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London’s Tech City

UK entrepreneurs also have other options for launching and growing their emerging companies including the much publicized Tech City in London, which has been recognized and heavily supported by the UK government and has become home to hundreds of startups as well as offices of large technology multinationals such as Cisco and Google.  Tech City initiative has been pitched as providing entrepreneurs and investors with a unique mix of urban diversity; concentration of of media, film, TV and creative industries; and proximity of government, and the initiative has been supported by the availability of tax benefits, liberalized immigration for entrepreneurs and the creation of a new High Growth Segment on the London Stock Exchange to enhance liquidity for UK-based emerging companies.  One major challenge, however, has been a so-called “digital skills gap” due to the large unmet need of firms in the UK digital sector for people educated at the graduate level or above: applications for IT-related degree programs have dropped dramatically at the same time that a large percentage of UK digital employers are complaining about their inability to recruit team members with the right technical and practical skills.  In addition, companies that have set up in Tech City have complained about high rents, difficulties in finding skilled workers in the immediate area and a lack of access to capital.  Nonetheless, the Greater London area remains extremely attractive because it has the highest proportion of skilled workers in the UK and the strongest local economy in the country and there have been calls for technology companies to look elsewhere in London, such as the Mayfair District, to set up their operations.  To learn more, see O. Solon, Europe’s Hottest Startup Capitals: London, WIRED (October 1, 2013) and C. Rhodes, Forget Tech City!: Mayfair is Where Tech Start-ups Should Be, London Loves Business (June 24, 2013).


Guidelines for Successful Globalization by High-Tech Start-Ups

Clearly emerging companies must confront significant risks during the early stages of development, even when operations are limited to strictly domestic markets. However, many such companies have found that expanding into foreign markets can actually increase their chances of success, even while they are still struggling to gain a foothold in their home market. For example, young businesses with limited financial resources may benefit from using low-cost manufacturers in foreign countries to produce goods that can be sold at attractive prices in the company's own domestic market.  A new company may also seek out foreign markets that have not been identified by larger competitors and build significant market share as a barrier to entry. The success of the product or service in a smaller foreign market can then be used as a base for entering larger markets. 

Globalization can seem like a daunting task for the founders of an emerging company when they are first starting out and struggling to complete development of their first product or service and identify potential customers and partners that can assist the company with scaling up operations quickly and efficiently.  Nonetheless, the evidence shows that globalization should be incorporated into initial strategic planning, even if exporting is not the first priority.  A group of researchers who surveyed and analyzed globalization among young high-tech companies from Germany and the UK in the late 1999s—and found that internationalization was the norm for those firms and that the key strategic question for them was not whether, but when, to internationalize—generated the following useful list of recommendations to founders and managers of similar firms who wished to improve their chances of successfully growing and internationalizing:

  • Recruit as good a team of founders and managers as possible with high levels of international experience, preferably gained in both large and small firms.
  • Start as large an enterprise as possible including the size of the founding team and the financial, technical and experiential resources available.
  • Incorporate highly innovative technologies into products and services but not at the cost of usability and reliability.
  • Select products which are sold to industrial users rather than consumers.
  • Build a portfolio of demanding customers but do not become excessively committed or integrated into the non-standard needs of a few large customers.
  • Commit the firm to international sales from Day 1 in both actions and all planning targets.
  • Build a business model that is scalable in both volume and number of market targeted.
  • Be prepared to enter additional new countries rapidly after the first internationalization activity.
  • Plan for significant additional costs in developing international sales and marketing activities.
  • Appraise markets in terms of aggregate international demand rather than domestic demand and growth.
  • Develop a permanent and focused R&D activity.
  • Avoid “deep niche” products if high growth is a desired goal and ensure a wide range of applications for both products and technologies.
  • Continue to reduce product adaptation/transaction costs, particularly the installation and maintenance costs incurred by new customers or the vendor.
  • Assess rigorously the ‘pros and cons’ of exporting direct versus the use of distributors, and consider the effect of industry sector, target country and technological innovativeness on channel selection.
  • Manage distributor relationships effectively recognizing the need for continued investment of time and resource in supporting network linkages.
  • Get known quickly and recognize the existence of the “liability of alienness” (i.e., larger firms, including customers, are likely to be very wary of entering into trading relationships with unknown firms).
  • Be prepared for the rapid entry of new competitors into your product/market space.
  • Consider objectively the merits of external finance (i.e., venture capital, business angels), particularly the consequential benefits of factor productivity, reputational effects and advice for fast growth firms.

