Web Startups: The London Scene

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Overdressed for Success

Index partners Saul Klein and Dom Vidal explain that while London's moment in the dot-com limelight may have been fleeting, it opened the eyes of smart, young people that starting a company was an option. Now, thanks to the experiences of such companies as Skype, Last.fm, and Bebo, more and more kids are beginning to believe they too could become the next Mark Zuckerberg, of Facebook fame, or more appropriately, Niklas Zennström, who co-founded Skype (EBAY).

To be sure, this band of entrepreneurs remains outside the norm in London. There's not so much a tech scene as there are pockets of like-minded cliques whose members spend a lot of time in the Valley—or at least reading up on its ways. A group of 20 or so promising startups is on a pilgrimage to the Bay Area now. "I decided I had to see this place," says the group's leader, Oli Barrett, an event promoter who has never been to the Valley but says he's become fascinated with it thanks to all the stories that start out, "Oh, that's not the way they do it in the Valley."

Many of these up-and-comers could probably use the extra hand-holding U.S. entrepreneurs take for granted. Hogarth doesn't know a single kid from his Cambridge class who is starting a company, and his co-founder Smith still gets calls from his grandmother who's aghast that he's not using his law degree. (Their co-founder You gets off easy; she lived in the Bay Area for a while and her mom was a venture capitalist.)

When Hogarth and Smith went to meet with Y Combinator's Paul Graham, they planned on wearing jeans until Smith's dad gasped, "You're properly trained British gentlemen!" They didn't wear ties, but were still overdressed. Seeing the Y Combinator founders clad in jeans and flip-flops, Smith thought, "Oh, I'm so British!" He covers his face with his hands and blushes as he recounts the story.

An Emerging Startup Pocket?

The fact is, you can start a breakout Web-based company anywhere. But there are few pockets where this happens with any regularity. It's an open question whether the MySQL, Skype, Bebo, and Last.fm acquisitions were coincidental or there is genuinely some Internet scene and momentum building in London. It's also unclear whether any big standalone public companies will emerge from the pack.

In the U.S. and abroad, a little momentum can spur excitable economic-development types to coin monikers like "Silicon Alley," "Silicon Gulch," a term used to refer to Austin, Tex., or "Silicon Wadi," used in reference to Israel. If Google (GOOG) successfully sends rockets to the moon, no doubt I'll field press releases all about "Silicon Crater." But in a downturn, few of these places ever keep up momentum.

There's hope for London yet. While the number of bets placed by U.S.-based firms is declining, the average deal size is on the rise. In 2007, the number of investments by U.S.-based firms in Europe declined for a sixth straight year, to 897, even as the tally soared elsewhere, according to VentureOne, a Dow Jones company. Meantime, the total invested has been rising steadily since 2003, increasing to $4.6 billion in 2007. In other words, there are fewer bets, but the bets are substantial.

That looks to me like the healthy emergence of a market—and not sheer momentum investing that will disappear as soon as a slump hits. After all, most good deals get done when the flood of U.S. venture capitalists aren't paying attention.

Sarah Lacy has been a business reporter for 10 years, most recently covering technology for BusinessWeek. Her book, Once You're Lucky, Twice You're Good: The Rebirth of Silicon Valley and the Rise of Web 2.0, will be published by Gotham Books in May, 2008. She is also Silicon Valley host of Yahoo Finance's Tech Ticker.