Tech city: made in the UK

Welcome to Tech City, London. I've come to a rather ugly building off Old Street, to see British innovation at the sharp end. But the people I'm visiting would rather I didn't tell you where they are, because they have more than enough members already, and not enough space to accommodate more.

There are 400 of them altogether. They call themselves hackers, but there's nothing sinister about what they do: in a previous generation they'd called themselves inventors. Between them they have bought two adjacent industrial suites and knocked them together into a kind of glorified shed, for making things. All kind of things. And at any time of day or night. Indeed, the man who shows me around today is bleary eyed. “I've been working here all night,” he says, for all the world like the Dick van Dyke character in Chitty Chitty Bang Bang, only with trainers, a T-shirt, and a better British accent.

The hackers come here to work because, despite being scruffy, the place is (to use the vogue term) a hub. It contains a quite extraordinary array of tools the membership has borrowed, or bought on subscription: 3D printers for rapid prototyping, mills, lathes, drills, bike repair kits, pieces of timber, laser cutters, machines for making holograms, and for reproducing DNA samples, bookbinding equipment, LED light displays, lock-picking devices, a knitting machine, a sink, a fridge, an A1 printer and – it should go without saying – state of the art computers.

With all this, the members of this “hackspace” come together to bring amazing ideas to life. Most of the ideas will never be suitable for commercial exploitation. Fair enough, perhaps, in what was set up, after all, as a kind of play-space. But in the nearby workspaces where some of these same people have jobs the ideas are very much expected to create value – to lead to products that could rapidly turn a start up into one of the biggest companies in the world – the next Google, if you like, or Facebook.

The British government has invested a huge amount into Tech City – the area around Old Street's vast road junction, also known as Silicon Roundabout – establishing Tech City Investment Organisation to boost digital and creative enterprise here and across the country. As a result, Tech City has become one of the fastest growing technology hubs in the world, expanding from about 20 companies in 2007/8 to more than 700 in 2012. And it's not only startups that have located here. Some of the world's leading technology companies – including Cisco, Vodafone, Facebook, Intel and McKinsey & Co – have committed to the area's long-term future. Less well known, but rapidly growing companies that have done the same include Yammer, Eventbrite, Airbnb, Last.fm, TweetDeck and Care.com. Google leased a seven storey building, to be used for speakers, collaborative programming events, training workshops and product demonstrations for engineers, but also as an incubator for 90 start-ups. (There are 800 others on a waiting list for a desk, but they can register for free access to the cafe and networking spaces.) “Our success will be measured by the success of the startups who use our campus,” said Google.

The first initiative of its kind for Google anywhere in the world, estimated to have cost about £5m for a ten-year lease and fit-out, was hailed as a great step forward for Tech City. But the British government wants more – it would like to see companies like these take space in the well-equipped nearby Olympic facilities, and to keep up the momentum it has continued to work towards creating a genuine “ecosystem for talent” in the area, with a huge variety of initatives, galvanised by monthly meetings at Number 10 and the support of Eric van der Kleij, Tech City's official “entrepreneur in residence”. These have included a “Silicon milkroundabout” to attract the kind of high-performing graduates who might otherwise go into finance or the professions, and an “entrepreneur's festival”.

Others who have helped include the City of London Corporation, which recently hosted an “Angels in the City” event. The hope is that city workers might invest as much as £10m a year in startups. “There are 100,000 people earning over £1m in the capital and we need to harness these people for the economy,” said a corporation spokesman.

It sounds good but when you look past the hype, and the real investments these companies have made, what will it actually amount to? Will Tech City truly help to turn London, and the UK, into a place where innovation leads to real business success? Or to put it another way: does anyone really believe that the next Google could be started here?

One who certainly thinks there is a long way to go is the Google chairman, Erick Schmidt. Last summer, before Google made its investment in Tech City, Schmidt delivered a speech in Edinburgh that started by acknowledging Britain's past record in innovation. The UK had “invented computers in both concept and practice”, he said – before adding that the UK had failed to build industry-leading positions or successfully transfer ideas from the drawing board to the boardroom. “Thank you for your innovation, thank you for your brilliant ideas. You're not taking advantage of them on a global scale.

“The UK does a great job of backing small firms and cottage industries, but there's little point getting a thousand seeds to sprout if they are then left to wither or transplanted overseas. UK businesses need championing to help them grow into global powerhouses, without having to sell out to foreign-owned companies. If you don't address this, then the UK will continue to be where inventions are born, but not bred for long-term success.”

