London hit an important milestone this month, but you may have missed the news as it emerged with a characteristically British lack of fuss. For the first time, the city’s technology startups attracted in excess of half a billion dollars of VC funding in a single quarter – $646.98 million for the period January to March 2015.
The data, collected by London and Partners (the evangelical wing of the London Mayoralty) puts the city on course for a $2 billion-plus investment year. That feels a lot like progress when you consider that London’s tech firms scraped together a miserly $10 million in Q2 2010. However, on purely numerical terms, our achievements are still modest.
London’s 2014 funding total of $1.35 billion puts it on par with Redwood City, Calif., population 76,000 and home to Evernote, Reputation and Turn. Even more humbling is the fact that San Francisco-based Uber raised $3 billion on its own last year.
But size isn’t everything. London exerted architectural influence long before its sedate skyline was punctured by the monolithic Shard. So it is with our technology companies – modestly proportioned, but globally significant.
Consider fintech and the foundations on which this rapidly growing sector is built; London is the world’s leading foreign exchange hub, handling $2.6 trillion per day, more than double that of New York City. It sits on the prime meridian, literally the centre of the world, at least in terms of time zones.
The U.S. is so large and service-hungry that there’s also money to be had launching the first, second and even third valet parking app.
Yet, Britain is a small island with a population of just 60 million people. The need to seek and service markets beyond our own borders shapes London’s burgeoning technology firms. Many of the companies that have attracted substantial investment – our own included – have internationalized rapidly.
By contrast, some of the best known and most generously funded U.S. startups are focused on American solutions to American problems. And why shouldn’t they be? The U.S. is a huge and lucrative market whose financial system is creakingly antiquated and ripe for disruption. Domestic bank transfers still take several days and the slow adoption of chip and pin technologies and NFC cards primed shoppers for the likes of Square and Apple Pay.
Beyond finance, the U.S. is so large and service-hungry that there’s also money to be had launching the first, second and even third valet parking app.
It is still possible, in 2015, to create a multi-billion-dollar business without venturing beyond the borders of the United States. By contrast, European startups enjoying a level of success are compelled to internationalize almost immediately.
Compare Square, which, six years after launch, is only available in the U.S., Canada and Japan, to its younger Swedish counterpart iZettle, which is already being used in 10 countries.
Early in the growth cycle we are faced with operating in multiple legal jurisdictions, setting up local business entities, language translation, international recruiting, marketing and customer support. That drives very different business models.
International agility is increasingly important in a connected world because common platforms and global distribution means that dominant players in one territory can quickly find themselves under siege from overseas. Facebook’s defensive purchase of WhatsApp showed that entrenchment in one or two large markets is no match for global virality.
Having a different perspective on internationalization also opens up new business opportunities. It is tempting to turn first to big, homogenous markets like the U.S. and China. Everything else is seen as “long tail” because the ratio of set-up effort to financial return is less favorable. However, there is such a thing as a “rest of the world” business.
And the potential rewards are far from long tail. In the case of international remittances, $5.5 billion is sent annually, most of which is currently offline. These growth patterns are not exclusive to London; we see them elsewhere in Europe also.
Having a different perspective on internationalization also opens up new business opportunities.
Adyen is a Netherlands-based online payments service (and fellow-member of the European fintech 50). Fewer than 10 years old, it now handles more than 180 currencies and is used by the likes of Facebook, Spotify and Airbnb. Adyen is favored precisely because it solves the problem of diverse local payment systems. Its rival, the longer established WorldPay, is based in London.
The effect of investors’ increasing engagement with these ‘rest of world’ opportunities is startling. Although the UK’s share of global fintech investment is still relatively small in financial terms, our rate of growth is not. According to Accenture, investments in UK fintech increased by 3x the global average and 5x that of Silicon Valley over a five-year period.
In 1982 Chariots of Fire screenwriter Colin Welland proclaimed to the Oscars crowd “the British are coming.” More than 30 years later, few in Hollywood would dispute that prediction.
There is some way to go before UK startups and London fintechs in particular enjoy Benedict Cumberbatch levels of acclaim stateside, but we are already more than ones to watch. We’re building something here, we’re doing it differently, and it looks like we’re onto something.
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