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London's high-tech businesses top Euro venture capital league

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London has the largest cluster of high-tech venture capital-backed companies outside the US, according to a new report published by gateway2investment (g2i).

Last year 380 London-based companies – two thirds of them operating in the technology sector – received a total of £450 million venture capital investment. London’s total represents almost 20% of the £2.5 billion invested in Europe as a whole and is on a par with the whole of France (£460 million) and well-ahead of Germany (£360 million).

But while London may lead Europe, when compared with the US position it appears the capital has considerable room for improvement. The new g2i report says in 2005 a bumper 35 per cent of the £12 billion venture capital poured into US coffers was invested in Silicon Valley – nearly 10 times the amount invested in London.

Although London is demonstrably more successful than the rest of the country in raising larger amounts of investment cash – 40% more than the national average or around £6.35 million per firm, according to Library House data – the crucial difference is in the size of the deals.

The report, entitled ‘London – Anchoring European Technology Investment’ - notes that while London firms receive, respectively, some 55% and 45% more than the UK average in first and second institutional funding rounds, they fare less well when it comes to the earliest investment stages.

While these higher than average investment figures are partly attributable to factors such as a company’s age and sector, g2i argues that the powerful cluster effect gives London four key advantages at first institutional investment rounds:

• Clustering of technology firms breeds a large pool of start-ups and investors and encourages deal tension. London-based entrepreneurs have more bargaining power than their counterparts outside the capital and this both increases valuations and raises the size of institutional funding rounds.

• A high concentration of firms and investors helps build an investment community of potential syndication partners and encourages more dissemination of information on new investment opportunities.

• Location, location, location. London’s position within easy reach of road, rail and top airports eases domestic and international travel. Oxford and Cambridge – two of the UK’s key innovation hubs outside the capital – are both just an hour away by train, making London a logical base for inward European investment.

• Support from the Regional Development Agencies and other Government bodies has been rationalised into a strong and coherent framework with clear points of contact for both investors and start-ups. The growing cluster of UK technology firms can only fuel expansion of these support services.

London has seen a strong history of exits in recent months, says g2i, which not only helps raise the city’s profile in the eyes of potential investors, but ensures that current investors enjoy attractive returns and can invest again. To many small start-ups, it adds, AIM is now a viable alternative to late-stage investment.

“This report shows that the importance of London as a centre of investment for growing companies and particularly for technology companies should not be underestimated,” says Sarika Patel, Director of Enterprise and Technology at Grant Thornton and g2i Board member.

“It is fantastic that the capital has developed such a strong lead because of the economic benefits it brings. But the challenge remains to maintain and build on its position at the centre of UK and European technology investment by continuing to provide investment opportunities and returns.

“Recent exit activity, as well as future investment opportunity, looks set to sustain interest in London and maintain its position of anchoring European technology investment for the foreseeable future," she concluded.

Posted October 3, 2006