‘Why have we not grown any giant companies?’ The UK’s attempt to take on Silicon Valley


A decade ago, Taavet Hinrikus and Kristo Kaarmann stood before prospective investors at Seedcamp, a start-up event in London, and set fire to a £50 note.

The two entrepreneurs were hoping to demonstrate the money wasted on overseas transfers, and the cost advantage of their new service, TransferWise, which was pitched as a “Skype for currency exchange”.

But the image of wantonly burning cash was an apt metaphor for what, at the time, most British investors thought about the prospects of UK start-ups.

“Start-ups were still a very strange thing,” says Hinrikus, whose company has since rebranded as Wise. “When we were starting Wise we had to raise [most of] our money from the US because nobody would invest in Europe.”

Weeks earlier, Apple had overtaken ExxonMobil as America’s most valuable company. Britain, meanwhile, had by 2010 produced fewer than a dozen tech groups valued at more than £1bn.

Entrepreneurs Taavet Hinrikus, left, and Kristo Kaarmann, led Wise to a £9bn direct listing on the London Stock Exchange this year © Birgit Puve/FT

Comments from one of Britain’s most prominent tech investors suggest little has changed. This summer the outgoing chief of Baillie Gifford — the Scottish fund manager that made early bets on Amazon, Facebook and Tesla — lamented that the UK was yet to produce a huge global success on the scale of Silicon Valley’s trillion-dollar companies or to rival the likes of Tencent and Alibaba in China.

“Why have we not grown any giant companies?” James Anderson, joint manager of Baillie Gifford’s Scottish Mortgage Investment Trust, asked the Financial Times in June. “It seems to me there is a real problem here.”

However, in the decade between TransferWise’s cash fire and Anderson’s comments, there has been a ten-fold increase in the number of UK “unicorns” — start-ups worth more than $1bn — while the capital invested in British tech companies has jumped from €1bn to €13bn a year over the same period, according to figures collated by investment firm LocalGlobe.

“The tables have turned radically,” says Hinrikus, who led Wise to a £9bn direct listing on the London Stock Exchange this summer. “We’re past peak Silicon Valley now.”

Interviews with dozens of the UK’s most successful company founders suggest that Anderson’s frustrations are widespread, but so is Hinrikus’s optimism.

“UK culture doesn’t celebrate the entrepreneur,” says James Dyson, the inventor behind the eponymous appliance and technology business.

chart showing that the US leads the way in billion-dollar valued start-up activity

Tom Blomfield, co-founder of digital bank Monzo, counters that the environment for founders was “almost unrecognisable” today from when he first began starting companies more than a decade ago.

“It becomes a virtuous circle, where the more success you have enables the next ones,” he says. “I’ve made 18 investments this year. There’s a really strong network of angels in London who will write serious cheques, whereas 10 years ago that didn’t exist.”

The past two years, in particular, have finally shaken off dotcom hang-ups. According to PitchBook, the UK’s venture-backed companies saw “exits” — including takeovers and stock-market listings — totalling €20.7bn in the first half of 2021, beating all previous annual totals. In the UK and Ireland, PitchBook said, venture investment topped €10bn for the first time in 2018 and so far this year had reached €14.6bn — already matching the total for all of 2020.

The rapid rise of private British companies such as Revolut, the six-year-old digital bank valued at $33bn in July, and Hopin, a two-year-old virtual events start-up that was priced at $7.8bn in August, demonstrate that valuable businesses of global scale are being built more rapidly than ever in the UK.

Column chart of Deal value ($bn) showing VC investment in the UK has increased sharply in the past year

A transformative year

For many UK-based entrepreneurs, 2014 was when things really started to change. At the start of the year, artificial intelligence company DeepMind was acquired by Google for $500m, the latest in a line of promising British businesses lost early in their development to a larger US tech giant.

