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Saturday, March 24, 2007

International Investment Capital

London may be the top European city for tech investment, but it still lags Silicon Valley. Entrepreneurs and investors gathered last week to discuss the challenges they face - and some solutions

'London is like a country in its own right,' observed Jens Lapinski, VP of analysis and consulting at Library House, about the capital's success in attracting venture capital. He was speaking at an event at Grant Thornton House last week to mark the unveiling of a new report from g2i, 'London: Anchoring European Technology Investment', which describes London as the best city to attract investment across Europe.

According to Library House's analysis of recognised investment deals, London received �485m venture capital in 2005, which is 38% of the total invested in the UK and more than the total invested in the whole of France (�457m) and Germany (�363m). The picture is particularly bright for technology companies, with IT accounting for a third of that investment, closely followed by the retail and services sector.

However, to put those figures in context, Silicon Valley attracts ten times the investment of London, according to Ernst and Young's Global Venture Capital Insights Report 2006. In fact, over 35% of the �12bn venture capital invested in the US went into Silicon Valley. Lapinski suggested that in order to catch up, London should form a 'super-cluster' with Oxford and Cambridge and 'build the things we need to support that - the infrastructure, finance and access to markets.' The aim would be to encourage collaboration across the South East, rather than each investment centre doing its own thing.

Just as important, while VC funds may be flowing, there are still significant obstacles for entrepreneurs to overcome earlier in the business cycle, not least in bridging the gap between early stage finance and venture capital. Angel funding is widely available in London - it's accessing it that's the problem, according to David Hunter, managing director of investment at funding body Nesta. Initiatives are in hand to formalise London's angel networks, including the recent formation of the British Business Angels Association, supported by Nesta. But Hunter said networks need to be clustered together better as they are around the universities in Oxford and Cambridge.

At the same time, many believe that more can be done with grants. Nesta itself handed out �22m in grants last year, many of which were in London, and the capital accounts for the single largest share of research grants. Nonetheless, Hunter suggested that some companies were leaving London because they thought they stood a better chance of accessing regional development grants.

Serial entrepreneur Philip Birch, CEO of Imperial College London spin-outs Veryan Medical and Heliswirl, called on the government to provide more help for London's entrepreneurs: 'There's a tendency [for the government] to think London is so well catered for, with experienced management teams and a truly fantastic investor base, that we'll find our own money. But a grant provides that first bit of undiluted capital that can get a company out of the starting blocks.'

Sarika Patel, director of enterprise and technology at Grant Thornton, one of the g2i partner companies, agreed that early stage funding was still a weakness in the capital, but argued that g2i was going some way to redressing this by helping companies access funding from the �50,000 to �2m mark: 'Before g2i there was nothing that connected the money and the companies seeking it across London,' she said. 'g2i brings a wide skillset and is putting those networks in place.' In assessing up to 25 companies a month for investment readiness, g2i looks at factors like skills gaps in management teams, technology weaknesses and the IP potential, as well as investigating joint venture opportunities and routes to market for its candidate companies.

Part of the investment equation is about growth potential, and many start-ups fall into the category of 'lifestyle businesses' that are happy to keep ticking over and surviving on cash flow, but with no dramatic ambitions to grow. One entrepreneur presenting at the event, Jon Holmes, CEO of Michelson Diagnostics, said it came down to motivation. 'You've got to be clear on why you're going into this. If you want to make a bit of money to support your family, that's not enough. You've got to really crave success.'

By David Longworth, Webster Buchanan Research