptional tech companies—provided the institutional context makes it possible for rebels to access the other resources.

Thus Britain is not short on any of the key ingredients that make it possible to grow a successful entrepreneurial ecosystem. But the resources needed to terraform the ecosystem are not enough to make it grow healthily. You also need key institutions, of which security is the most important.

Let’s delve into that further 👇

5/ Many people think that entrepreneurs take numerous, extreme risks. This is very far from the truth: entrepreneurs are merely on a journey during which they take one risk after another. And they can move forward in that journey only if the right institutions are in place to cover a given risk when it’s finally time to be exposed to the next one. I call this key institutional pillar of a healthy ecosystem ‘security’.

Here’s what I wrote in 5 Steps to a Healthy Entrepreneurial Ecosystem (July 2016):

Rewarding entrepreneurship and putting Entrepreneurs under pressure is beneficial at the early stages of a company. But once past the crucial point of product-market fit, the priority must be to construct the safety net necessary for allowing Entrepreneurs to accelerate their growth and take even more risks as their company grows. This security, which is critical for local tech companies to reach domination, has several complementary dimensions.

As for Britain, security is present when it comes to talent because London is such a magnet for individuals from all over the world. It’s also present when it comes to raising capital because on top of all the money tied up in the City, London is where most pan-European and US VC firms are headquartered—the likes of Index Ventures, Accel, Atomico, Balderton, and now Sequoia.

But there’s a third front when it comes to security: regulation. What about regulatory security in Britain?

  • Sure, there’s the regulatory sandbox pioneered by the Financial Conduct Authority for startups entering the banking sector. As I wrote with my wife Laetitia Vitaud in Do Banks Still Have a Future? (November 2015), “Tighter regulations distract banks from considering radical innovation efforts. Few regulatory bodies are willing to support those efforts. The UK’s Financial Conduct Authority (FCA) is the exception, as it launched an “Innovation Hub” to adapt regulatory regimes so as to foster innovation. The idea is to give innovators a sort of ‘special treatment’.”

  • But in other sectors in which the British government has been more involved (as opposed to independent regulatory bodies such as the FCA), it’s less convincing. A very negative view on innovating in Britain has been displayed through the never-ending story of Uber in London. As I wrote in October 2017, “In time, what we need are strong elected officials that make a priority out of supporting startups instead of busting them—even if it means letting US companies momentarily gain the advantage over worn-out, rent-seeking incumbents.” 

6/ By the way, the British government could have made an enormous difference in helping the local ecosystem to race ahead. My view, however, is that it ended up stumbling because of Brexit:

  • Tony Blair came too early. When Labour won its first general election under Blair’s watch (1997), the Internet was barely a thing. When Blair finally left in 2007, it was before the massive acceleration triggered by the financial crisis the following year, and his focus was on managing the (disastrous) aftermath of the war in Iraq more than on supporting British tech entrepreneurs. Yet as shown by the most recent work he’s been watching over at the Tony Blair Institute, I’m 100% convinced that he would have been the ideal politician for leading Britain into the Entrepreneurial Age. In a way, we’re still missing leaders of his caliber.

  • Then came David Cameron. His was an interesting strategic positioning. The promise that he made to voters in 2010, when he stood as Leader of the Conservative Party, was that the government would take a step back and rely on the “Big Society” (that is, individuals, businesses, and charities) to provide a growing number of essential services. I think it was a compelling political value proposition: very much in line with the core value of the Conservative Party, and yet aligned with the promise of radical innovation in the world of tech startups. Indeed, he managed to surround himself with top-notch people in that field!

  • But then Cameron made the Brexit referendum blunder. Once he left the stage, the whole focus of the entire government was exclusively on negotiating with the European Union. Sure, there’s this idea (from Dominic Cummings) that Brexit makes it possible for Britain to fully recover its sovereignty in order to be able to reposition itself advantageously in a fast-changing world. But I’m not sure it’s true in practice. Cummings’s recent misadventures prove that there’s not much room in government for idealist geeks like him. And the outside support of Cameron’s dream team (people such as PUBLIC’s Daniel Korski) is not enough to pull it through.

As I wrote on Wednesday, “So far the toxic politics have refrained British innovators (and immigrants attracted to that tradition) from revealing their true potential.” Even worse, the mix of Cummings’ techno-optimism and Brexit (and the disastrous handling of the pandemic) could contribute to discrediting the very idea that Britain should lead the way in the Entrepreneurial Age.

7/ Another very important feature of the London startup ecosystem is the city’s attractiveness for immigrants from all over the world. Several factors come into play:

  • The language. I’m passionate about this issue and have written about it on many occasions. Quite simply, quoting the main edition on Wednesday, “English puts Britain on the global map; it makes the local business community more exposed to ideas and influences from abroad; it facilitates trade with many parts of the world; and it attracts the best and the most ambitious entrepreneurs, who still consider London the best place to build great companies in Europe”.

