unchaining investment: barriers to us venture investment in uk digital businesses

7/28/2019 Unchaining Investment: Barriers to US venture investment in UK digital businesses

1/39

1 Unchaining investment

Barriers to Us ventUre investment in UK internet and digital BUsinesses

1

Lou mo, L coll, alb Bo-Bo, h L

Ju 2013

UnchaininginvestmentB o Us u UK i l bu


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abou n

n UK u. a p c,w p pp b . W b p b c,

wk k.

n op Cp c e W w cp ub7706036 c ub 1144091. r c sc ub sC042833.r c: 1 Pu Pc, l, eC4a 1de

..o.uk n 2013.
http://-/?-http://-/?-


3/39



cOntents

acKnOwLedgements 4

1 intrOdUctiOn 5

2 PerOrmance and investment data 7

3 the rOLe O internatiOnaL investOrs 13

4 BreaKing dOwn the POssiBLe exPLanatiOns O the UsUK gaP 17

1 less sUCCessUl vC Und managers 19

2 loWer retUrns When exiting sUCCessUl ComPanies 213 eWer good ComPanies to invest in 24

5 regULatiOn and UK digitaL startUPs 26

immigration 27

exit marKets 28

CoPyright 29

data ProteCtion and PrivaCy 30

BanKrUPtCy 32

laBoUr and emPloyment 33

tax inCentives or investment 34

taxation and other issUes 35

6 cOncLUsiOn 37

endnOtes 38

Unchaining investment

B Us u UK i bu


4/39



acKnOwLedgements

t wk w u w k upp g. a w p p n.

W wu uc k k w pk u u cu c cu:

W wu k k w p bck c,cu K wlo Bu.

rc c w p b vok t.

t qu bu pu wk w Poo Jo L h U.

J a, C-u, lc2

Lul Bo, P, gck il

Jo Bo, m dc,tc

s cu, C-u, Cdj

Pk cu, P, nw epac

J clk, Pc m, Bvu Cp ac (BvCa)

J cl, u mP, stc vC

s couu, a i a

e goo, a, h lb

L h, P, ivu P

d hok, g P, auuCp

so J, C-u, oacc

hu Kj, u, h vu

s Kll, ecu dc, CoadeC(t C d ec)

sul Kl, P, i vu u C, scp

c Klbk, C-u, rk

upbcp

m Lju, P, ac

cop Lukz, dc Cuc emea, abb

i mk, m P, Wh Cp u, accac

Pul mll, P, B gvu

go nol, ecu a,eup vu Cp ac(evCa)

rl Pk, s ac, dJ

Jo Poll, Ceo, ac

so s, Pcp, dJ ep

Jo to, C, Pc

hz gup

wll vz, Pcp, eupi u (ei)

to Zppl, P, h CpP


5/39



1 intrOdUctiOn

t UK ll l b Us vc po

vu pl UK $2.3 bllo 2012, op o $41 bllo

Us. t UK u 6 p o Us, p

20 p o populo 16 p o gdP. w u popoo

o gdP, UK u pl l l z o Us u.

ru UK u u w Us cup. nc pAtlantic Dritpub 20101, w p w 1990 bu w 2000. t w c p p w p w .

vu cp p k bu c, p p upp k cp. a w c w u cp p , w quck, u pc,2 b u 3 b c k .4

c c5 n c UK vCbck w w cp vC bck cp. W 7 p c UK c w* p, 20 p c vCbck .

t UK u k u w pcp b , uccu cu Us k. t UK eup u uzu 90 bu pcp u c bubb. a cqu pu p u b k. t cbu pc k cp b UK up.

abou po

ac Us b j b cc w p cp w pc p . t p wc cfuc Us u c UK up, w pcu cu u p cu cu Us u UK.

U uqu u u b, sc 2 cb cu UK ucp c pc, w sc 3 bf Us .

sc 4 u pb p pc p bw UK Usu. , k up p c.

