Is London still the best place to build a start-up?

Analysis
15 Jan, 2016

The capital's high rents are driving UK entrepreneurs to base their companies elsewhere

The shine may be wearing off Shoreditch, as entrepreneurs pick other places in the UK to base their start-ups.

Fewer new start-ups are being founded in Shoreditch's start-up scene, Silicon Roundabout, with 2015 stats showing that the number of new companies fell by a third (15,620 to 10,280) on the previous year, citing high rents as one reason for the drop.

"Rising rents in the Silicon Roundabout area are causing many start-ups to choose other neighbouring areas of central London, such as City Road, as their first base," says Colin Jones, a partner at UHY Hacker Young, who conducted the research.

"By attracting larger firms into the area, rents increase, available space decreases, and smaller start-ups that were initially attracted to the area are forced out into neighbouring areas. That is exactly why we have seen the tech start-ups heading away from Old Street to the City Road area."

The price for renting an office in London rose by 11 per cent in the first half of 2015, according to a report from real estate consultancy firm Knight Frank, which is a greater increase than any other city around the world, and only Hong Kong and New York are more expensive to rent an office in.

One Shoreditch migrant is telecommunications firm Natterbox, which moved its main operations base to South London's Croydon early last year in order to scale the company.

"Outgrowing our old premises meant that we had to find a southern UK base with easy transport connections and good catchment area for staffing, where we could put down some roots for expansion," explains Adrian Evans, chief operating officer.

"We looked as far down as Brighton and assessed other London locations but Croydon in the end was an easy choice. It ticked all the boxes and with the new Croydon Retail Partnership development it is clear that there is a new energy about the place."

Jonny Rose, founder of Croydon Tech City, an organisation that promotes the town's start-up credentials, claims its tech scene has seen a 49 per cent increase in new tech, digital and creative businesses set up in the area since 2011.

"This boom has been created by a combination of the supportive and dynamic start-up ecosystem created by Croydon Tech City and Croydon's unique mix of excellent office space, new business rate relief and solid broadband infrastructure," he tells IT Pro.

But companies have been moving away from Shoreditch for some time, according to figures from property advisory firm Colliers International picked up by City AM, with 33 per cent of tech firms instead basing themselves in Aldgate and Whitechapel, compared to just 21 per cent picking Shoreditch.

For instance, City Road has seen by far the fastest growth in start-ups, according to UHY Hacker Young, increasing by 479 per cent (1,450 to 8,400) between March 2014 and March 2015.

These statistics support the belief that many firms are choosing new, less crowded areas in which to work. But does this extend even further, to cities outside of the bustling, increasingly pricey capital?

Where else?

There was a time when entrepreneurs little choice but to set up in a trendy part of the city to make the right contacts. Now, that might finally be changing, and with cities around the UK and beyond becoming home to some of the most innovative new companies.

Places like Bristol or Peterborough are quickly emerging as new and exciting hubs for technology companies to thrive, turning their cities into innovation testbeds where companies can take advantage of previously unprecedented connectivity and an environment that encourages experimentation.

Paul Wilson, MD or Bristol's smart city project Bristol is Open, tells IT Pro: "We're a nation of innovators and clever folk. [Bristol is Open] opens up an innovation space which is huge, and people have a habit of filling the space."

Focus areas for the Bristol is Open project include assisted living for the elderly, driverless car experiments and playable cities, with 40 post-doc academics from the University of Bristol leading the tech side alongside the city council.

Ruth Jacobs, MD of IT recruitment firm Randstad Technologies, which hosts a jobs event in the city along with Google and LinkedIn, says: "Bristol has grown into one of the most cutting-edge tech clusters in the UK. Not only does the city push the envelope with its environmentally-friendly initiatives, it's also at the forefront of the global smart cities movement, as well as being a major player in both the IT and robotics sectors."

Peterborough has similarly embraced the smart cities movement, recently becoming the UK's first 'gigabit city' with an ultrafast citywide fibre network connecting more than 100 public sector sites.

"The growth of the tech sector in a non-traditional tech city is vital in ensuring that the city continues to grow in a sustainable and viable way," says Gavin Elsey, cabinet member for digital, waste and street scene. 

Richard Godfrey, ICT manager at Peterborough City Council and assistant director for Digital, adds: "[Peterborough] is at the heart of the UK and is a much more affordable destination for businesses to operate from than the capital, which is only under an hour away."

Tech North

Many more cities' flourishing tech scenes are proof that London doesn't have the last word on UK start-ups, and the government has taken steps to support their development in the north of England too.

Tech North, the off-shoot of the promotional organisation Tech City UK, aims to be a cheerleader for burgeoning hubs, but has become a contentious issue for many who believe that the project has been neglected since its launch.