Only days before, one of Britain's greatest successes had indeed been sold off to a foreign-owned company. Autonomy, founded in 1996 as a spin-off of technologies developed at Cambridge University, had rapidly grown into a FTSE 100 company with a value around $10bn – before being snapped up by Hewlett Packard last summer.

Why does this kind of thing happen? In April this year, Startup Genome published data comparing cities around the world. Startup Genome ranked London third after Silicon Valley and New York in the world's 25 top startup ecosystems: not bad. The next highest European cities were Moscow (10), Paris (11), Madrid (14), Berlin (17) and Warsaw (23). Poring through the data underlying this, we find three statistics that broadly confirm Schmidt's argument. First, the Silicon Valley ecosystem has 54% more companies ready to scale up than London. Second, Silicon Valley startups seem more willing to change direction as markets require: pivots happen 33 percent more on average in Silicon Valley than than London. Third: London has twice as many founders hoping to make a quick flip than Silicon Valley or New York.

In other words, the UK has fantastic ideas – four of the world's top ten universities, including the number one, Cambridge; 14 per cent of the world's highly cited research articles, second only to the US, and more usage per article than in the US, China, Japan or Germany – but Britons lack the commitment to make full use of them. Why?

Professor David Gann of Imperial College, London has some ideas. Gann sat on the UK government's Hargreaves Review last year. “The chancellor asked us to look at whether there were impediments to a Google arising in the UK. We did find some impediments in the UK regulatory system, but they weren't big and have been dealt with.”

The government has also tried to incentivise innovation by means of changes to the tax system. Among other things, this includes the Seed Enterprise Investment Scheme, designed to incentivise very early investments: first-stage investors in a start-up receive a 50 per cent tax break and with investments in 2012 they will never be charged capital gains tax. There are also tax credits for R&D.

Critics say that London remains expensive. Behind Hong Kong it's the second most expensive place to rent offices. But on the other hand labour costs in the UK are well below the EU average.

Gann has confidence in London. He believes the next huge wave of innovation will not be about the backbone of the web, or the technology underlying devices but about the services that are going to flow on top. “And that kind of innovation starts in marketplaces, at the point of consumption, vibrant cities with a lot of diversity. London has all the right attributes.” Every day, he notes, 330 languages are spoken in London, compared with 220 in New York. “So if cities are fertile markets, it's quite possible that they will be more important than Silicon Valley. And that's why Silicon Valley Bank has a UK licence now.”

Jon Callaghan, founder of Silicon Valley-based VC firm True Ventures, visited London recently and was struck by how global the city is. “The entrepreneurs with whom I met had global ambitions. Many of the ideas were targeting emerging users in Africa and Brazil, and these founders are thinking of the worldwide trends from the start. Though we have some of this consciousness in the US, the global view feels omnipresent in the London entrepreneur scene.” (Like the rest of Europe, London benefits from being in a zone compatible with truly global trade.)

Other observers, in continental Europe, share the sense that London has a global reach. Le Bridge is a French organisation looking to bring businesses in London and Paris closer together. It recently listed London's advantages: most European VC activity is in London; and London has the English language, providing easier access to the US and more than 60 other countries where English is the official language. “Getting closer to London is a no-brainer and would make Paris more competitive,” Le Bridge concluded.

London attracts talent, for cultural and quality of life reasons,” says Tamas Locher, who moved his fashion business, Lookk.com, to London from Vienna. “A healthy tech sector needs job mobility, and a liberal migration policy. London has that.” But more important still for Locher was access to funds: “The vast majority of the European venture-capital industry is in Lodon.”

The most important thing, Gann insists, is access to the market. “The next generation of ideas is going to come from the melting pot of services in dense urban areas. It's not virtual. Games apps can be done virtually. But just even setting up a trial with the organisations we work with in transport or health, in order to do it you can't do it in the lab. This is market-facing innovation. It has to happen where people will trial things in use. if you want to do something with transport, health or utilities, which will be highly disrupted by big new business models, you have to work with providers. face to face time is necessary. For instance, electric vehicles are something we're going to see more of in the future. But at the moment the transport infrastructure doesn't talk to energy: if everybody drove to Wembley and plugged in their cars while they watched a game, would the grid collapse? We don't know. We're working on projects that will enable that to happen in the digital future, and working with incumbent providers.

All the same, Imperial's own research (in collaboration with other bodies outside the UK), published in April as the Gedi Index (Global Entrepreneurship Development Index) shows the UK at a disappointing 14th place, globally, as a place with the right system to support entrepreneurship. The report considers a wide range of factors, and shows what needs to be done by government and others.

And the most important thing to address is low British aspirations.

