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Tech Hubs Attract Venture Capital Around the Globe

Tech hubs, clusters of innovation, are growing. Bangalore is home to IT incubator Electronics City and is adding biotech innovation. in the Beijing suburbs Zhongguancun employs more than half a million people in the tech sector. Tel Aviv has more VC interest per start-up than similar businesses in Europe. And Berlin wants to turn its creatives commercial. Silicon Valley remains the tech hub by which all others are measured, but Silicon Alley in Manhattan is looking to make its own mark. And in the UK, Tech City is growing up and out from Silicon Roundabout

Silicon Roundabout

By David Prosser

Will more support see the East London hub produce world-beating UK businesses?

Prime Minister David Cameron unveiled a £50m redevelopment of London’s Old Street roundabout.

“We are seeing it continue to grow and go from strength to strength,” he said of what was first dubbed Silicon Roundabout five years ago by social networking pioneer Matt Biddulph. “That is down to the talented, creative entrepreneurs who have set up there.” There is no denying the growth: Biddulph identified the area around Old Street roundabout as a tech hub on the basis of just 15 early-stage technology companies clustered near the tube station in Shoreditch, East London. The Tech City Map puts the figure at around 1,300, but some estimates are about three times higher.

Now renamed the more corporate-sounding Tech City, the area has developed with little assistance from policymakers and has grown from low rents, with limited external investment. A local community using coffee shops and shared work venues as meeting places has fostered a collaborative spirit.

Inbox half empty
So where next for Tech City? What has happened in Shoreditch undoubtedly represents a triumph of innovation, but the commercial rewards are, as yet, less tangible. Some of the best known names of the internet have moved into the area – Google has set up the Google Campus in Shoreditch, while Amazon is opening a Digital Media Development Centre near the Barbican Centre.

Obviously there is scepticism about the longer-term impact Silicon Roundabout will have. In January, the inventor Sir James Dyson called for a more considered approach to public investment in engineering and science, blasting the UK government for its focus on Tech City. He bemoaned the seeming obsession with Silicon Roundabout:

“I am concerned we are sometimes distracted by the glamour of web fads and video gaming rather than the development of tangible technology that we can export.”

Possibly the most common complaint among Tech City’s critics is that while start-ups have proliferated, profitable companies are hard to find. There have been few cases where founders have been able to take their businesses to market for an IPO or sale. Shoreditch’s beacons of success are businesses such as Mind Candy, the company behind children’s social networking phenomenon Moshi Monsters, the online business card manufacturer Moo.com, and business-to-business email marketeer Mimecast.

The area’s biggest ever deal came six years ago, before the area was even dubbed SiliconRoundabout, with the £140m sale of Last.fm to CBS Interactive, part of the media and entertainment titan. Then, in 2009, mobile phone giant Nokia paid £12m for Dopplr, Biddulph’s own social networking firm – it subsequently mothballed the business. And in 2011, Twitter paid £25m for TweetDeck, a business that developed applications for using the messaging site more effectively.

Since then, however, there have been no exits on this scale – the pipeline to the market appears to have dried up. Maybe new impetus is required? Andrew McMillan, head of the technology team at law firm Simmons & Simmons, says: “Banks historically have not been able to get their heads around technology companies, particularly pre-profit businesses, and in the current climate for the banking sector it has only got worse.”

In November last year Silicon Valley Bank, an investment bank with a history of funding start-ups in the US, opened its first UK branch next door to the Bank of England, which happens to be a stone’s throw from Tech City. McMillan is cautiously optimistic, but points to this launch as a positive development. He says the equity finance environment for those businesses prepared to give up stakes has become healthier.

Next leap forward
The private equity and venture capital sectors are active, led by the likes of Index Ventures and Accel Partners, which have been growing operations in the UK and the rest of Europe. Eileen Burbidge, a partner at venture capital firm Passion Capital, arrived in Shoreditch three years ago following stints at Skype, Yahoo! And a decade in California’s Silicon Valley.

She is confident Tech City will succeed. “There will no doubt be failures – maybe 90% of these businesses won’t make it, but if 5% or 10% do, that’s 5% or 10% more than would have made it without this ecosystem,” argues Burbidge, who also sits on the advisory board of the Tech City Investment Organisation. “It simply wouldn’t be going this well without this concentration and density of businesses – and the collegial environment that encourages them – in a single area such as Tech City.”

