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The Digital Economy

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Disruptive startups aim to make billions The UK is fast becoming an incubator for startup companies with the potential to disrupt business models and make a fortune T he most important list in technology is the CB Insights league table of unicorns. These are the tech startups valued at more than a billion dollars. At the top are household names like U ber ($51 billion), Airbnb ($25.5 billion) and Spotify ($8.5 billion). Scroll through the list and one ob - vious thing stands out – to be a uni- corn you need to be a disruptor. You can't just imitate an existing busi- ness. You've got to revolutionise an industry with an innovative busi- ness model. Uber is a taxi firm with no taxis. Airbnb turned homeown- ers into hoteliers. Spotify gave the music industry a way to fight piracy. This is what every tech startup wants to do – to disrupt an industry and in doing so wind up on the unicorn league table. The UK already has a growing ros - ter of unicorns. Transferwise shook up foreign cur- rency. Funding Circle let business borrow direct from savers, cutting out banks. The newest entrant to the unicorn paddock is Skyscan - ner, which pioneered online price comparison in the travel industry. Now the race is on to found the next generation of unicorns – and there is no shortage of candidates. "This is a golden age," says Tom Blomfield, founder of Mondo, an app-based digital bank which aims to reinvent high street banking. "I founded my first startup ten years ago when I was at university. My co-founder quit his job at Deutsche Bank. Everyone thought he was insane. He was an Oxford gradu - ate and was leaving an investment bank to join a startup. Now? The number-one pick for MBA grads is startups. Investment bankers and young lawyers all want to work at a disruptive startup." Naturally, the prospect of vast rich - es is a big part of that. When Insta- gram sold for a $1 billion, a pool of 13 employees shared $100 million. The company had only been running for 15 months. But there's more to dis - ruption trends than that. Perhaps the key factor is the si- multaneous emergence of a string of new technolo- gies. KPMG polled business leaders to ask what inno- vations are having the greatest im- pact right now and interviewees were spoilt for choice. They cited the cloud, the inter - net of things, data analytics, mobile platforms and apps, artificial intelligence, digital currency and payment platforms, and 3D printing. Each one of these technologies is young. Each has ex - plosive potential. And each feeds into the other. The rise of the cloud has made ar- tificial intelligence accessible to all. Digital payment means mobile apps are commercially viable. The internet of things is generating huge amounts of data, which needs powerful data analytics to provide useful insights. STARTUPS CHARLES ORTON-JONES Best of all, these technologies are cheap to use. Joe Schorge, man- aging partner of venture capital house Isomer Capital, believes the boom in disruptive tech startups owes a huge amount to the plung - ing cost of tools. "You don't need £10 million to get started. It's more like £10,000. In fact, many cloud providers offer their services free at first. Transaction costs are close to free. You can found a company 01 East London's Tech City near Old Street, formerly known as the Sili- con Roundabout, is home to one of the largest technology startup clusters in the world 02 Workers at the Level39 fintech incubator at One Canada Square in Canary Wharf and run it for next to nothing, then scale it up," he says. This low cost of entry, plus the lure of a payday, means the number of disruptive startups is sky high. Investors like Mr Schorge are more than happy to fuel the trend. "We believe in trying lots of ideas," he says. "The more shots you take, the more goals you score." He explains that his investment model relies on a small number of companies sup - plying the bulk of the returns. "Lots will not come to fruition." An under-appreciated ingredient in the rise of disruptive startups is the supportive environment for entrepreneurs. Take Property Part - ner, a novel crowdfunding concept which allows consumers to invest in the UK property market. Founder Dan Ganesha recruited experienced entrepreneurs to help him develop his concept. "Ed Wray, who founded Betfair, is an investor and non-exec - utive director," says Mr Ganesha. "To found a disruptive business you need people you can bounce ideas off. It takes more than just money. You need guidance from people who've been through the phase of hyper-growth. The US has had that for a while and I think we have it in the UK now too." Startup incubators and accelera - tors are soaring in popularity. Lev- el39 in Canary Wharf is Europe's largest accelerator of fintech com- panies. High-growth companies are given priority. Crammed into three floors of the One Canada Square skyscraper you'll find sev - eral dozen young companies, each with the potential to reach the mag- ical billion-dollar valuation. Bar- clays Bank has an accelerator, as does Santander, Citibank and UBS. Tax is a lubricant. The Seed Enter- prise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) offer big breaks for anyone taking a punt on a startup. Property Partner pinpoints tax as a big reason it flour - ished so fast. "We used both the SEIS and EIS to raise £1.4 million before launch," says Mr Ganesha. "The right tax scheme means investors can write off losses. They can back an ambitious idea. If nine out of ten don't work, it's OK because of the tax safety net. It encourages bold ideas." Add up all these factors and you have the perfect conditions for dis - ruptive digital startups. "It's the cool thing to do," says Mondo's Mr Blom- field. "The movie The Social Network [portraying Facebook founder Mark Zuckerberg] was the moment. When Justin Timberlake wants to play a startup founder you know some - thing special is happening." Is the trend sustainable? The key metrics point to the affirmative. For example, the internet of things is forecast by McKinsey to have a total economic impact of $11 trillion by 2025. Mobile data traffic is rising by around 60 per cent annually, says Gartner. Some of the most exciting digital technologies, such as virtual reality, have barely got started. If anything, this is just the dawn of the disruptive startup. Share this article online via raconteur.net The race is on to found the next generation of unicorns – and there is no shortage of candidates 02 01 SECTOR BREAKDOWN OF UK DIGITAL COMPANIES Getty Images Level39 THE DIGITAL ECONOMY raconteur.net 18 RACONTEUR 28 / 01 / 2016 5% 10% 15% 20% 0% Source: Tech Cit y UK 2015 Software development Advertising and marketing Media and entertainment Marketplace/lead generation Data management and analytics E-commerce Hardware and devices Fintech Telecoms and networking Edtech Healthtech Games development and publishing Electronics and components Other

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