But by the end of the year, the UK had started to punch back. Wise’s Kaarmann had secured a major investment from Andreessen Horowitz — and, unusually at the time, did not move to Silicon Valley as a result. Instead, he asked investor Ben Horowitz to come to London for board meetings.

“We tried to raise money from Andreessen earlier, and they were willing to fund us, with one catch: we had to move to California,” says Wise’s Hinrikus. “And we told them it makes no sense — we have a business going in Europe, why would we ditch that? We went back two years later, it was a very quick deal to get them to say yes — they were somewhat apologetic.”

In Manchester, Matt Moulding, founder of online retailer The Hut Group, had managed to raise his first institutional funds with investment from BlackRock after six years of trying. In London, Lehman alumni Nikolay Storonsky began building what would become Revolut, Anne Boden founded digital bank Starling and food delivery app Deliveroo raised its first funding round.

Seven years on, Revolut has become the most valuable private tech company the UK has ever produced at $33bn, while THG, Wise and Deliveroo have all secured multi-billion pound public listings. Starling hopes to follow suit as soon as next year, alongside other possible initial public offerings including meal kit start-up Gousto and Atom Bank, both of which also took off around the same time.

Nikolay Storonsky, co-founder of Revolut
Nikolay Storonsky, co-founder of Revolut, which has become the most valuable private tech group the UK has ever produced at $33bn © Charlie Bibby/FT

“2014 was a watershed moment,” says Moulding, whose business is now worth £7.6bn.

For years UK entrepreneurs had to scrabble together cash to start a business. Moulding remembers having to use a chunk of his bonus and several remortgages to get THG going in 2004. This was a few years after John Roberts had started online electronics retailer AO in nearby Bolton on the basis of a £1 bet.

Mike Lynch started software company Autonomy with a £2,000 loan from an “eccentric” man in a pub. Billionaire Icap founder Michael Spencer used £50,000 of cash from him and three friends from their company bonuses in 1986.

“We very much felt that we were alone,” says Charlie Green, co-founder of flexible office provider The Office Group that started in 2004 with a small office in Islington but now occupies 53 buildings backed by Blackstone. “We just focused on what we were doing. But now founders can see an ‘endpoint’ to aim for, be it the next funding round or an IPO.”

When Michelle You was fundraising in 2008 for her start-up Songkick, it took her several months to pull together less than $1m, despite the buzz around the “Silicon Roundabout”-based concert tracking site that had been through the prestigious US accelerator, Y Combinator.

This year, though, You was able to raise a $2.7m “pre-seed” round for her new start-up, a carbon tracking and removal platform called Supercritical, in just a month. You says it could have been even faster, but she wanted to ensure that half of her investors were women, who are still under-represented among both tech entrepreneurs and their backers.

Founders say that technology has become paramount while the importance of geography has waned. There is much more cash available than before to allow companies to stay and grow in the UK.

“The reason companies previously sold was because it wasn’t as easy or possible to raise the large amounts of capital that were really required to build these businesses,” says Nigel Toon, co-founder and chief of Graphcore, a Bristol-based chip developer that has raised $700m over the past five years, giving it the firepower to take on Silicon Valley rivals such as Nvidia.

The sudden influx of private capital is enabling more founders to stay private for longer and scale up their operations, according to Timo Boldt, founder of mealbox provider Gousto.

“We always wanted to be a very, very large business over a very long time frame. I can’t think of a single reason we can’t build a Google or Amazon here — we certainly have ambitions. The risk appetite has changed positively over the past 10 years.”

Chart showing that North America and Asia dominate private company valuations

Culture questions

Riccardo Zacconi, the co-founder of King, creator of the Candy Crush video game, argued the sheer size of the American domestic market continued to act as a powerful tailwind to US-based companies.

“If you want to build a Google, you have the option to start in the UK but then you will never build a global company,” says Zacconi, who first took UK-based King into Europe before tackling American rivals on their home turf and eventually selling to Activision Blizzard in 2016.

