BIBLE: Internet startup culture - the UK versus America

UK startups find themselves operating under a very different environment

The rash of coverage in the national press recently, with surveys of those 20-something 'Internet Millionaires' may have convinced you that the startup boom in Silicon Valley is about to hit home. Even Tony Blair reckons the UK has a chance of "rivalling Silicon Valley" .

In truth however, UK startups find themselves operating under a very different environment, one which may ruin Tony's vision of a competitive e-Britain.

Although the situation is changing , UK startups still struggle to find funding, a problem unheard of in America. It should be no surprise then that first class UK firms are forced to leave Britain for America, where they believe they will find the funding and support necessary to succeed.

Keith Teare CEO RealNames , has had first hand experience of this process. In 1995 Teare developed the first Web portal -- Channel Cyberia -- but was forced to sell to Microsoft's MSN when funding from UK venture capitalists didn't appear. Fed up, he went to the US to form RealNames, whose Web addressing system has now been adopted by some of the Internet's largest content providers and portals.

Three years on, Teare says the UK still has a lot to learn from the US. "Just today I had two emails from people who can't get funding in the UK. There is a real absence of risk-laden investment in Britain, the City of London and IT just don't go together. In the US there is a different structural flow of money, a proportion of which goes to venture capitalism."

So bad was Teare's experience that he made a conscious decision never to use the UK again. "The value that you receive from your effort over here in the US is disproportionately higher than in the UK. One of the extraordinary things about the States is that I could come over here on a nine months visitor's visa and set up my company," he says.

With the arrival of the American venture capital model on UK shores, there is a growing pool of cash being made available for UK Internet startups. Although British startups will argue it's not happening fast enough there are clear examples of change. One is the decision by US online investment banking firm Wit Capital Group to ally with enba, a European Internet financial services provider. The two companies will form a Pan-European investment firm that will give Internet startups the help they need.

But more is needed.

Currently cash in the UK is hard to come by, particularly for small startups with modest initial turnover expectations. Although £10m financing deals do happen here, they are by no means commonplace with the majority being around £3m, according to Jupiter analyst Nick Jones. Another analyst, Lance Close of Mintel Research, says UK startups have a rough time. "The small guys, those with projected turnover of less than £1m, are likely to find it impossible," he says. "Their main source of funding is from banks which have very little experience in dealing with e-commerce companies. It will be another three years or so before the corner shop firms will be able to gain access to adequate funding in the UK."

Investment in the UK is also still at an embryonic level in But it's not just cash that is in short supply. Support services, the type of which provide a network for the new guys are also a rarity here. Internet incubators, which provide companies with consultancy, hardware, software and infrastructure support, are causing positive change, but British companies are still left without the support package automatically tied into US funding.

"There is a lot of money available in the UK but most of it isn't intelligent money," according to Robert Zegelaar, senior principal at international venture capital partnership Atlas Venture. "It doesn't provide help for the company such as advice on branding, the technical design of the Web site and who to work with etc."

In America, or more specifically California, there exists a very different culture which thrives on helping others.

Isabel Maxwell, daughter of disgraced media baron Robert Maxwell, is now President of the US Web-based email provider CommTouch . She believes there is a lack of 'cultural understanding' in the UK. "There is much more openness over here," says Maxwell. "With my family background a lot of people were out to make it very hard for me. In the UK if you've done something bad or underhand with your money people don't forget and they can't say 'congratulations, you're 20 years old and you're a millionaire. Over here if you fail it doesn't mean that you can't get up and start again."

Close agrees that cultural attitudes in the UK leave a lot to be desired when you're trying to get a startup going. "There is a significant gap between attitudes towards entrepreneurs [in the US and the UK], the American system as a whole is much more supportive, with people willing to stake their future on the success of another," he says.

However analysts and industry insiders have noticed a swing away from this stifling attitude. Ernesto Schmidt, president of , which launched recently, believes these archaic European attitudes are beginning to change. "The European attitude to risk and failure is still a concern, there's still a stigma attached to failure," says Schmidt. "But the Internet is changing that, as you can see from all the people leaving their jobs in banks and so on to start Internet companies because they see from the States that you are allowed to fail and start again."

Like most success stories however, Silicon Valley is showing signs of become a victim of its own success. Many of the brick and mortar services that buoyed so many startups, have put a significant strain on the infrastructure needed to support the flood of new companies. PR firms, advertising agencies and lawyers simply have too much to do.

"Space is a big problem here," said Bill Rollinson, CEO MediaFlex , a provider of e-commerce solutions for the printing industry. "There is a 99 percent occupancy rate in the Valley, we had to move one more town out than we wanted to. There are always people behind you watching for the space."

"It's getting ridiculous," adds Rollinson. "Even services like law and advertising companies are interviewing potential clients and saying 'we're don't know if we want you as a customer, who are your backers?"

This, coupled with the drain of talent leaves many companies desperate for staff of the right calibre. "We can't hire people fast enough," says Rollinson. "Getting staff is like trying to hire a rock star these days. Even the offer of stock options is not enough any more."

While things aren't exactly desperate in Silicon Valley, companies are increasingly considering alternative locations for business premises, either in the US or abroad. In an ironic twist, some are even considering moving to the UK. "I actually know of a UK company that is helping US companies to get a foot in Europe," Maxwell says.

Rollinson sees it slightly differently and predicts "more and more companies opening satellite offices outside the US." He adds, "Lots of companies like us are going to be forced to do more of this in the future."

Fortunately for British startups, a lack of talented people is one thing they don't have to deal with but unless the market gets its act into gear, a brain drain may well be on the horizon. "The market is too small as yet and talent can be soaked up over here," said Close, "However Silicon Valley will soon start to become and attractive force. Plus, with US companies looking to set-up in the UK, you've got to remember that intellectual property is a finite resource."

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