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Silicon Valley, UK: national game plan or pipe dream?

Britain has many of the ingredients to lead innovation, but it needs more if it's to catch up with the best, says KPMG's Bivek Sharma.

by Bivek Sharma
Last Updated: 20 Jun 2016

While the UK should celebrate its technological talent and entrepreneurial vision, we have, as yet, failed to create a start-up ecosystem anywhere near as successful as Silicon Valley. And it’s not just us struggling to keep up. Four of the six highest-value unicorn companies in the world were created there. 

But if there’s anything working with disruptive firms teaches you, it’s that even the most established orders can change fast. Many of the characteristics needed for game-changing innovation are already here. There is no shortage of ideas or ambition, with over 600,000 businesses started in the UK last year, while London is home to more IT programmers than San Francisco, New York or any other European city. 

So why are there so few examples of young British companies with the eye-watering valuations that are so common in Silicon Valley? Funding agility is a major issue and three changes in the UK finance environment would go a long way to supporting tech start-ups and the inspiring people behind them:

1. Investment culture change

The UK is a great place to start a business, but for those with serious ambitions there are still relatively few investors and lenders that are entirely comfortable with the hockey stick growth curve many tech giants follow. 

WhatsApp style businesses that can go years without turning a profit as they build a user base require serious investment before being ready for monetisation, demanding a bold yet patient investment community. Similar businesses created in the UK today can face pressure to monetise ideas quickly, leading entrepreneurs to move too soon and miss out on their full potential. 

Last year’s series of The Apprentice offered a pop culture clue to this trend when Lord Sugar chose to invest in a plumbing business over a gamified dating app – the latter required more investment, but promised higher potential returns. We already have the talent and infrastructure to build innovative young firms, but also need an investment culture that supports their growth trajectory.

2. Policies to protect cash flow

While the government demonstrated its support for small businesses in the last budget, and its policies really helped high street firms, less relief was provided to disruptive ventures. This seems remiss when it’s these high-potential firms that could become the major UK-headquartered job-creators and tax-generators of the future. 

The staggeringly high failure rate affecting start-ups often results from how easy it is to burn cash as a small firm. With this in mind, it was disappointing to see innovation grants replaced with loans in last year’s Autumn Statement. Grants can be vital to small businesses that need to invest in intellectual property. Loans simply saddle these firms with additional outgoings when cash is already tight. 

One alternative would be a start-up loan system replicating the loans available to students so that repayments are aligned with ability to pay. As access to talent is crucial for fuelling growth it would also be great to see the government offering early stage start-ups further employment tax releases above and beyond those for established businesses. 

3. Clarifying the funding landscape

Although more could be done to improve the funding environment, the alternative finance boom has already generated a range of viable new options for entrepreneurs. One significant challenge is navigating this new marketplace. 

Peer-to-peer (P2P) lenders and equity-based platforms can be extremely attractive, but they can sometimes be difficult for unproven businesses to access. Many P2P lending platforms require firms to have been trading for two or three years, which excludes many start-ups when they most need a cash injection.

That said, there are options for companies without an established track record. Some funders will lend to start-ups that have began making sales on websites like Amazon, while new age invoice financing allows businesses to sell one invoice rather than their entire ledger book to secure short-term cash.  

Start-up owners could do with more guidance on the options, so professional advisors have a role to play in explaining the alternatives and securing the best deal for each situation. 

In the UK we have an incredible entrepreneurial economy, but there is still a huge opportunity to catapult early stage businesses forwards. Forget the way to San Jose, let’s create a Valley of our own. 

Bivek Sharma is head of KPMG Small Business Accountinga service for small firms covering cashflow, accountancy and budget planning.

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