Friday, October 31, 2008

A London TechHub? Don't Be Daft

After Rob Knight gave a shout-out to me in a blog entry, I didn't realize that other people had been talking about trying to set up some type of "TechHub", and now apparently they're talking about doing it in London.

People who have seen me in full-on rant mode down t' pub may recognize this as one of my favorite topics, and one on which I completely agree with Rob Knight in that London is perhaps the stupidest place in the UK to do it, bar none. Don't get me wrong: there are definitely technology firms doing quite interesting work in London, and there are a lot of people that I admire working for technology pure-plays here in London. And that's great. But you're never going to have anything near Silicon Valley style concentration of technology startups or firms here.

Micro-Cluster or Macro-Cluster
Your first question is whether you want a micro-cluster or a macro-cluster. I think the current plans for a Tech Hub are on the micro-cluster form: it's a building or two nearby each other where you can put lots of tech startups in one area. And what does Mike think you need for this?
  • Great transport links
  • Nearby cheap hotel
  • Super-Fast broadband
  • Hot-desk facilities
Uhm, Mike, do you just realize that you've essentially invented the business model for Regus? Simple fact, none of those things is unique to technology startups whatsoever. And in fact, none of the most successful startups that I know of has ever had such ideal digs right off the bat. Wanna know why? Everybody wants them.

And when everybody wants them, the cost of them goes up. And that means that startups get priced out of being able to move straight into them. My startup started in the cheapest office space we could get, which was a serviced office in an industrial park in San Mateo, with shared T1 access and no static IP and no public transport and right at the intersection of two freeways which were always massively crowded so you had to commute at odd hours. Because it's what we could afford. And we even had a 7-figure seed round under our belts!

Providing prestige office accomodation for startups doesn't make any sense because they'll be priced right out of moving into them.

So where do startups end up clustering by their very nature? Places which have some of the above, but are not Grade A office space for a variety of reasons. Places like Old Street and Hoxton and Shoreditch and Bermondsey. Oh, and look, those places already have quite a few startups naturally gravitating towards them.

Places like the TechHub already exist, in every way you can imagine, it's just that you can't afford them if you're a tech startup.

The Valley Is Bigger Than London
Okay, so let's reconsider as a macro-hub, where we're trying to figure out how to replicate Silicon Valley rather than Palo Alto. That requires scale. Lots of it.

When you talk about The Valley (and not the San Fernando Valley from whence comes pr0n) [my best recollection was that The Valley essentially spread from San Mateo down to southern San Jose and across to include parts of Fremont; if you include San Francisco and Berkeley you're talking about a huge area] you're talking about an area that that's about 35 miles across. That's pretty much the entire size of Greater London from Heathrow to Upminster.

One of the advantages for many people there is that you can largely pick where you live relatively independently of where you're going to work. When I was there I worked in San Francisco, San Mateo, Burlingame, Menlo Park, and Cupertino. I lived that entire time within a 1 square mile area. You can easily settle down in Cupertino or Sunnyvale or Mountain View and have the entire Silicon Valley employment system available to you. Admittedly, this is part of the whole car/freeway culture, which sucks royally, but can you say the same for London? No.

London is completely impossible to navigate in over any moderate distance whatsoever in a car. So let's stop that route right now.

Let's look at the public transport map then. In fact, the public transportation system of London is irredemably designed to do exactly one thing: get people to and from their jobs in the City, and to and from their playgrounds in the West End. And it can't even do that. You want to go from Non-City-Location-A to Non-City-Location-B via public transportation? Oh, it is to laugh. If you can do it at all, it's going to take you an eternity each way. I had a 45-mile door-to-door commute from San Francisco to Cupertino once. Took me 45 minutes each way. My current commute (from Fulham to Bank) takes me longer than that. For what, 5 miles? And I'm following the direction of the transportation system. For me to go play Table Tennis on Sunday, to go about 2.5 miles, takes me 45 minutes each way in a bus. For 2.5 miles.

