Transforming London into a Silicon City - All it needs is $10bn

It's become clear after the Digital Britain session last week that the UK's TMT (Telcoms/Media/Tech) industry is being thought of as a potential replacement for the imploding financial sector - its of similar size, and you can kinda work out what the stuff does, especially the derivative stuff. This piece by Y Combinator's Paul Graham on transforming other places into a Silicon Valley is thus interesting:

The first thing to understand is that encouraging startups is a different problem from encouraging startups in a particular city. The latter is much more expensive.

People sometimes think they could improve the startup scene in their town by starting something like Y Combinator there, but in fact it will have near zero effect. I know because Y Combinator itself had near zero effect on Boston when we were based there half the year. The people we funded came from all over the country (indeed, the world) and afterward they went wherever they could get more funding—which generally meant Silicon Valley.

As Paul points up, the issue is that dreaded Equity Gap (which we have written about ad nauseam):

If you want to encourage startups in a particular city, you have to fund startups that won't leave. There are two ways to do that: have rules preventing them from leaving, or fund them at the point in their life when they naturally take root. The first approach is a mistake, because it becomes a filter for selecting bad startups. If your terms force startups to do things they don't want to, only the desperate ones will take your money.

Good startups will move to another city as a condition of funding. What they won't do is agree not to move the next time they need funding. So the only way to get them to stay is to give them enough that they never need to leave.

This has been held up as a major issue in London every time anyone looks at but is vehemently denied by the funding community, however the steady westward flow of London entrepreneurs is testimony to this being a major issue. HM Governement has tried to solve this with 50/50 grants (Funds 50% of any investement) but even so its an issue. Organisations have been set up to fund direct from grants, but these to date have typically been regional, whereas most of the UK's "New" TMT is London based. Paul does some interesting maths:

How much would it cost to grow a startup to that point? A minimum of several hundred thousand dollars. Wufoo* seem to have rooted themselves in Tampa on $118k, but they're an extreme case. On average it would take at least half a million.

So if it seems too good to be true to think you could grow a local silicon valley by giving startups $15-20k each like Y Combinator, that's because it is. To make them stick around you'd have to give them at least 20 times that much.

However, even that is an interesting prospect. Suppose to be on the safe side it would cost a million dollars per startup. If you could get startups to stick to your town for a million apiece, then for a billion dollars you could bring in a thousand startups. That probably wouldn't push you past Silicon Valley itself, but it might get you second place.

So imagine build something 10x that size in London - about 10,000 startups.

Given that we have paid £1,000,000,000,000 - One Frigging Trillion Pounds just to keep the banks alive to carry on paying themselves off with our money, you'd think syphoning off a mere 1% to build a major scale New TMT industry would be a good play. As Paul notes:

For the price of a football stadium [Or a fraction of an Olympic Bid], any town that was decent to live in could make itself one of the biggest startup hubs in the world.

What's more, it wouldn't take very long. You could probably do it in five years. During the term of one mayor. And it would get easier over time, because the more startups you had in town, the less it would take to get new ones to move there. By the time you had a thousand startups in town, the VCs wouldn't be trying so hard to get them to move to Silicon Valley; instead they'd be opening local offices.

The issue then is how to select startups that are The Right Stuff - Quango selection programs to date are felt to be quite woeful, as Paul acknowledges:

You have to pick the startups. How do you do that? Picking startups is a rare and valuable skill, and the handful of people who have it are not readily hireable. And this skill is so hard to measure that if a government did try to hire people with it, they'd almost certainly get the wrong ones.

The best qualified people, according to Paul, are entrepreneurs who have already made it big, but they are in short supply outside The Valley. The answer therefore, according to Mr Graham, is to entice ones already funded to come to London:

However, a city could select startups by piggybacking on the expertise of investors who weren't local. It would be pretty straightforward to make a list of the most eminent Silicon Valley angels and from that to generate a list of all the startups they'd invested in. If a city offered these companies a million dollars each to move, a lot of the earlier stage ones would probably take it.

Preposterous as this plan sounds, it's probably the most efficient way a city could select good startups.

It would hurt the startups somewhat to be separated from their original investors. On the other hand, the extra million dollars would give them a lot more runway.

He suggests taking about 30 or so ( A Y-Combinator size load methinks ) and shifting them over to(say) London - and suggests the City should not take stakes, but instead Convertible debt that only converts in big rounds (hmmm, very convenient there, Paul).

And I'd disagree that Londoners can't find the right startups, since:

(i) as has been shown in industry after industry, from predicting hit movies to asset pricing, its amazing what a bit of analysis can do to help prediction success.

(ii) As some wags will point out, all you need do id set up an office at San Fran International and fund all the Brtis who step off the plane there to go to Y Combinator .

Still, I think its an idea well worth looking at and piloting - so how about it, Boris?

*Tampa eh - is Wufoo a startup or just a good way to fund a party