Dynamism and Networking Lacking in Silicon Fen?

Another factor relevant to new business launches in Silicon Fen is the belief that the region may lack the competitive dynamism and networking that appears to thrive in Silicon Valley.  It has been observed, with some truth, the scientists and engineers in the UK are somewhat reluctant to tread into new areas that have already been staked out by colleagues.  As a result, it is common to find that no more than a handful of researchers may be pursuing a particular lead or project at any one point in time.  In contrast, when a promising idea or technology is identified in Silicon Valley, several firms, often a dozen or more, may receive support from venture capitalists to engage in what become a rapid race to be the first to bring a product to market or develop a sustaining intellectual property portfolio around the new technology.  Those that do not succeed will either pass out of business or perhaps be acquired by the winner or a larger company interested in a shortcut to entering an emerging technology market.  Intense competition in Silicon Valley also co-exists with elaborate networks of collaborative arrangements between firms, a strategy that is particularly important to small companies that focus on R&D yet must look to others to complete other functions such as manufacturing and distribution.  In contrast, surveys show that links with local businesses are generally perceived as being unimportant by venture capitalists, universities and other research institutions in the UK.

As for networking, Huber’s study of 105 research and development workers, technology officers and managing directors working at 46 different hardware and software companies in Silicon Fen (Do Clusters Really Matter for Innovation Practices in Information Technology?: Questioning the Significance of Technological Knowledge Spillovers) revealed that informal social networking of the type that flourishes in Silicon Valley was generally thought to be unnecessary by his respondents and that most of them felt that they did not have the time required for networking to be effective.  Many of the respondents reported that they believed that their fields were too specialized to benefit from sharing and collecting ideas outside of their workplaces and those who were involved in activities that had a global focus were likely to go beyond their local community to interact with others around the world on knowledge-based issues using Internet communications tools.  In other words, online sharing was more important than face-to-face interaction within Silicon Fen and Huber’s findings cast doubts on the theory that clustering of firms working in related industries will generate positive “spillover” effects through sharing of news, ideas and best practices.

Koepp (Clusters of Creativity: Enduring Lessons on Innovation and Entrepreneurship from Silicon Valley and Europe’s Silicon Fen) makes the interesting argument that Silicon Fen entrepreneurs may be unwittingly influenced by the rewards and honors systems that has prevailed in Britain for centuries and that this may have an impact on how they manage their companies.  According to Koepp, entrepreneurs, including those who come directly out of the University, may consciously or unconsciously be striving to achieve titles and positions in Britain’s eternal social hierarchy and that this quest may become more important than the inventions created, products developed or revenues generated during the course of launching and building a firm.  Koepp conceded that the technology-based companies in Silicon Fen are likely more meritocratic than British corporations outside of the region, but cautioned that the larger social fabric of the nation must always be taken into account.


Directors’ Organizational Actions Assure Smooth Launch for New Corporations

Preparation of the resolutions for the initial organizational actions by the first directors of a new corporation is an opportunity to provide the founders with a comprehensive checklist of the most important actions that will need to be taken in order to complete formation and organization of the corporation and get them on the correct path toward effective corporate governance.   The organizational actions can be taken at a meeting or can be approved by a written consent action.

