1. Economics
November 25, 2015

London is still the start-up capital of Europe – but its crown is at risk

By Haley and

Silicon Valley often gets the lion’s share of attention when it comes to start-ups – and perhaps for good reason. But earlier this year, David Cameron launched a bid for its dominance, declaring that the UK should be “the startup nation of Europe”.

Startups’ low operating costs, lean management structures, and ability to pivot quickly mean they have the power to disrupt the business ecosystem and exert competitive pressure on prevailing companies. This, in turn, drives improvements in productivity and prosperity in the overall economy.

Digital businesses, in particular, are doing a fine job of disrupting whole industries and turning on its head our basic understanding of how we source goods and services. Just think of AirB&B and Uber.

Not all cities provide equally fertile ground for such startups, however. Nesta, as part of the European Digital Forum, set out to determine what it is that digital startups and scale-ups want from a city.

Working with digital entrepreneurs to determine what matters to them, we ranked 35 capital cities and known innovation hubs in the European Digital City Index. Combining multiple metrics – including digital infrastructure, culture and skills availability – we found London, with its plethora of “unicorns” such as Wonga, Zoopla and Shazam, to be top of the list.

The top 10 cities for digital entrepreneurs.

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But why does place matter at all given the virtual nature of digital entrepreneurship?

Environmental conditions within cities still have a strong impact. For instance, local cultural attitudes towards entrepreneurship vary hugely and can influence the number of people who start new enterprises.

Physical connections between people are often highly significant in forging business relationships, and many venture capitalists prefer to invest in specific regions. Likewise, many digital firms still rely upon geographically-bound markets, if only to encourage initial network effects.

Contributing to London’s success is its access to capital, particularly its developed venture capital markets; a marked entrepreneurial culture, with a willingness to take on risk; and positive knowledge spill overs from multiple world-class universities such as Imperial, UCL, LSE and Kings.

But the Index also found that London is a victim of its own success.

Increasing costs – for labour, office space and day to day living expenses – give cause for concern. As any small business knows, cash is vital. So while London is a good place to acquire investment, the costs of living and working here also drain businesses of cash much more rapidly than elsewhere.

While these problems were not found to be enough to deprive The Big Smoke of its top place, policy-makers should not be complacent.

Extending small business rate relief to co-working spaces, incubators and accelerators may help somewhat, at least in the short term. However, high local taxes, a dearth of reasonably priced commercial buildings, migration pressures and an uncertain foreign worker programme all play a part in reducing the attractiveness of entrepreneurs looking to set up or relocate to London.

The city is also being challenged by the likes of Amsterdam. As explained in CITIE – a project which assessed the policy environment of 40 leading global cities – Amsterdam’s size permits policymakers to experiment more with policies that will drive innovation and entrepreneurship. The Dutch capital has also been investing resources into its overall innovation strategy with projects like the Smart City initiative, where new products can be tested in a “living lab” and tweaks made according to real-word feedback.

Berlin, too, is a challenger to watch. In this year’s ranking it was marked down for its slow and costly digital infrastructure; in comparison with some cities in Eastern Europe, which have jumped straight to fibre from dial-up modems, the German capital is relatively sluggish. However, the city is making progress towards the German government’s goal of comprehensive 50 Mbit/s broadband by 2018, and this constraint is likely to be short-lived.

Paris, on the other hand, was expected to be a close contender, but was let down in our ranking mainly by its local market conditions: some digital goods and services here are growing at a surprisingly slow rate compared with the rest of Europe. This is a more difficult problem for city authorities to fix, but were this to be remedied, we believe that Paris could prove more attractive than London.

While London may be leading the pack, the capital cannot rest on its laurels if it wants to maintain its position. The Index provides food for thought for Europe’s competing cities and suggests ways policy makers can assist those trying to develop the local startup ecosystems – and helping Europe to perhaps, one day, trump its competition across the Atlantic.

Christopher Haley is head of startup and new technology research, and Siddharth Bannerjee digital startups researcher, at Nesta, the UK’s innovation foundation.

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