W pcp Us UK u wwc UK up p. W k pcu w u cbu c . W c w u i

up , wc p 33 p c c u cp UK. o c , uc bc , u u, b cu .

*ac u w p 20 p c.


6/39



methOdOLOgy

t p cb qu qu u cu

UKUs pc p. , up u cp pc uk u pu p,AtlanticDrit,1 w c . t w pcp t o Pq, w upp . u p u , p p.

sc, w cuc w w 27 , up cp cc u pcp w UsUK , pc u. t w qu cp w uu p, bu w pb.

u 1: t UK u pl o UK op

2,000

7,000

1,000

US$ millions

6,000

8,000

5,000

4,000

3,000

0.00

2011

2010

2012

2007

2008

2009

2005

2006

2004

2003

2001

2002

2000

1999

1998

1997

All VC investment Internet/digital investment


7/39



2 PerOrmance and investment data

w p?

UK u pl ou o ou 0.1 p o gdP, op o

ou 0.2 p Us (u 2). i pobl o UK u

o ll Us, vc UK oul b $2 bllo

.

t pp pp b pp. W UK Us u gdP w c , c . a u, p w w.

u 2: vc ou p o gdP*

t c c cu UK Us u cp u(u 3), bu c . B Us UK u c pp i cp, w pcc b UK u. i c, it w c b k.UK u uc pu bc, w Us u c .

0.004

0.014

0.002

0.012

0.01

0.008

0.006

0

2010

2011

2007

2008

2009

2005

2006

2004

2003

2001

2002

2000

1999

1998

1997

UK US Continental Europe


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u 3: aou b o

w po p?

UK u u c up cp Us u.a irr w c 20 pc p Us u p c bubb UK u (u 4).

a W U squ vu6 c c, u u Us b cku p c, b ck k p.

u ju b u i bubb, u b ac b p, bu cu b w UK (u

19902007

UK Funds

20082012

UK Funds

US Funds US Funds

Internet/Digital IT Hardware Business/Industrial

Consumer Energy Biotech/Health

Financial Services Business Services Other Industries

22%

39%45%

20%

20%

10%

7%

5%8%

18%

3%

3%

3%

3%

33%

9%

13%

12%

12%

4%

4% 4%4%

4%

14%

7%

7%

9%

16%

5%

5%

16%

6%

6%


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pc p bw Us ). t p w w c u wc i bu, w irr UK u c i bubb b pc p bw Us cup .

u 4: a po o UK Us u pl u

15.00

20.00

5.00

10.00

25.00

30.00

35.00

5.00

0.00

33.34

13.98

UK

fund

s

USfund

s

3.87

0.53

UK

fund

s

USfund

s

15.00

20.00

5.00

10.00

25.00

30.00

40.00

35.00

5.00

0.00

19901997

37.91

13.70

UK

fund

s

USfund

s

1998200719901997 19982007

3.34

2.07

UK

fund

s

USfund

s

Net IRR (%)

All funds Internet/digital funds


10/39



u 5: a Us UK u po b

lk pc b w , w UKUs pc p c uc 2000, pc b ac b p. t k b c uc uccu c iPo Us, c c bc i , qu uc . lk pcc b pbc u w p p u u pu. t b UK u cp w p qu Usu, b cu p p. t bu u bpc w bw p b p, p wc w p pc c cu. hw, w UK u c p w, p pc p ju u, bu p b qu (u 6).

10

0

Net IRR

(percentage)

50

40

30

20

-10

2007

2005

2006

2003

2004

2002

2001

1999

2000

1998

1997

1996

1995

UK US


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u 6: dbuo o UK u Us u u 19902007

u 7: dbuo o u b u po

USbased funds

UKbased funds

-20 20 40-0

Excludes outside values

Net IRR (%)

USbased funds

UKbased funds

1990

1993

USbased funds

UKbased funds

1994

1997

USbased funds

UKbased funds

1998

2002

USbased funds

UKbased funds

2003

2007

Excludes outside values

15010050

Net IRR (%)

-50 0


12/39



u 7 b p bu b p, w c p p pc c ju bubb. sc , bu b uc (c w u u), u UKu w bw p b p.

c , Us u b p pp c b w Us u k b k w Us cuc w pcp ( cu u sc 4).