UK start-ups still sell to larger US companies with some regularity: examples this year include Snap’s buyout of smart glasses maker WaveOptics and Etsy buying used-clothing marketplace Depop.

The UK has had a long tradition of innovators and entrepreneurs, making money out of finance, property, commodities and retail. But they have often faced suspicion, rather than the sort of celebrity status afforded in the US to founders such as Elon Musk, according to Icap founder Spencer.

Spencer, who now invests more than £1bn of his own funds privately into companies such as Superdielectrics, AJ Bell and CME, says that conditions have improved hugely in the past two decades but the UK still “has a long way to go” and is more likely to recognise a “mediocre musician” than a homegrown entrepreneur.

Those that do permeate the public consciousness tend to be ardent self-promoters rather than business revolutionaries. “I really think there might be something in the culture when the US has Steve Jobs and the UK has Richard Branson,” says John Collison, co-founder of Stripe, the payments company that has dual headquarters in Silicon Valley and Dublin.

Michelle You, founder of Songkick
Michelle You, founder of Songkick, raised a $2.7m ‘pre-seed’ round this year for Supercritical, her new start-up © Charlie Bibby/FT

Others fear that the UK still has an ingrained suspicion of success. Entrepreneurs such as AO’s Roberts and Martin Sorrell, who left WPP, the advertising group he built, after a scandal, point to “tall poppy syndrome” — where successful businesspeople are built up to be knocked down.

But they also agree that the UK’s view on entrepreneurship has changed significantly, with greater respect for many emerging from the ranks of tech start-ups, in particular.

“Over the last 10 years the UK has done a fabulous job of encouraging people and the attitude towards entrepreneurs has changed completely. Now it’s accepted as a career, which is a fabulous change,” says Graphcore’s Toon.

British entrepreneurs who have been successful in America still see advantages in the US, however. “I do appreciate the sunny attitude,” says Will Marshall, chief of San Francisco-based satellite imaging company Planet Labs, who is originally from Tunbridge Wells.

“Because of that attitude, the ideas get going,” he added, pointing to the propensity for Silicon Valley’s many billionaires to take a punt on the next generation of Stanford dropouts. “It’s not that there is more capital, it’s that people are willing to give it.”

But Marshall also believes that Covid-19 is “flattening the playing field”.

Monzo’s Blomfield agrees: “I think Silicon Valley is losing its gravity in a sense, especially with Covid and more people going remote,” he says. While few global cities can match San Francisco in tech talent, it has become increasingly expensive for start-ups to recruit the best engineers — and for some, a less appealing place to live.

Some of the more optimistic UK investors and entrepreneurs point to a “reverse brain drain” as British executives return from Silicon Valley. That is particularly true in fintech and ecommerce. “The British fintech ecosystem is the most interesting in the world,” says Stripe’s Collison. “That’s an example of a space that is going absolutely gangbusters.”

Many founders worry that Brexit will counteract this change. “The big risk now is if large platforms like Google, Apple and Facebook move their real [operational] headquarters from the UK to mainland Europe to serve better that market, and those markets become more and more important,” says Zacconi at King. Big Tech, while a source of competition, is also a vital source of training and talent for local start-ups.

Riccardo Zacconi, co-founder of King
King co-founder Riccardo Zacconi said: ‘If you want to build a Google, you have the option to start in the UK but then you will never build a global company’ © Charlie Bibby/FT

One sign of progress in the UK has been the willingness from venture capital and angel investors to back science and healthcare start-ups clustered around Oxford and Cambridge, boosted by government schemes that have made investing in start-ups more tax-efficient.

But Dyson raises a common concern when he says that the research breakthroughs had not always translated into successful businesses.

“Britain has great universities which give us a great advantage in knowledge creation compared to competitor economies, but we need to be much better at commercialising those ideas quickly and understanding the fierce international competition that we face,” he said.