Innovation among investors is also providing new finance sources. The crowd-funding model is a good fit for many start-up technology businesses, offering modest sums from a diverse range of investors. Crowdcube, which has just become FSA-regulated, was the first such business in the UK, and Seedrs, launched last year, has offices in Shoreditch.

Additional support for early-stage technology businesses comes from incubator and accelerator operations. These include Wayra, the Telefónica-backed organisation, which provides funding of up to €50,000 to nascent digital businesses, as well as a range of mentoring and development services. It already has a portfolio of more than 20 companies in the UK. Seedcamp, a pan-European investor that offers start-ups funding of up to £50,000, provides office space in Google’s Shoreditch offices.

There is also Springboard here, which offers equity finance to business founders who undergo a 13-week intensive training course at its Shoreditch and Cambridge offices. The Business Growth Fund has been getting in on the act, having already bought into one Tech City firm, Unruly Media.

The advisory community has started getting a presence in the area. Tim Kay, technology start-up lead at KPMG, which opened a Shoreditch office in January, thinks Tech City sceptics are in danger of missing the boat. “This is not a typical sector, even compared to the technology sector of the past when you had IBM, say, growing over several decades,” he argues. “The lifecycle is very different and if you want to be involved, you have to take a different approach – that’s why we’re now in Shoreditch.”

Kay argues that more widespread commercial success for Tech City businesses may be closer than people realise. “There are companies here that have been working very hard for five years or more and they are proper businesses – they are transactional and increasingly international,” he says. “And while Silicon Roundabout originally came out of London’s creative sectors, we’re now beginning to see a second wave based on the other backbone of the city, which is financial services.”

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Fairytale of New York?

By Mary Lisbeth D’Amico

New York City is staking a claim to be the number two technology hub in the United States.

In 2007, New York mayor Michael Bloomberg put making the city less dependent on Wall Street at the top of his agenda.

Since then, the Big Apple has indeed become something of a digital technology hub – an upstart rival to Silicon Valley. Hot start-ups such as Tumblr, Gilt Group, Foursquare, Kickstarter, Mashable, Etsy and Fab.com all call ‘Silicon Alley’ in Lower Manhattan home. Silicon Valley giants such as Google, Twitter, Facebook, eBay, LinkedIn and Yelp have opened offices there in recent years – and are planning expansion.

The New York Tech Meetup, an informal twice-monthly gathering of people connected to the tech sector, currently logs more than 23,000 members. In 2008 it had 7,500 members. According to a May 2012 report by New York City think tank the Center for Urban Future (CUF), information technology jobs in the city have increased by 28.7% since 2007, from 41,100 to 52,900. CUF ranks the city second to Silicon Valley in its concentration of companies, with more than 1,800 tech companies.

Boston comes in third. However, between 2007 and 2011, the area drew a 32% increase in venture funding, while Silicon Valley and Boston experienced decreases.

But a small reality check is in order. Boston-based start-ups still raised more money in 2012, according to data from private equity database Prequin, with 284 deals valued at $3.2bn to date, compared to 280 deals totalling $1.6bn in NY. Silicon Valley companies dwarfed both with 1,180 deals worth $13bn. Many of the NY investments are at the seed stage, where investments tend to be much smaller.

Fertile testing ground
There is strong demand for tech companies that create content, sell products and provide services online.

“New York is a great place to try out new consumer apps and services due to its density,” says Warren Lee of Canaan Partners, a Boston-based VC that opened a New York office in 2011. “New York offers an incredibly dynamic atmosphere for start-ups.” The firm’s NY investments include digital network Blip TV, online semantic advertising company Peer39 and Tremor Video, a digital video technology company that serves online advertisers and publishers.

Start-ups that settle in the city feed off its other well-established industries. “If you have a company
that wants to serve media, finance, advertising or marketing, you’d better be in New York,” says Weston Gaddy, principal with Bain Capital Ventures, the venture arm of Bain, which has invested in online designer dress company Rent the Runway, and Stamped, a product recommendations app that sold for an undisclosed price to Yahoo in October. NY-based companies now make up around one third of its portfolio, according to Gaddy. Successes such as DoubleClick and AOL also work in New York’s favour — they produce “alumni” who go on to found other ventures.

The presence of such large tech firms means that there is an exit option for start-ups, that the venture can be reabsorbed. Yahoo, for example, recently bought San Francisco-based mobile startup OntheAir just to hire its engineers.