Already, a lot of work has been done on this already at universities, setting up incubators to help academics and students to spin off businesses. Cambridge works with Springboard, UCL has Seedcamp, Imperial College has the Imperial Incubator… and there are many others. Between them, they have access to considerable funds, and have already spun off many successful businesses.

In 2011, prompted by a McKinsey report into graduate entrepreneurialism, the British government to set Entrepreneur First, backed by a large number of entrepreneurs, students and corporate sponsors, was to lure graduates towards entrepreneurship instead of conventional careers.

After receiving more than 400 applications, 34 applicants were selected in April this year. They will participate in a two-week “bootcamp” in Cambridge in August, forming companies with fellow participants and beginning to turn ideas into businesses. From September, they will be set up with a desk in a co-working space in London's Tech City, with expert training, access to funding and mentoring from companies such as Cisco, BT and Silicon Valley Bank.

The individuals selected were chosen because they had already demonstrated entrepreneurial flair, setting up businesses to support themselves through university, or developing and selling software or hardware. One, Robert Whitehead, used to create products for Second Life when he was at school. “What I need is guidance on how to run a business, and get funding.”

Critics point out that Entrepreneur First, like the various university incubators, is open only to graduates. Steve Jobs, founder of Apple, Mark Zuckerberg, CEO of Facebook and Sir Richard Branson, founder of Virgin, would not have been able to join. As Branson recently put it at the launch of his own drive to promote entrepreneurialism: “The message is loud and clear from young entrepreneurs – they have told us that it would be easier for them to get a loan to study enterprise than to get a loan to start an actual business.”

If aspirations are changing among the population at large – and there's evidence that they are – it's not because of Tech City, or university incubators or government programmes. It's because British broadcasters have for the last decade or so massively increased the amount of prime-time programming devoted to business and entrepreneurialism, says Professor Raymond Boyle, at Glasgow University's Centre for Cultural Policy Research.

In his research into this, Boyle draws a distinction between documentary programmes, in which an expert troubleshooter visits struggling real-life businesses (Gordon Ramsay's Kitchen Nightmares, Mary Queen of Shops) and game-show formats, such as The Apprentice (where Amstrad founder Alan Sugar seeks new recruits each year) and Dragon's Den (in which would-be investors hear pitches from would-be entrepreneurs. But both types have dramatically changed the general viewer's idea of business. “In the 80s, entrepreneurs were presented as dodgy, or crooks,” says Boyle. “But now the entrepreneur has become much more high profile, and in a broadly positive way.”

It may seem preposterous to suggest that watching TV can help the UK to flourish in the digital future, but it may turn out to be just as important as building prototypes in an overcrowded hackspace in Tech City. Boyle's research identified benefits that directly address the lack of aspiration that was identified as problematic in Imperial's Gedi Index. If they watch the right shows, viewers can pick up valuable knowledge and real skills. “Dragon's Den led to people starting to talk about franchising and equity – terms that they would not previously have understood,” says Boyle. “And they also pick up soft skills, such as how to present an idea, and the need to have a business plan.”

SIX COMPANIES TO WATCH

Luluvise is a women-only social network that allows members to share gossip and advice among friends. (“He didn’t call you back after you hooked up? Feel free to vent in private.”) The startup has won huge amounts of press interest, and high-profile visits to Tech City often have photos taken with the team.

Peer Index maps influence across the social web, identifying the individuals who have the most insight and influence – not just by what they say, but based on the evidence of how others respond to what they do and say online. This helps individuals make the most of their influence, and helps companies identify opinion formers.

Skimlinks enables bloggers to get paid a commission if what they write about results in someone buying something. Publishers use it to monetise content without intrusive ads that disrupt the user experience. It went into profit in 2011, and has 20,000 clients in 20 countries.

Mind Candy is the company behind a social-networking and gaming franchise for children. Founded in 2007, it now attracts more than 60m children to its website, from 150 countries, and has spun off vast quantities of merchandise. Founder Michael Acton Smith has been described as Walt Disney 2.0.

Songkick is a company that makes it easy for music lovers to keep up to date with live events. Since launching an app on Spotify in November it has gained more than 100,000 new users. Music industry insiders say it's already changing the types of concerts people go to – away from the well advertised blockbusters towards niche bands.

Moo.com is a Shoreditch-based company that prints customised business cards and other stationery using photos from the internet. In a previous incarnation, it put itself first and the customer's creativity second – and failed. It went into profit in 2009 and has doubled revenues every year.

GoSquared is a web analytics business started by four young men when they were doing their GCSEs. It provides useful, accurate information in real-time, presented in an appealing and intuitive design, so that publishers can see who, why, how, where from, and for how long people visit their sites.

First published in CNBC Business magazine