Land of plenty: London for startup investors

Megabuyte, November 2012. Original article here (£).

london investorsThe Early View
Land of plenty: London for startup investors
The London startup ecosystem now constitutes at least 3,000 tech-focused companies, but possibly as many as 5,000, according to research by Charles Armstrong, the ethnographer and business innovator. Armstrong runs Trampoline Systems in Shoreditch, an award-winning social analytics software specialist, which maps companies’ internal and external relationships. But even he has been surprised at the speed and intensity of growth in the tech cluster around what is admittedly one of London’s grimmest roundabouts. As the London startup hunting ground is getting increasingly rewarding for investors, we spoke to Seedcamp and Passion Capital about what they are looking for, and what kind of opportunity they see in the London scene.

Seedcamp: Network is king
“At the moment we are calling ourselves a global early stage seed investor with a mentoring programme, ” says Kirsten Campbell, general manager of Seedcamp, as we meet in their offices at Google Campus in Shoreditch. The terminology needs work, she laughs: “But we are more than a seed investor. I wouldn’t necessarily classify us as an incubator, as those typically tend to have companies in a co-working space. We don’t like to use the word accelerator either, although there’s a lot of value when that happens.”

Regardless of what Seedcamp will end up calling itself, the fact remains that a host of hot startups can be traced back to the five-year-old programme. These include fashion data expert Editd, peer-to-peer currency exchange group Transferwise, and Playmob, the charity and gaming link-up specialist. Seedcamp’s standard investment is €50 000 for a 8-10% stake, alongside a year-long support programme with access to leading events and mentors. Similar initiatives include Springboard in Europe and Y-Combinator, 500 Startups and TechStars in the US, which support early-stage companies for a limited time while preparing them to raise their next round of funding.

Seedcamp is usually a company’s first cash injection outside friends and family, says Campbell: “This means there’s also a learning curve, as quite often when we send companies a term sheet they have never seen one before.” On that note, Carlos Eduardo Espinal, Seedcamp partner alongside Reshma Sohoni, has set up seedsummit.org, where anyone can look at legal documents for startup funding as agreed as standard by over 30 of the bigger investors [including Passion Capital]. “So even if you have nothing to do with Seedcamp, you can look up what a standard term sheet looks like. That gives you grounds for negotiating if you get something that’s way off.”

This may seem very neighbourly of Seedcamp, but these are actually a very choosy bunch. Operating exclusively on an events- and applications basis, last year Seedcamp got 2000 letters, from which they selected 200 for personal meetings before choosing 20 for investment. “So that gives you an idea of our process, but if you’re talking about quality, we could probably invest in more. There are certainly companies that have applied to Seedcamp and not been picked that have gone on to raise money elsewhere,” says Campbell, pointing out how Christian Thaler-Wolski, Wellington Partners principal and Seedcamp mentor, kept track of a company he met at Seedcamp Berlin last year. Bonusbox, a Facebook-based shopping portal, didn’t get into the Seedcamp programme, but Thaler-Wolski ended up contributing to their funding.

But with companies like Seedcamp being quite exclusive, is there enough money going around in London to fund the good startups? Campbell thinks for a moment: “I guess it depends on how well networked you are, and what investors think of your capabilities. But if you have a strong team in London, Berlin or another hub, I don’t think companies struggle too much to get investment. There seems to be a boost at the moment, there are so many angel networks pitching events.” Right now, Seedcamp is present at ‘How to Web’ in Bucharest, ‘LeWeb’ is coming up next week in Paris, and last week there was an event in Vienna. And investors do go to these events, says Campbell, as well as big corporates such as Microsoft and Facebook, ever keen to see what’s happening on the ground. She points out how co-working community TechHub held an event at Campus earlier in the week; it was meant to be a casual night for founders to test their demos, but investors still managed to sneak in.

For startups, Campbell recommends researching which investor is most suitable to your specific situation and target that shortlist. “Look at the size of deals they typically do to make sure they can give you the amount you are looking for. Look at which sectors they like: for instance Notion Capital likes to invest in B2B software, and Anthemis likes fintech.” Campbell is also a fan of AngelList, the San Francisco-based online network for connecting startups with angel investors. A similar initiative is London-based Seedrs [who we met in September], where companies can reach out not just to angels but anyone else who’d like to invest. There are nearly 18,000 business angels out there in the UK, most being registered by The British Business Angel Association.