There is also a dramatically increased fund availability. Of the tech start-ups founded in New York since 2007, 15 have raised more than $50m in investments, 27 have investments of at least $25m and 81 have raised at least $10m, according to the CUF.

Manhattan transfers
Venture firms Accel Partners, Matrix Partners, New Enterprise Associates and First Round Capital have all opened NY offices. There are also specialty funds such as Trigger Media, founded in 2011 by entrepreneur Andy Russell, who has invested in Zynga, Silicon Alley Insider, DailyCandy and Thrillist.

The $22m fund operates like an incubator, as it is closely involved in setting up new companies, according to Vanessa Liu, COO at Trigger. So far the fund has made investments in InHook, geared to “guys who have limited time, but discerning taste and a thirst for experiences”, as well as Host Committee.

However, a note of caution for fledgling incubators is that accelerator Y Combinator in Silicon Valley recently announced it would take on far fewer investments.

“Only good companies will get financed further,” says Miles Spencer, an angel investor in companies including Operative, Mojiva and Cellufun, who proclaims himself an incubator-model sceptic. And with many “me-too” companies, Canaan’s Lee says “it’s hard to break out”.

Chris Dixon, a huge advocate of NY’s tech investing scene, recently announced he was joining Californian VC firm Andreessen Horowitz in California. Although Dixon says he is not giving up on NY, he stated: “If you are going to do venture capital at scale, it’s clear to me that California is where you’d want to be based.”

New York has yet to produce a spectacular exit. Of those that have made the journey east, Facebook and Zynga haven’t fared well since they went public and IPO candidate Gilt Group, the fashion e-commerce site funded by Draper Fisher Jurvetson, has put its plans on hold. Yet the VCs are not about to turn tail.

“Overfunding is part of the VC business,” adds Lee, who says this actually illustrates that NY’s investing scene has gained critical mass.

“When I started out, people would say, ‘wow, there are start-ups in NY?’” recalls Zeeshan Zaidi, who moved from Sony BMG to music start-up Limewire in 2009. Zaidi, who is CEO and co-founder of Host Committee, an online platform for event organisation, says: “Now we have more community, infrastructure and financial resources.

“I always thought I would have to move to the West Coast, but I think you can have a long and successful career here and never leave this city.”

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Venture Spree

By Brian Bollen

The emergence of Berlin as a tech start-up hub dates back to 2005. Will it live up to its billing as Silicon Allee, or are their heads in the clouds?

The western half of Berlin was both the frontline in the Cold War and a Mecca for creatives. After 1989, it saw enormous development and cheap rents continued to attract a counterculture.

The next wave of development is seeing tech creatives proliferate in the German capital.

Berlin’s Senate Department for Economics, Technology and Research recently produced a report on the transformation of Berlin to ‘Silicon Allee’, which described the city as a ‘Mecca for Web 2.0 companies’. Dr Alex von Frankenberg, managing director of the German government’s High-Tech Gründerfonds (HTGF) initiative, which invests in young, innovative technology companies based in Germany, traces the development of what has come to be known as Silicon Allee back to around 2005.

“It’s clear in hindsight that the trend started around then,” he says. “In 2006, Berlin accounted for around 12% of our investment commitments. That figure rose to 32% in 2012, making the city the number one location for venture capital investment in Germany.”

HTGF estimates that total inflows to Berlin, combining seed finance with later stage finance, amount to €200m to €250m annually. The HTGF itself invests in 40 to 50 new companies a year, providing seed finance of around €20m, of which €7m flows to Berlin. Launched in 2005, investors in HTGF’s first fund include BASF, Deutsche Telekom, Siemens, Daimler, Robert Bosch and Carl Zeiss, as well as the BMWi and the KfW Banking Group. In October 2011, a second fund was closed. In total it has about €565.5m under management in its two funds.

Locals observe that Berlin, despite its lack of status as a financial centre, has become one of the places to be. Despite relatively high levels of unemployment, it certainly has a vibrant artistic, cultural and music scene, which has attracted a mass of creative people from across Europe.

Creative and visionary
Berlin has everything that a city needs, attests Behrend Freese, serial entrepreneur and currently CEO at Bitplaces, a Cloud platform that enables the integration of locationbased services into smartphone apps.

“Berlin has creative, visionary people, it is a great place to have fun and it’s not very expensive. It has good technical universities, and peoplewho made money in the first dotcom boom who are prepared to invest in modern start-ups,” he says.