In this respect, the outer/inner London system acts as a fully centralized Silicon Valley: you can settle down anywhere with a train into central London and just stay there, as you move from City-job to City-job. More on that next.

Staff Up, Yo.
So let's say that you did want to create a macro-cluster of tech firms. I would say that the #1 hurdle you have to face is this: How do you make it relatively easy to get about 20 A-list software engineers in a startup quickly. Let's look at each of those in turn:

Relatively Easy. By this I mean that your hit rate on qualified candidates isn't less than 1% (which is roughly what my hit rate on CVs to interviews was just after the Dot Com Boom ended as everybody who was pretty marginal in the valley all went looking for jobs at the same time).

20. I pick this because I think if you're looking for a team smaller than this, you could probably do that almost anywhere. And I know that modern programming languages and techniques are making it easier to do more with less, but you've still got a requirement for about 20 technical people overall, whether it's hosting, configuration, testing, the works. To get something that's really good in a commercial context still requires a fair number of people.

A-list. Startups aren't amateur hour. Well, they are in Web 2.0 (oh, snap!), but not in the real world. Bring your A game, yo.

In a startup. This point is critical because you have to get people who are willing and able to work for a startup and in a startup environment.

Quickly. Is it going to take you 12-18 months to ramp a team that quickly? Fail.

What's going to block you in every single one of those criteria? The financial industry.

Follow The Money
Where are all those people that you want working in London? The financial services industry. Why? The money. Why are we such money-grubbing whores? Because London's expensive.

When I moved to London (and it had to be London; I wasn't willing to consider anywhere else in the UK) for personal reasons about 5 years ago, I initially thought I'd go work in a startup or in the tech industry, and I met with quite a few VC-backed firms, and had several meetings with a very prominent London-based VC (who works for a very prominent Sand Hill Road firm's outpost in St. James). His advice stuck with me, and it's never more true. On average, you're always going to earn more in the financial industry with lower variance.

If you play the startup game, over a 10 year period, figure you're going to have one minor pop (acquisition for small money) and one medium pop (acquisition for major money). Assume that you will never be part of a successful IPO (because the chances are so slim that it's laughable). During that period you average £X in annual pay, with those minor and medium pops paying you £Y in total one-off payments.

During that same period in financial services, you'll be earning £A in annual payments, and £B in bonuses every year. In order to make the maths work out, you would have to assume that 10X + Y is more than 10(A + B). It's not. If you're the type of person who's going to be in at the first round of a startup (and thus makes Y meaningful), Y is going to work out at roughly the same as (or even a little more than) 10B. But A is astronomically higher than X.

And the financial industry knows that their competition for top software talent in the UK is the rest of the financial industry, and the technology sector. And they know that by their very nature, most super-strong software engineers would prefer to work in a pure-tech environment where they're not a support structure, but the central pillar of the firm. Therefore, they know that they have to pay them more, and with much lower variance, than they would get in their preferred industry. And they do.

And let's be honest: if someone told you "I'm going to pay you more every year, in fact, I'm even going to pay you enough to own property in Zone 2 in London" versus "I'm going to pay you so little you're going to be renting somewhere 30 minutes from a tube line in Zone 6, but maybe just maybe in 6 years you might do pretty well," it's a pretty easy decision for a lot of people to make.

Which is precisely why Paul Graham likes his serfs to be so young: so that they haven't yet built up any tradition of eating anything other than ramen. When you've been able to afford Nobu, you don't want to go back to nothing better than McDonalds (unless it's on the way home after the pub and you need all the fat and protein you can shove in your face if you're to be functional the next day). You'll do it if you have to, but most people aren't going to choose it.

I guess that's why the vast majority of the people I know here who are of the calibre I worked with in the valley work in finance here in London. And they wouldn't do an early stage startup, because they physically couldn't slash their monthly expenditure to a point that would make the startup pay effective. You might be able to get a few, but 20?