British R&D spending also remains a concern. In 2019, private and public investment in the UK totalled £38.5bn, according to the latest figures from the Office for National Statistics. Germany’s spending was two-and-a-half times bigger, while in the US Apple and Alphabet alone invest almost the UK total, with a combined $50bn last year.

The UK government aims to address this gap: last month, ministers confirmed plans to increase annual public investment on R&D to £22bn and carry out an independent review to assess research, development and innovation across the UK as part of a 10-point innovation strategy.

The British regulatory climate is often compared unfavourably with the US. “On the whole, tax and other regulation only gets more complex and assumes people are doing wrong rather than trying to do right,” says Simon Peckham, chief executive of Melrose Industries, and one of the co-founders of the manufacturing investment group. “These barriers discourage and restrict entrepreneurs.”

Moulding at The Hut Group believes that the best thing for politicians is to stand back: “The biggest role that the government can play is to be as hands-off as possible. The barriers just aren’t there — the opportunity for these businesses to go on a global stage is massive.”

FTSE vs the Nasdaq

One area where government intervention is warmly welcomed by most entrepreneurs is in helping to overhaul London’s stock market listing regime.

“If we want to have Google-type companies in the UK, we’ve got to get them to list in London,” says Lynch, who regretted selling Autonomy to HP in 2011 but added that British investors would have never refused the 79 per cent premium offered by the US tech group.

“If we can fix that, then those companies will list, some of them will be very good, and they will become very large,” says Lynch, whose latest business, Darktrace, the AI-based cyber defence group, listed in April and now has a £5bn valuation. “You can definitely build a very large business in the UK. And that wasn’t clear in the past.”

Greg Jackson of Octopus Energy hopes that the government-commissioned Lord Hill review into improving the UK’s listed market will help “investors understand companies that don’t fit into the usual investment template”.

Many entrepreneurs accuse British investors of thinking short term, refusing to tolerate short-term losses in exchange for long-term growth. “Certain investors have historically had an allergic reaction to red ink in this country,” says Alex Chesterman, chief executive of Cazoo, which chose to go public via a blank-cheque company in the US rather than IPO in London. Moulding agrees that as it stands “the valuation differences are immense on the market . . . so much money sits in the US”.

James Dyson
Billionaire James Dyson, pictured in 2016, pointed out that research breakthroughs had not always translated into successful businesses © Heathcliff O’Malley

Sorrell says his new advertising firm S4 Capital would have a higher value with a purely US listing. “It’s better than it was — the market has got bigger. But are we treated, encouraged and dealt with as in America? No. America is the country of most opportunity.”

Charles Dunstone, co-founder of Carphone Warehouse, says that the UK-listed market has become an increasingly difficult place for companies to operate.

“It’s become a lot more miserable,” he says, pointing to burdens of new corporate governance and “smug fund managers happy to take 2 and 20 fees but begrudge people getting a decent salary”.

Spencer is even more blunt, saying that running a public company now “is a pain in the ass”. “It’s an environment designed to frustrate a CEO,” he says.

A related question vexing several UK-based venture capitalists: who shares in those proceeds, whether they come from an early sale or a long-awaited IPO?

“UK pension funds by and large have been underweight exposure to this asset class [venture capital],” says Saul Klein, an early Skype and LoveFilm executive who now invests at LocalGlobe.

That means, even when successful UK companies do go public or sell for multi-billion pound sums, the beneficiaries will not be those fund managers in the City of London — or the British people saving through their funds — but overseas investors, such as the sovereign wealth funds of Abu Dhabi and Singapore, or one of the Canadian pension funds that have become significant backers of venture firms in Europe.

“For one of the world’s great financial centres, this feels like a pretty catastrophic miss in the last 20 years,” says Klein. While the UK may not yet have produced a trillion-dollar success, the entrepreneurs based here have nonetheless made giant strides. The problem, added Klein, was that “local capital seems to have got the memo late”.

Additional reporting by Sylvia Pfeifer

To read our list of the UK’s top 100 entrepreneurs, click here



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