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

TechHub, near London's "Silicon Roundabout". Image: Oli Scarff/Getty.

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.

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.


As EU funding is lost, “levelling up” needs investment, not just rhetoric

Oh, well. Image: Getty.

Regional inequality was the foundation of Boris Johnson’s election victory and has since become one of the main focuses of his government. However, the enthusiasm of ministers championing the “levelling up” agenda rings hollow when compared with their inertia in preparing a UK replacement for European structural funding. 

Local government, already bearing the brunt of severe funding cuts, relies on European funding to support projects that boost growth in struggling local economies and help people build skills and find secure work. Now that the UK has withdrawn its EU membership, councils’ concerns over how EU funds will be replaced from 2021 are becoming more pronounced.

Johnson’s government has committed to create a domestic structural funding programme, the UK Shared Prosperity Fund (UKSPF), to replace the European Structural and Investment Fund (ESIF). However, other than pledging that UKSPF will “reduce inequalities between communities”, it has offered few details on how funds will be allocated. A public consultation on UKSPF promised by May’s government in 2018 has yet to materialise.

The government’s continued silence on UKSPF is generating a growing sense of unease among councils, especially after the failure of successive governments to prioritise investment in regional development. Indeed, inequalities within the UK have been allowed to grow so much that the UK’s poorest region by EU standards (West Wales & the Valleys) has a GDP of 68 per cent of the average EU GDP, while the UK’s richest region (Inner London) has a GDP of 614 per cent of the EU average – an intra-national disparity that is unique in Europe. If the UK had remained a member of the EU, its number of ‘less developed’ regions in need of most structural funding support would have increased from two to five in 2021-27: South Yorkshire, Tees Valley & Durham and Lincolnshire joining Cornwall & Isles of Scilly and West Wales & the Valley. Ministers have not given guarantees that any region, whether ‘less developed’ or otherwise, will obtain the same amount of funding under UKSPF to which they would have been entitled under ESIF.

The government is reportedly contemplating changing the Treasury’s fiscal rules so public spending favours programmes that reduce regional inequalities as well as provide value for money, but this alone will not rebalance the economy. A shared prosperity fund like UKSPF has the potential to be the master key that unlocks inclusive growth throughout the country, particularly if it involves less bureaucracy than ESIF and aligns funding more effectively with the priorities of local people. 

In NLGN’s Community Commissioning report, we recommended that this funding should be devolved to communities directly to decide local priorities for the investment. By enabling community ownership of design and administration, the UK government would create an innovative domestic structural funding scheme that promotes inclusion in its process as well as its outcomes.

NLGN’s latest report, Cultivating Local Inclusive Growth: In Practice, highlights the range of policy levers and resources that councils can use to promote inclusive growth in their area. It demonstrates that, through collaboration with communities and cross-sector partners, councils are already doing sterling work to enhance economic and social inclusion. Their efforts could be further enhanced with a fund that learns lessons from ESIF’s successes and flaws: a UKSPF that is easier to access, designed and delivered by local communities, properly funded, and specifically targeted at promoting social and economic inclusion in regions that need it most. “Getting Brexit done” was meant to free up the government’s time to focus once more on pressing domestic priorities. “Getting inclusive growth done” should be at the top of any new to-do list.

Charlotte Morgan is senior researcher at the New Local Government Network.