And even if you could get 20, do you think that you could get 400 (20 startups each with 20)? I've been at parties in San Francisco with 400 tech-company software engineers for particular social niches. Do you think you could get 400 A-list software engineers to give up their cushy financial industry salaries and stay living in London on a pittance to work for your startups? Because you'd need at least that to kickstart it.

And this isn't just a London problem. New York isn't a tech industry epicentre for the same reasons. Chicago's interesting in that it has enough financial firms to have spillover effects, but not so big that its gravitational well can't support pure-play technology firms.

Could you just pay startup employees more? Well, how many European VCs do you know who like having their founding team earning into 6 figures sterling before they have a dime of revenue? I didn't think so.

Oh, Noes! The Credit Tsunami!
Oh, wait, the Credit Crisis/Crunch/Quake/Tsunami is going to fix all this by eliminating all the financial industry jobs! My ass.

Bonuses for many are going to temporarily suck. People will be laid off. But I don't know of any strong technologists who have yet been laid off by a financial firm in London (I'm sure there are, but in the transitive closure of people that I know, I don't directly know of any). They're so difficult to hire at the best of times, you want to hold onto them. Don't count on there being such a flood of programming superstars who are given massive severances so they can all start companies at the same time that you can turn back time.

You'll probably see what happened when the Dot-Com bubble burst. You saw all the people who came into the industry (Tech then, Finance now) who really weren't good enough, but who got hired because people needed warm bodies who could do the grunt work (then web coding, now WinForms programming), they'll all go. And a few people who really shouldn't go, but get caught up in a round for some reason or another. And those people will find jobs almost instantly (great Silicon Valley anecdote: I had to delay the CEO of my firm laying me off once because I was on the phone getting a job offer from another firm).

So even if the Credit Implosion results in a different technology employee market in London, you'll just face the problem of identifying the little wheat from the piles of chaff. And that sucks very valuable resources.

If Not Here, Where?
Here's where I (somewhat) agree with Mike and disagree with Rob: Manchester isn't close enough to London. VCs aren't going to want to live in Manchester, and neither are your other financiers and lawyers and all that. They want you to be within a 1 hour drive of their offices on Sand Hill Road in Silicon Valley, which essentially defines where you can have your offices there. And they aren't going to want to get on a plane.

I think you've got an hour-and-a-half to two-hour train journey from central london (which puts you unfortunately in outer-commuter-belt). Places that are interesting:
  • Brighton. Has a similar vibe to it as San Francisco, and similar numbers of "creative types." But it's so hemmed in by geography it might not be easy to grow it. And it's horrid in the summer as all the day-trippers come down and invade it (disclaimer: I used to have a weekend place there).
  • Bristol. Already has a massive HP lab outside of it, good university town, decent weather, fast trains.
  • Oxford/Cambridge. Universities (remember, Palo Alto has Stanford and Berkeley has Berkeley, largely defining why Silicon Valley is where it is) bring young talent who haven't been seduced by London yet.
  • Reading/Bracknell. The area was starting to get that way (with all the outposts of US tech firms out there), except that it's really soul destroying and foul so nobody young and talented would want to live there (remember: you can work in Silicon Valley [similarly soul destroying and horrible], but live in San Francisco quite easily. I had a friend working in Reading and living in London and it almost killed him). Maybe if Crossrail had gone there, but otherwise too grim.
If Manchester had a super-high-speed rail link to central London, then it would be quite interesting, and it would probably actually really benefit the UK as a whole. But given that the UK can't do new infrastructure, I'm not holding my breath.

Where does this leave us? Well, I think essentially the following:
  • London has a geography and transportation system that limits you to locating in central London to draw on enough talent;
  • The desirability of London for so many reasons makes any office space suitable to drawing on a lot of talent ridiculously expensive; and
  • The financial industry will collectively act to ensure that the type of people you need to do a pure-tech startup simply aren't available at the prices that a startup can afford.
Yes, I'd love a technology cluster inside the M-25. But I'm realistic.
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