The draft of the organizational resolutions should be accompanied by a transmittal communication–letter or e-mail–that summarizes the key issues that will need to be considered.   Given the importance of the actions to be taken by the initial directors you should strongly recommend to your clients that an actual meeting be held so that you can answer any questions about the actions to be taken; however, if the directors prefer to act by written consent you should still ask them to schedule a conference call with you to go over each of the resolutions in the written consent before it is signed and becomes effective. 

In any event, make sure that the directors recognize that the resolutions are a good checklist of the issues that need to be considered and the actions that need to be taken including designation of officers, issuance of shares, regulatory filings, tax elections, opening bank accounts and appointment of outside legal counsel and accountants for the corporation.  In addition, many of the resolutions will refer to, and incorporate by reference, other important documents that you will be providing to the clients.  For example, the issuance of shares to the founders and their appointment to various positions on the management team will actually be covered by stock purchase agreements, which will include vesting provisions and restrictions on transfer of their shares, and one or more employment-related agreements that include conditions on protection of confidential information and assignment of inventions.


Why Doesn’t Silicon Fen Create Big Companies?

Notice has often been taken of the striking differences between the technology-based companies launched in Silicon Valley and Silicon Fen and, in particular, commentators have pointed out that Silicon Fen has lagged far behind Silicon Valley with respect to creation of large companies or serving as the birthplace of entire new industries.  In most cases, Cambridge entrepreneurs chose, and often successfully followed, niche strategies that are bound on special purpose technologies that are generally not suitable for mass markets and achieving high levels of sales revenues and, in fact, local surveys taken during the late 1990s indicated a distinct preference for maintaining a manageable size of the enterprises and that no more than 3% of the local firms at that time had more than 200 employees.  Pfeifer et al. (The Golden Triangle: A Comparative Perspective—Silicon Fen (UK) and Campinas (Brazil)) found that about two-thirds of the technology-based companies in Cambridge had been founded by “locals” (i.e., from the University, another local research establishment or former employees of a larger local company that provided support to the founders in spinning off a new business) and that a majority of the companies remained locally headquartered businesses with small staffs as they matured.  Ejler et al. (Managing the Knowledge-Intensive Firm) argued that many technology companies in Cambridge realized that growth is often counterproductive for continuous innovation and opted for a strategy of pursuing interesting new projects by “spinning out” the necessary people and assets into new business units or companies that could be organized in a project-based form that was more hospitable to the low levels of formalization and decentralized decision making thought to be best for knowledge-intensive firms.

While governmental restrictions on commercial and residential developments in Cambridge, as well as infrastructure issues such as poor transportation planning, have certainly contributed to the comparatively modest growth of Silicon Fen technology companies, another possible explanation for the direction the Cambridge Phenomenon has taken is the personality characteristics of the local entrepreneurs themselves.  It has been suggested that the founders of new businesses in Silicon Fen do so not to create a global monolith, no matter how badly the politician may want that, but instead will be content to nurture small-scale enterprises that cater to the needs of an identifiable and manageable market niche that does not draw the attention of large competitors.  In fact, Cambridge entrepreneurs have often been criticized based on the perception that they are only interested in creating “lifestyle companies” that allow them to pursue their fascination in a particular technology while avoiding strategies and activities that might result in the firm growing to a size that is beyond their immediate control.  On the other hand, however, a significant portion of the new companies in Cambridge are spin-offs of other firms and the founders of these new companies have been praised for their “strong pedigrees” in research and management based on the experience they have accumulated during their previous ventures.  It has also been suggested that the relatively cautious approach to growth among Cambridge firms contributed to impressive survival rates in comparison to Silicon Valley and other UK innovation centers: in one study of 53 companies launched through the St. John’s Innovation Center in Cambridge over a ten-year period (The Golden Triangle: A Comparative Perspective—Silicon Fen (UK) and Campinas (Brazil)), only five of them ceased trading and, of those, failure of the business was not the reason for shutting down for two of them.