When choosing their investments, Campbell says Seedcamp primarily consider the team and the market size, but also the general impression of the people involved. “Some of the teams are really early stage, so all you can get is a gut feel whether these founders will be able to achieve something.” Campbell reckons about half of the applicants to Seedcamp have a previous venture of some kind behind them: “We invested in Cashpadder last year and in March they sold to AirBnB. The founder, Stephen Rapoport, is now doing his second startup [YourGrind, a custom coffee bean delivery service], so even in a short space of time we are seeing experience building up.”

Passion Capital: A room full of opportunity
White Bear Yard, Passion Capital’s open and friendly co-working space in London’s Clerkenwell, is the sort of buzzy space that gives the impression of the next generation of tech being created right under your nose. Luke Johnson, head of Risk Capital Partners and chairman of StartUp Britain, described it thus in the FT: “This method of building new companies at warp speed is fascinating. […] I like the sense of urgency, the work ethic, the high-pressure environment that helps drive rapid progress, and the incredible opportunities to network and cross-fertilise.”

The $60m Passion fund has only been around since April 2011, but founders Stefan Glaenzer, Eileen Burbidge and Robert Dighero have been busy. Out of 1500 possible investments in the first year they ended up with 20, including real-time analytics group GoSquared, direct debit innovator GoCardless, social micropayments outfit Flattr, and Pusher, a programming interface for adding scalable functionality to apps in real time.

“There is a hell of a lot of deal flow in London and Europe right now,” says Stefan Glaenzer. The Passion team look for three Ts when choosing their investments, he explains: team, traction, technology: “Team is the most important once. We first look for passion and willingness in the entrepreneur. It doesn’t necessarily have to be passion for the product, but are these these passionate people? Then there’s the execution and the ability of the founders. And last, do they have the entrepreneurial oomph?” This is where the gut feeling comes in, says Glaenzer: “Some have the oomph and some just don’t.”

Glaenzer thinks the quality as well as the quantity of startups in London, and Europe overall, has increased, and a lot of this can be traced back to the growth in the overall scene: “The ecosystem is getting better. Go back 6-7 years there were 3-4 digital companies around the roundabout. Now there’s over 3000 in 1.5 square miles.” Of course not all the startups are good, adds Glaenzer, but the increasing mass improves the networking and funding opportunities.

Being involved in companies at the earliest stages is where the fun’s at for Glaenzer, who co-founded auction site Ricardo.de and was the first to invest in Last.fm: “I love it. That’s why we do early stage: being involved from the moment of the idea or prototype, then you see a service or product become loved, and then you enter a growth phase … nothing beats it.” Having said that, the backers at Passion will either take a close or remote role with its companies, depending on what they prefer: “We provide them with some funding, resources and a network, and some grey hair magic. But in the end it’s the entrepreneurs who make or break it.”

Passion’s seed rounds last either six, nine or 12 months, during which time the companies need to find an external lead for the next round and Passion will participate pro rata. If they can’t, for a great entrepreneur this may not mean the end, but a signal to go back to the drawing board, says Glaenzer: “It took me five companies to hit on a good one. It doesn’t have to be the first one that makes it. I experienced this myself: you don’t get it right every time.”

The entrepreneur resource
London is the world’s seventh most influential startup ecosystem, according to an interesting new report from Telefonica Digital and Startup Genome, after Silicon Valley, Tel Aviv, Los Angeles, Seattle, New York and Boston. The ‘Startup Ecosystem Report 2012’ surveyed over 50,000 entrepreneurs in an effort to understand how their locations played a hand in their progress. Diverse talent, good support networks, lack of red tape around company creation, and supportive capital structures has made London the biggest hub in Europe, but it still has 70% less “risk capital” available for early-stage startups than the Valley.

While accelerators, angels and investment funds may look like the gatekeepers from the point of view of companies, Glaenzer points out it’s actually the great entrepreneur that is the scarce resource and money that’s the commodity. “For the exceptional entrepreneurs it’s not that hard to raise money. […] But then there is this bracket of entrepreneurs, especially first timers, where the potential might be good but there’s no proven track record.” This is the segment that may find it harder to get funding, but having said that, Glaenzer thinks London and Europe has come a long way in providing opportunities for also this group: “But I’d like to see five times the funds we have now [in the region] become available over the next five to ten years. With the increasing density of the startup ecosystem, I think we could make use of that amount of money.”

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