The UK start-up scene is hot.  There are lots of incubators, accelerators and shared workspaces. The biggest growth sector in London is probably TechSeedCityHubbery.  There are similar set-ups in half a dozen other UK cities. Both big brands and agencies are keen to get close to tech start-ups, and some are investing, providing mentoring, office space, and more.

I see a lot of start-up and small business pitches. In this post I’ll focus on what I’ve seen in the start-ups themselves. In Hot Chip 2, I will cover how big businesses, and marketers in particular, interact with start-ups. Finally, I will share what I’ve learned, mostly from other smart investors, about picking winners.

Who are the start-ups and what are they doing?

I help select and coach start-ups in a specialist accelerator called Collider (collider.io), which focuses on tech businesses that help brands connect with their marketplace. That sector is commonly referred to as adtech but of course there’s more to marketing than advertising. (Sarah Wood from Unruly called it “mad tech” which she said was a fair reflection of the culture at her business.)

I’ve also seen many businesses in healthcare, fashion and furniture retailing, financial services, property management, all web or app-based.  There are some clear trends.

1. In marketing tech, the big themes right now are social, mobile and video. Social media – managing it, measuring it, influencing it – is still a big challenge for brands that a few good start-ups are working on. Mobile and video are a bit different since both are tools, and not an end in themselves. Both can be social, both can help with brand communication, both can be used for consumer insight – all applications we’ve seen in Collider. There is so much potential in all these for marketing professionals, and for our customers, and the new businesses just keep coming. You might expect to see “big data” as a theme here too. There’s a bit of that but not much. Maybe it’s too hard for non-specialists to get into.

2. Over the past year, I’ve seen only two businesses which were actually planning to manufacture something: JAM vehicles making electric folding bikes (jivebike.com), and ZippyKit making electronic self-build toys (futurecouture.com).

3. Everybody wants, and needs, an app.

4. Nobody delivers actual stuff any more (except Amazon). Software as a Service (Saas) is the preferred business model for b2b start-ups.

5. It’s easier to imagine a consumer-facing business, but it’s probably smarter to build a business to business one. Many seem to think building a consumer-facing brand is easy and cheap, since they usually claim they will do it by going viral.

Why are they doing it?

The best pitches lead with a business or consumer problem they’ve experienced personally, and how they are tackling it. This is especially true in Collider where people have come out of the marketing industry themselves to start something they needed that didn’t exist. But far too many other pitches start with either a market that is big and potentially lucrative, or a business they want to copy (yes really).  I’m all for making money, but neither of these is sufficient reason to back a business.

It’s practically free to start a tech-based business, if you are willing to forgo income. Younger entrepreneurs do their own coding which is a real benefit for them, but they tend not to know their market so well. More experienced business people who are starting a business that they’ve seen a need for are more likely to understand their customer and the need but also have to pay youngsters to do the coding, so they need to raise real cash sooner.

There’s a lot of excitement around raising money. London is well stocked with venture capital funds investing in tech-based businesses. Then there are all sorts of people styling themselves “angel investors”. Anyone who invested in anything which has yielded some sort of return on exit can claim success, but that is very much the minority. Those rare angel investors with a good track record are the rock stars of Tech City, wooed and flattered by event organisers and start-ups.

Many start-ups seem more interested in raising investment than in generating business revenue.  A growing business needs to raise money to survive, but a new business has a much better chance if it’s doing something that potential customers will pay for – not just something a VC might invest in.

What next for Tech Seed Hub City?

The low barriers to entry suggest there’ll always be more start-ups, as long as London stays in love with them and gives them a home. It’s too soon to say whether many of them will make it big, or make it at all. We hear about the successes but, as Harvard academic Shikhar Ghosh put it, venture capitalists “bury their dead very quietly.” He estimates 3 in 4 start-ups fail. But any centre for hosting start-ups has created its own industry. The entrepreneurs will come and go; as long as people believe in themselves and in the possibility of success, the hub will flourish.

 

Read Hot Chip 2 here and Hot Chip 3 here

Comment | July 2014