The project was publicly criticised by Labour MP Chuka Umunna, who called it a blow to plans for a 'Northern Powerhouse' in the UK, saying: "[Chancellor] George Osborne is fond of talking about a Northern Powerhouse but, as with infrastructure and rail, the details are falling far short of ministers' rhetoric.

"The Tech North project was launched to great fanfare by Nick Clegg in Sheffield last year although progress has been slow and it is unclear whether this was anything more than a pet project which, after the election, ministers are now ignoring."

The initial ambition of the project was to double the number of technology jobs in the region as well as co-ordinate tech clusters across participating cities to create a 'Northern tech centre' as part of Tech City UK.

"Tech North, which is actually supporting the seven Northern cities, is very much about capitalising growth and change and making sure it has an impact on making businesses grow, but also making sure that people have a role to play in the economic growth of a region," said Gerard Grech, CEO of Tech City UK.

But Grech also pointed to local councils as instrumental in fostering innovation for their respective cities, saying that digital growth strategies much be in place if areas are to attract investors away from London.

Where can UK tech workers earn the most?

Any perceived shift in power away from London doesn't appear to have affected salaries for staff across the UK: Workers in the capital still enjoy a higher salary premium than anywhere else

This translates to earnings nine per cent higher on average than their peers in other cities, beating only Scotland, whose tech workers enjoy a six per cent salary premium. 

In contrast, the average IT worker in Northern Ireland is underpaid, earning 22 per cent less than those in London according research from Randstad Technologies.

Ruth Jacobs, managing director of the company, says: "If you're a techie based in the north – with Scotland the exception – you're being grossly undervalued, and it could really be worth your while moving south."

So the average salary for workers in IT clearly rewards those basing themselves in or near London, even if property prices and living costs are rising at a rate that still excludes many from living and working in the capital. This alone makes it harder for businesses outside of London to attract skilled workers.

"There's a whole element of making sure that if we do attract the right businesses into Peterborough, we've actually got the skill sets coming out to take those jobs."

Digital City Peterborough's Richard Godfrey tells IT Pro of the city's dedication to training students in digital skills in order to support new business growth.

But a report released in November 2015 shines a ray of hope for workers outside of the capital, with the number of new IT roles being advertised in Glasgow, Manchester, Leeds and Bristol rising while London jobs dry up. Higher rates for big data jobs, the highest paid, were also offered to workers in Birmingham and Edinburgh.

London is still thriving

London remains an attractive place to launch a start-up, even if the trendy Silicon Roundabout area is no longer a viable option for many. The capital is Europe's largest hub for start-ups, beating Paris, Dublin and Madrid among others, with more than 1,000 "tech investment projects" started there between 2005 and 2014.

Tech companies in the capital employ almost 200,000 people and have grown by 46 per cent since 2010, according to Tech City UK statistics.

Meanwhile, women residing in London are three times more likely to be working at a start-up than those living in Silicon Valley.

And while the UK as a whole inspired a record amount of venture capital investment in 2015, 75 per cent of the £1.44 billion raised between January and October was invested in London-based companies.

The problem of visibility

Despite many exciting start-up scenes around the UK, the focus on London leads to a lack of focus on other cities.

"Even though Bristol technologies pack a punch, the city is still relatively unknown on the global arena," admits Randstad's Ruth Jacobs, pointing to a lack of coverage for these smaller hubs.

Peterborough City Council's Richard Godfrey tells IT Pro that it is crucial successful start-ups flourish in areas outside of London, saying: "It's important for innovation but I think it's important for the cities as well.

"Outside of tech there's not a huge amount of change happening, so if you don't have tech companies in the city where you live, whether it be Peterborough or wherever, I think you're going to struggle to grow sustainably."

Dublin's first commissioner for start-ups, Niamh Bushnell, says people underestimating the city can also work to its advantage, however.

"People have been really enthusiastic from the start because I think everybody thought Dublin is punching way above its weight and nobody is talking about it," she tells IT Pro.

Irish companies become global companies much faster than they might if based elsewhere, she claims, often moving their main centre of operations to the US in order to widen their customer base. Part of the reason for this is how relatively unknown Dublin and Ireland are in the start-up scene, according to Bushnell.

Looking to the future

While London's wealth of venture capitalists, large tech companies, and media focus will always attract start-ups, the consequences of its successful start-up hubs have pushed other entrepreneurs to base their companies elsewhere.

Whether this expansion across the UK is a good thing for the industry as a whole remains to be seen but, with cities like Bristol and Peterborough (and many more besides) making strides to foster greater levels of innovation and embrace the rise of IoT and smart cities, we may be looking at a future in which London is just one of many places worth talking about.

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