  • Housing. This doesn’t sound intuitive since housing in London is so expensive. But compared to Paris, finding housing in London is quite easy for an immigrant coming there to found a startup. In the UK, you only need to have enough money to make the down payment, and you’ll be evicted in no time if you stop paying rent. By contrast, in Paris a tenant is basically there forever, whether they pay or not, which means that the bar is set extremely high for a landlord to accept a new tenant. Needless to say, a would-be entrepreneur with brown skin and no previous references because they come from abroad will never be able to find an apartment in Paris.

Add to that the quality of life in London—as I wrote, a beautiful, vibrant, and cosmopolitan city ❤️ Trust me, I lived there for five years!

8/ What will become of all this after Brexit? I have written quite a lot about the topic, and nothing that has happened since then (which is a lot 😨) has changed my mind. Here’s Will Brexit Kill European Startups? (February 2016—that is, before the referendum): 

Startups are organisms that thrive on chaos. Often more friction or more red tape mean more business opportunities. As long as governments don’t stifle them completely, entrepreneurs could flourish and solve many problems in an EU further damaged by Brexit.

And here’s European Startups Don't Really Care About Brexit (Forbes, November 2018):

Post-Brexit London will likely remain the unchallenged startup capital of Europe, supporting European entrepreneurs with the many resources it has to offer. Britain used to be a thalassocracy, a seapower willing to compete on the global stage. From that glorious past, it inherits a culture that perfectly fits the current Entrepreneurial Age.

What’s more, the English language provides the UK with an extraordinary opportunity to achieve strategic positioning on the international stage. Many thought leaders and media organizations, among them The Economist and The Financial Times, have made London their base, at the crossroads of American and continental thinking.

Leading companies in the Entrepreneurial Age don’t emerge from entire countries, even less so from continents. Rather they emerge from small, dense metropolitan ecosystems. Considering that, once we’ve gone past the backward-looking frenzy, new laws, regulations and good practices could help turn a city like London into the leading entrepreneurial ecosystem in Europe again. 

So as you can see, I’m still optimistic about London—even if I’m not about Britain as a whole.

9/ In addition, there’s a case to be made about London becoming a sort of Hong Kong for the Entrepreneurial Age—that is, a city that serves as a bridge between two heterogeneous worlds. For Hong Kong itself, it was between the West and Mainland China. For London, there are two options:

  • One is to become the bridge between the US and continental Europe. Even if the US becomes more inward-looking and less and less capital flows from the US into Europe (as I believe), there will still be interests that US corporate giants--starting with large US tech companies--will want to defend in Europe. London would be the ideal place to do that, just as it would be the ideal hub through which European entrepreneurs could seek to explore the occasional expansion on the large (but increasingly difficult) US market.

  • Another option is that London serves as a bridge between the West and Asia—replacing Hong Kong, which is quickly losing its status due to the Chinese Communist Party hastening the end of “One Country, Two Systems”. This is former Portuguese minister Bruno Maçães’s thesis, recently shared in The Spectator:“The beauty and power of Hong Kong has always lain in its ability to fuse together East and West. After 1997, China respected Hong Kong’s role as the capital of Eurasia, combining the best of Europe and Asia. But if China has given up on this, it is time for someone else to recreate it elsewhere – so why not Britain?”

10/ However, I’m not sure that Britain can have the best of both worlds. The immediate aftermath of Brexit could be long, difficult trade negotiations between the US and the UK. Nothing will be expected from the UK besides concessions, as it will be in the weakest position imaginable, as explained by geopolitical strategist Peter Zeihan here: The Future of the United Kingdom.

Sure, Joe Biden could become president in January 2021 and embrace a more lenient approach (and be more favorable to the idea of the European Union). But once it has left the EU, Britain’s residual value in the eyes of the US will be as a channel to secure access to the large (but complex and fragmented) continental European market for their capital-intensive companies. Don’t expect much attention to be paid to growing the local ecosystem in such a context. (Why? Well, is Hong Kong a startup ecosystem? I don’t think so—and I’ve been travelling there quite a lot seeking to learn more on that topic.)

On the other hand, if Britain decides to reconnect with its imperial past and to become the bridge that (I agree with Bruno on this one) we really need between Europe and China, then you can expect quite a few difficulties when it comes to the special relationship with the US—already seen these days in the pressure exerted on Boris Johnson regarding Huawei?

Here’s my conclusion. Few people see the relationship between leaving the European Union and what will become of startups in the UK. What I see, with a background as both a tech investor and a former civil servant, is that the probability is rather low that Britain can have it both ways: remaining the startup capital of Europe and acting as a bridge between Europe and another part of the world—be it the US or Asia. In even fewer words: why did they decide to leave the European Union in the first place, when they could have continued using it to their advantage, as they had been doing for decades?

To be continued, I’m sure!

From Normandy, France 🇫🇷


This post is for paying subscribers