Successful fintech: UK has some, but it's not in Silicon Roundabout

Open up the business pages of any national newspaper and much of the coverage is focused on the latest fintech startup, the marvel that will transform the global financial system, backed – inevitably – by big name venture capital firms.

But is this obsession with fintech deserved? A cool analysis of the phenomenon long term suggests it probably is not. Why? The results coming out of TechCity and other fintech-type hubs are much more modest – and less profitable – than the hype and exaggeration first indicated.

It is an extraordinary fact that it is almost impossible to find even one of the UK’s incubated companies that has gone on the junior AIM market – whereas so many un-incubated startups have done so – although many have disappeared after trade sales.

Not one of the 100-plus companies invested in by super-entrepreneur Hermann Hauser since 1997 – who awarded his honorary KBE this week – was hot-housed.

Furthermore, neither of the UK’s two most high-potential fintech firms went through any of the fintech incubators. In 2014 Ismail Ahmed, founder and LBS graduate, secured a £24m investment for WorldRemit, a global online money-transfer service he founded in 2009.

It was backed by Accel Partners, an early funder of Facebook, Dropbox and Spotify. Accel was impressed by WorldRemit’s rapidly growing business and its mission to improve money transfers. It invested $40m, one of the largest ever Series A funding rounds in Europe.

The second firm, blockchain investment company Coinsilium, is a very rare example of a fintech firm that went through an IPO. In July 2015, Coinsilium became the first blockchain company to go public, having gained investment from Richard Branson, Paypal co-founder Peter Thiel and many of the world’s biggest banks.

Coinsilium is expecting to raise at least £3m from the listing that it will use for further later stage investments and to take a larger stake in some of the 11 companies it already invests in.

Absurdly, many of the fintech startups don’t have a phone number, and often not even an address, on their website – unthinkable for a professional, sales-led, trading company. “Fill out this email form” if you’re a prospective buyer – has become the dismal norm.

Next, the actual number of real, commercially active companies in the Old Street district of London that has come to be known as a startup district consists of around 350, mostly micro-businesses – and far less than the 1,000 plus often claimed by TechCity promoters.

The starry-eyed investors and startup CEOs all dreamed of replicating the now legendary startup incubator Y Combinator, based in Mountain View, California. That, however, has produced a stream of hotshot successes and launched the craze for Me-Too incubators worldwide.

Renowned for its pressure-cooker atmosphere, it was estimated in July 2015 that 13 of Y Combinator’s startups are now worth a total of $50bn. In those valuation rankings, AirBnB came first, followed by Dropbox, Zenefits and Stripe.

Not surprisingly the entire world woke up and rapidly began to copy the model of a seed accelerator programme. In his magisterial study of incubators – named Seed-DB – Cambridge University MBA student Jed Christiansen counted up no less than 235 incubators globally, with 5,710 companies accelerated, and $12bn in funds raised.

In the league table of those outside the US, Seedcamp in London comes top, with 118 startups funded, including firms such as Rentmineonline, GrabCad, and CrashPadder. Next comes the international incubator network Wayra, in 13 city hubs, with 48 companies funded and $16m in total funding contributed. Bethnal Green Ventures, started in London in 2012, has 33 startups and 4 exits on its track record. Another startup hub, Springboard, notched several successes including PlayMob, Hassle.com, PagerDuty and Blottr to its name.

However, the sad news for Christiansen is that it is still far from complete. Missing from his list is the UK’s largest, and perhaps most successful accelerator of recent years, Codebase, in Edinburgh, now home to more than 50 companies.

It was founded by Jamie Coleman, a true renaissance man. Codebase is noted for having nurtured, accommodated or aided a clutch of fast-growing super-companies, including fantasy sports games leader Fanduel, management software firm Administrate, TV analytics firm TVsquared, and even the tiny Peekabu Studios, which cleverly turns pictures into online passwords.

Back in TechCity - very few of the companies actually make much of a profit. Even the highly vocal leaders – Transferwise and Duedil – which give countless interviews and opinions in the digital press, make losses, and increasingly may never make even a modest profit.

The low returns on the billions pumped each year into fintech startups, much of it from foreign investors, are increasingly an embarrassment to the City of London’s reputation. With the third annual London Fintech Week starting, starting July 15th, many delegates may be wondering if this will be the last – or the last to be taken seriously, with conference tickets costing £465 a head.

The core of the problem is that much of the £10m given to TechCity by the UK Government has been spent not on attracting companies to the area, providing accommodation advice and other vital services – but on PR.

One journalist told me: “In the Cameron era, himself a PR bunny, the UK national press was fed an endless stream of fintech-type stories - that was easy to print, never critically analysed, and nobody bothered to check.”

One head of TechCity, Baroness Joanna Shields, was even made a Dame, even though no one could remember what she’d done to deserve it. Real troupers, such as Dr Susan Searle, the two-decade veteran who led Imperial College’s enterprise office and helped start literally dozens of exceptional spinout companies, were ignored by the honours system.

In recent years it is the SETsquared partnership - initially four, now five, West of England universities – Bath, Bristol, Exeter, Southampton and Surrey – that have produced some of the best results. Last year it was even named “top university incubator in the world” by UBI Global, which benchmarks them worldwide.

One rising star is Monika Radclyffe, centre manager of SETsquared’s Bristol hub, where the 65 firms have created 1,020 jobs and raised a total of £28m in funding – and many are profitable.

Started in 2002 SETsquared claims to have helped more than 1,000 hi-tech start-ups, ‘contributing £3.8bn to the UK economy to date’, according to research from Warwick Economics.

In Birmingham Dr David Hardman MBE, a 30-year veteran of the SME community and now CEO of Innovation Birmingham Ltd, backs the incubator model. Have incubators been as successful as is often claimed? “Of course not!” he replied.

“But there are plenty that can point to success rates of 75-80 per cent for companies lasting more than two years after foundation which does better the unsupported rates of around 50 per cent.

There is much TechCity and the outlying fintech sector can learn from the UK’s other, much more successful tech hubs. In reality, there are probably too many startups in London, and far too few of the right quality.

Does the world really need another online payment system when there are hundreds in operation; another mobile app for foreign exchange transactions? Fundamentally, fintech needs to shorten the chain between entrepreneur and client – bypass the glut of artificial incubators and impatient investors - if many more are achieve even the modest results. ®