13/39



3 the rOLe O internatiOnaLinvestOrs

g ubl po p b UK Us,

Us b o UK k? t ub o ol Us

u pl, o o po uppl ou o pl o UK

up. t lu b ol p p; po ou

o l Us k; k o Us k. so

o Us o, pll w co u, b o ll

o pul bu ol, qu o

u pof. O b p u o k, o

o ok o o o bl po o Us k.

vC ppc, p ppu pck b cp c, w ppu u k cw k. t, vC k u , u c p b b w u u ppu.

examPLes O Us investment intO the UK

hlo t p pp p w l, wp Us, w tk c p. Us w pb nw ykb U squ vu, cu WP, ac, acc P c vu. t c $30 B u 2012.

m t cu c p, b l, cbck i vu P (Us) dw Cp (UK), $62.5 C u 2012.

hul t cub w p upp cb c bu. t cp a u UKw 2010 b B C Us. t w u qu s cc l.

alo t UK puc c w cp cu

p Us iPo pp w Ceo w w b b Us. tc u acc P, m u saP ubw 2005 2008.


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hw, w u bc uk, Us bu UK eup. W c Us u u , w u c qu (u 8).

u 8: Popoo o u ou o o*

40

20

60

80

0

19902007

30%

42%

62%

20082012

26%21%

46%

UK US CE UK US CE

Percentage

*Ce = C eup. u, u w pp eup; UK Us u wpp cu.


15/39



w b o Us o UK?

t ub UK cp c Us bubb, bu

b c. spcc, w w p c c, w , w c (u 9).i i bu w .

u 9: nub o UK op f b u loo

t w b w uc c c b c bu, uc U squ vu w, p Us u w cp. i ucc bc cc u cp, uccu c 30 b vC p .7

W UK, w w ub bu UK c , c c c . t c cu b , b c w juc ( p w k u w Us).

200

100

Number of

Companies

600

500

700

400

300

0

2008

2006

2007

2004

2005

2012

2010

2011

2009

2003

2002

2000

2001

1999

1998

1997

1996

UK US


16/39



t b p b w w:

d b c u , pc , p uc, b , kp uc w

w . vu cp p b cc p cp, w w u . m UK bc c Us wu p, ( wu u fw k ub).

Our concerns about investing in UK companies are predominated by the act that

you are eight time zones and a ten or 11 hours ight away... it has to be a very, very

compelling opportunity.

Pk cu

n p p w, UK vC c b pc. t p u u ( irr) bw Us UK u

20 pc p b c bubb (u 19901997) u pc p w (u 19982007). sw c pcu b pc, wc u b uu .

u o w p p c pc c u w c qu.

Lk o l o ck pc w k c wk u c ( w) u k.

ep pl o up pc l. a pcp cp b w u , c bu, w w bu.hw, l w p p p c:

London has raised its profle as a city in the US, I think its done a good job o selling

itsel

e goo

I think (London has) a pretty good ecosystem that will be vibrant enough to help

develop the next generation o entrepreneurs and startups, because thats the one

thing which is always missing in all the European countries: having enough establishedentrepreneurs, willing investors and venture capitalists to actually take companies

through the early stage to exit.

J cl


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4 BreaKing dOwn the POssiBLeexPLanatiOns O the UsUK gaP

U u o UK upo po o o

o b po, k o ol o UK up.

ru p puzz, u c fuc b pc, p w c w p cu b c. o pp p p p c pb cc cu b c .

t c c pb p pc p. t w p p ( p cu cb

c):

1. L uul vc u UK u cp u w Us u cp u bu ppc pucw u.

2. Lo u uul op t UK w pc u vC u iPo .

3. oo op o t UK puc w, ub u , u ck uc, u p u w.

i w p c u, wc pub w bu u, w c p b cu.