Prominent in the pantheon of the last named group are the three Samwer brothers, founders of the European Founders Fund. Their first venture, in 1999, was Alando.de, which grew to become the market leader of internet auctions in Germany and was bought by eBay.

After the success of their second venture Jamba!, a ringtone seller for mobile phones, the brothers decided to become investors: “We are familiar with every stage of establishing a successful company, raising money, getting started, building and growing an organisation into a very large business and realising significant value for all stakeholders.”

Stefan Tirtey, a Munich-based technology partner at Doughty Hanson, points to music app SoundCloud as the poster child for what is happening in Berlin. The company was launched with seed capital in 2008. Doughty Hanson became the first institutional shareholder when the next round of ‘proper’ venture capital financing took place in 2009. A year later, Index Ventures and Union Square Ventures climbed aboard. The near-legendary Mary Meeker of Kleiner Perkins Caulfield & Byers joined SoundCloud’s board after a $50m round of financing at the start of 2012.

“There are hundreds of companies starting in Berlin, although there are hardly any of the major venture capital players based there,” says Tirtey. “It’s easy to attract international talent to such a vibrant city, the cost of starting a company is lower than in, say, London, and there is plenty of finance available at the seed stage.”

This article was originally published in the March 2013 issue for Corporate Financier, magazine of the ICEAW’s Corporate Finance Faculty. www.icaew.com/cff

 

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Silicon samba
Various parts of Brazil compete for the title “Brazilian Silicon Valley”: Florianopolis in the far south, with its large software industry; the financial and university centre of São Paolo; the engineering hub in the interior of Minas Gerais. But it is Campinas, north of São Paolo, that lays major claim to the phrase.

Campinas has a large university and research centre, and is also home to major foreign companies like Samsung, Motorola and IBM. It grew as a technology and telecommunications centre when state-held Telebras and Petrobras set up research centres at a time when Brazilian-made technology
was protected against imports. Brazil spends $13bn a year online, and 2012 saw the big VC firms join in.

“At the start of 2012, no foreign venture capital fund had yet invested in Brazil. Now there are more than a dozen… desperately looking for investments here,” says Julio Vasconcellos, CEO of deal website Peixe Urbano, one of Brazil’s most successful start-ups. It has had investment from Morgan Stanley Investment Management, as well as Monashees and Benchmark.

But the flood of foreign capital, with Intel Capital, Pitanga Fund and Bosch Capital prominent, has left some observers warning of a bubble. In the past year, Redpoint Capital has put $19m into travel site ViajaNet, and Atomico raised $8.7m for retailer Connectparts.

One entrepreneur said: “The excessive liquidity is causing problems. Companies have started to lose focus in their business and focus on readying themselves for investments. There is a bubble.”

Pessimists will point to a lack of skilled workers to sustain the tech boom – programmers and engineers are being trained and imported. To North American eyes in Brazil, stifling bureaucracy remains, but others say the VC industry learnt its lessons from the Internet bubble of the 1990s.

Silicon Wadi
Tel Aviv has a thriving tech industry, and with more than 600 start-up companies is well supported by a healthy VC network. The Mediterranean city, whose tech centre has been dubbed Silicon Wadi, was ranked number two in the world for tech start-ups by Startup Genome. Local tech VC firms include Battery Ventures, Greylock Partners, Venrock Associates, Bessemer Venture Partners and Sequoia Capital’s Israeli operations.

Tel Aviv has more home-grown talent than other tech hubs – just 13% have worked in Silicon Valley, compared with a quarter of those in London and Paris. While access to VC is put at 20-times higher than in Europe, Israeli entrepreneurs tend to have a lower appetite for risk, says Startup Genome.

“If you take the amount of VC per capita, in Europe, it is $7. In the US it is $72. In Israel it is double that,” Jan Müehlfeit, Microsoft’s European chairman asserted last year. Microsoft, Google and Facebook all now have operations in Tel Aviv.

Indian summer
The power of India’s tech hub, in the southern city of Bangalore, is well-known. The gleaming tech parks that house the software and R&D arms of multinationals, as well as public-sector space and biotech research programmes, mean that Bangalore has the highest concentration of scientific talent in what will soon be the most populous country on earth.

There is barely a major tech company that doesn’t have a presence in Bangalore, but the question remains whether the city can attract the entrepreneurship to become a replicator of Silicon Valley rather than its back-office.

