Light Up Like a Christmas Tree

Linchpin Salon discussion on early stage investing in the U.K.

Our latest Linchpin Salon discussion, held at King’s College London’s Strand campus, was originally intended to have a broader scope.  However, the conversation stayed determinedly on the highly topical area of what is needed to encourage early-stage investors in the U.K.  It was chaired by Aoifinn Devitt and the panellists were:

• Stephen Breban, Senior Adviser and Consultant

• Nadine Buckland, CEO, Zenzic Capital

• Eli Krieger, Analyst, Lansdowne Partners

• Roy Kuo, CIO, Galilei Investment Office

Why the U.S. has dominated start-ups

We started off looking at why the U.S., and originally just Silicon Valley, has dominated start-ups over the past 30 years.  The U.K. has probably had at least as good research and Intellectual Property (“IP”) as Silicon Valley, but it hasn’t grown in the same way.

Some of the reasons are cultural:  American entrepreneurs and investors are more confident, the former not afraid to fail, the latter more likely to become serial investors after one success.  We mentioned American drive and a greater willingness to hustle.  This also shows itself in the desire to expand further rather than sell out early ‘to be with the family’.  One panellist commented in jest that perhaps Americans don’t like their families, but it is a real difference.

U.S. entrepreneurs put far more emphasis on the commercials, and Google was used as an example: a search engine which wasn’t even second best but still ended up dominating half the world.  In contrast Europeans tend to take the view that if a product is good enough it will sell itself.  There are plenty of examples like Betamax or Ask Jeeves to show this does not work.

The importance of an ecosystem

One panellist talked about how it ‘takes a village to raise a child’: a healthy ecosystem which accepts failure, makes it easy to recruit (and fire) staff, and can offer the necessary financial and other resources is vital.  Another emphasised the difference between U.S. and European investors.  The former are more interested in the entrepreneur’s journey, the latter in their track record and credentials.  This makes it significantly harder for start-ups.

What could Government do to help?

Then there is the Government’s role.  Our panel largely agreed that governments are able to incubate and grow successful start-ups, and Palantir, which grew from within the CIA, was used as an example.  We discussed the role of the British Business Bank in the U.K.  There was agreement that it suffered from many of the flaws of government, but most panellists thought that it had been a force for good in supporting and setting up structures to encourage investors.

We discussed the trend towards mandating investment in private equity.  A view from the audience was that it would achieve the objective of raising the number; but the panel generally expressed the robust view that the U.K.’s Mansion House Agreement had made no difference and was irrelevant.  Generally the panel and the audience agreed the Government should rely on incentives and not on regulations. 

One panellist thought that raising pension funds’ investment return target would encourage them to invest in higher risk asset classes.  Others disagreed, saying that UK corporate pension funds are broadly fully funded and their sponsors are more likely to want to de-risk or move to buy-outs rather than invest in longer term and riskier investments.   

Pension funds tend not to have the skill set to select venture cap investments or even funds, and are further constrained by an excessive emphasis on fee levels.  In start-ups more than anything, investors should be prepared to pay up to gain access to the best funds.  We touched on the unintended consequences of legislation.  For example, the fee caps on Defined Contribution schemes are not compatible with investing in high fee private assets such as venture capital. 

Light up like a Christmas tree

Given all this, our panel was surprisingly optimistic about the outlook for U.K. start-ups, especially in sectors such as genomics, defence tech and even natural capital.  There is plenty of IP being generated in the universities, and ecosystems are evolving to help them flourish.  One panellist was brave enough to predict that there would be a US$10bn IPO in the U.K. within five years.

The phrase ‘light up like a Christmas tree’ was used several times.  Several panellists thought it only needs a few tweaks to set the U.K. venture cap scene alight.  But these changes need to come from Government and are largely about providing incentives and not about mandating pension funds to invest there.  A member of the audience asked why Government itself does not own any equity, for example. 

The session ended with a short discussion about angel investing.  Panellists thought the concept was fine, but tweaks are needed to make it work.  The current tax structure is more about containing losses rather than encouraging gains, which seems perverse.  A member of the audience pointed out that after over 30 years angel investing only amounts to about £1.5bn in total, which can only be considered a failure.

Although there were several representatives of the Local Government Pension Scheme, the only funded U.K. public sector pension scheme, present, we did not speak much about how the pools now in charge of their investment implementation should be involved.  There is a scale problem as well as an access challenge.  However, links with local universities will naturally be stronger.

The conclusion of the room was undoubtedly optimistic about the outlook.  There’s no guarantee that the U.K. can follow the same path as Silicon Valley, but we do believe that we will see U.K. start-ups become commercial successes.  We just hope that politics does not get in the way.  Our thanks to Aoifinn Devitt, our panel, and above all our audience for an entertaining and insightful hour.