The London tech economy is an emerging global powerhouse that is grabbing the attention of savvy US investors. Total annual venture capital investment into London-based tech companies was $1.427 billion in 2014 – up from $69 million in 2010 – with US-based investors responsible for 56% of that 2014 total.
The London tech ecosystem is in its infancy relative to the major US tech hubs such as Silicon Valley, Boston and New York, but London already is widely recognised as a world leader in fintech, with key strengths in other areas such as fashion, health tech, adtech, edtech and gaming. Some UK startups – including Zoopla, Shazam, King.com, and most recently, online fashion marketplace Farfetch – have joined the elite club of “unicorns” that boast valuations in excess of $1 billion.
Historically, many US VC investors – particularly early-stage investors – have been reluctant to consider UK and other European investments, due in part to their perception of a lack of interesting opportunities. This, however, is changing.
Large US-led raises by UK startups have become increasingly common; examples include TransferWise, WorldRemit, Shazam and Skyscanner. Even US-led seed and Series A investments into UK startups are no longer unusual, as evidenced by Digital Shadows, YPlan, Azimo and MOVE Guides.
Despite concerns among many of a ‘bubble’ in the global tech sector (led by the US), the combination of tax incentives, favourable regulatory regimes, simplified immigration for key workers and entrepreneurs, national and local government support, and a concentration of co-working spaces and accelerators suggest that the tech economy in London – and the UK – is being built on a sustainable foundation.
Recent research recently released by TechCity UK indicates that, thanks to the successful hustle of UK entrepreneurs along with efforts by the Government to encourage the growth of tech communities, the UK digital community now consists of 47,000 businesses and contributes 10% to UK GDP. In London alone, more than 250,000 are in digital employment, and the capital hosts more than 36 accelerators and 70 co-working spaces.
For the globally-minded UK entrepreneur, the attention from US investors is welcome given the depth of the US venture capital markets. However, UK entrepreneurs need to understand the underlying business and legal dynamics associated with transatlantic venture capital investment.
The best early-stage investors add more than just capital; their expertise and networks are essential to the company’s success. These assets are harder to leverage when a Palo Alto investor has to Skype with a London founder across an eight-hour time difference. As a result, a UK startup looking to raise early-stage US funding is likely to need to establish a US presence unless the US VC firm is relying on a UK early-stage VC firm to lead that round and leverage its UK expertise and network.
In any case, US expansion makes UK companies more accessible and attractive to a broader range of potential investors, and most US investors will not be interested in an early-stage business that does not have US ambitions. Addressing this point does not necessarily require a UK startup to move its headquarters or business to the US lock, stock and barrel; indeed, it is not likely to make sense for it to do so. But it does require a serious US presence.
So, the key challenge for many UK startups is determining when to make the transatlantic leap, and how to do so in the most cost-effective and least disruptive way possible.
In the coming weeks, watch this space for the Fried Frank Technology team’s series of blog posts discussing business, tax and legal dynamics associated with US expansion and the securing of US venture capital investment.
Coming Next…. Differences between UK and US early stage venture deals.
Article produced in partnership with Fried Frank Technology.