There are many stories of Indian-born engineers who, having made a fortune in California, go “home” to Bangalore, but with a more American attitude to risk and starting businesses. Rajiv Kaul of CMS Info Systems and formerly of Blackstone, told Forbes magazine:

“There are a few things which happened in India. After the dotcom period, a lot of people burnt their hands, including us. We barely managed to get the money back and were lucky. I think that we are very risk-averse as a society.”

However, Bangalore-based companies raised $1.17bn from private equity in 2012, with the bulk of this in the IT sector. Online retailer Flipkart – now valued at $850m – received a $150m investment from Iconiq, MIH and Tiger Global. Consulting firm Technopak Advisors estimates India’s current digital (e-commerce) economy is $600m, but predicts it will rise to $70bn by 2020. The potential for deal-making is clear even outside the systems and software sectors that have previously driven Bangalore.

The China question
Zhongguancun, in Beijing’s northern suburbs and close to the Chinese Academy of Sciences, has established itself as mainland China’s tech hub. Long the home of Chinese firms Founder, Legend and Lenovo (which now owns IBM), the city is home to the Chinese arms of Google, Sony, Intel and Microsoft. It is estimated that more than half a million people are employed by tech industries in the suburb China’s internet market is the largest in the world, and there was a rush to IPOs on the US markets in the mid-2000s. But a raft of accounting scandals and fears of greater scrutiny from the Chinese government have turned investors off Chinese tech. VC investment is down fivefold year-on-year, with e-commerce operations missing out.

“In the first wave of capital that goes into a sector, there’s a lot of relatively dumb money,” said Gary Rieschel of Qiming Venture Partners. “The assumption on e-commerce was that everyone is going to be like Amazon, and it’s starting to be clear that that’s not going to be the case.”

Venture capital is now looking for areas with high barriers to entry, with Rieschel seeing a shift towards companies involved in analytics and cloud computing, where intellectual property and technical skills are paramount. Fidelity Investments have launched a Chinese VC fund worth $250m.

Meanwhile, Chinese money is active (in China and elsewhere), with leading Chinese PE firm China Science and Merchants Capital Management due to invest more than $1.75bn in at least 300 companies in 2013.

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[stextbox id=”info” caption=”TECH REGIONS”]

Silicon Fen
Around 1,400 technology companies in Cambridge employ more than 53,000 people and turn over more than £13bn a year.

Cambridge University is a major player in the local technology scene, as is the hugely successful Science Park, but the private sector dominates. The city has produced world-leading companies such as ARM Holdings.

Silicon Spires
Oxfordshire has also capitalised on academia. More than 3,000 high-tech businesses are based here, collectively employing around 45,000 people — technology and biotech sectors dominate.

Silicon Glen
Scotland’s technology cluster, mostly located in the triangle formed by Dundee, Inverclyde and Edinburgh, has been hit by the withdrawal of large employers such as Motorola and NEC, but still consists of several hundred businesses employing tens of thousands of workers.

Silicon Gorge
A University of the West of England paper has argued that the area formed in the triangle of Bristol, Gloucester and Swindon is Europe’s fourth biggest technology cluster. Well-known technology businesses in the region include HP Labs and Imagination Technologies.

Emerald Valley
Entrepreneurs in Newry are attempting to position the town as Northern Ireland’s centre for high-tech start-ups – around 10 businesses are already located there.

Cwm Silicon
An area to the west of Newport in South Wales is still home to a small number of technology businesses, though ambitious development plans first outlined a decade ago have yet to be realised.

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[stextbox id=”info” caption=”KEEPING ITS COOL”]

There is a challenge that Tech City must soon confront. The low rents that attracted the first start-ups have disappeared as the area’s brand value has grown, potentially depriving the area of new lifeblood. Moreover, the Google and others’ arrival not only exacerbates the trend towards higher costs, but the positive effects may be over-stated.

“For technology start-ups, the most important thing is protecting their intellectual property,” one investor argues. “They are going to feel very uncomfortable with any arrangement that feels as if they’re undermining the protection of that intellectual property”

Steve Pette, founder of Central Working, one of several shared working offices in the area, says this is one reason why ventures such as his are important. “It’s not overly corporate and there’s a great deal of independence,” he argues.

However, Lee Marshall, director of IT advisory services at E&Y, argues Silicon Roundabout has to work out how to move on. “Hubs such as Tech City are great, but the co-location is only one aspect of what will generate long-term growth,” he says. “The benefits have to be cemented because the cool factor will go as soon as rents become unaffordable.”

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