18/39



u 10: eplo o UKUs po p

UK VC funds are

worse at investing

than US funds

Why is there a gap

in performance

between UK and

US venture

capital funds?

For successful

companies, there

are fewer exits

with good returns

There are fewer

good ventures

to invest in

UK entrepreneurs

are less able to

produce good

ventures

UK entrepreneurs

arent ambitious

enough

UK Startups

dont have the

skills to succeed

There are fewer

experienced

mentors for

companies

The networks are

less densely

connected and

less supportive

UK Startups

find it harder to

access finance

The size of the

domestic market

is smaller

The regulatory

and legislative

landscape inhibits

startup growth

The startup

enviroment is

worse for growth

Fewer

opportunities

to exit in the UK

The exits that

take place

produce worse

returns

UK VC funds make

worse strategic

choices

Choice of

investment stage

and industry leads

to poorer returns

UK VC fund

managers are less

experienced

Fundraising is

more difficult

for UK funds

UK funds are

more heavily

regulated

The characteristics

of UK fund

managers are

different

The enviroment

for VC funds

is worse


19/39



1 Less sUccessUL vc Und managers

t p p bu UK u cp u

cc k w u. s cc b u p w pc p c ub ccc u.

u 11: UKUs po p b po*

*s b u ccc c : pc u , u pc u, u wc cp b u, z b u cp, ub cp u , w c ub ub c w u.

0.00

5.00

10.00

15.00

20.00

25.00

0.50

0.00

0.50

1.00

1.50

2.00

19941997 19982002 2003200719901993

Multiples

19941997 19982002 2003200719901993

Vintage Year Size and stage focus

UKUS gap for funds with thee same:Industry focus

Strategy variables and fund manager characteristics Share of IPO and M&A exits

-15.22

-21.49

-3.89-4.05

-1.18

-1.26

-0.22-0.16

Net IRR (%)


20/39



u 11 up cuc Atlantic Drit 2010 cp c . i w w u p c w w c ccu ccc u, . sp p u p p fucu u. ec

b p z UKUs u p c p, w cuuc b pp.

a o UK vc u ?B c vC u ccc , cu pc u , z u c ub, pb w u ccc c p c pc. a u 11, c c p pc p.

do UK u k o o?

i , bc cc u c k, cuu , u pc, ub cp , u wc , z , ub c, w c . a w u ccc, c p pw.

W u , c , cc u u ccc pp p p c u. 1998 2002 u, b ccu pc p ( b w), bu c z , u cu, pc pc , pc p u uuc u 2003( u p 1998).

hw, c c bu ccc vC u.8 tw c pcp UK, eup , k ppc k, w eup cu w.

s w u W C pc pu w, cp u pc cu u . o eC c , UK eup , u uc pc b u:

On the West Coast, (what) they will pay or something growing 50 per cent or more

is higher regardless o the EBITDA (earnings), as an example. I fnd that on the EastCoast, unless its over 50 per cent, theyre certainly going to want it to be EBITDA

positive or neutral. When I get to the UK, the curve looks almost linear. So I fnd that

people, and Im slightly exaggerating here, are almost willing to trade o 10 per cent

(percentage points o) growth or 10 per cent o EBITDA margin.

L h

t p ppc bu w k c, ck , pu ppc uz. t kck c ucc, c b c w c p cc k.


21/39



s UK cp cc c w w b up u p b ,w k b bc pb. t w c w c p9 u pp vC eup

u pb up Us.

s pp w p p eup vC cu cc. t p p pc k u Us, wc k u w k kb, wc u b pc. o c, eup u c u c bu, uk Us, ckc p. a k c cc, wc w pc . t wu kck c k u bku ucc, b up c ( k p).

a w z ppp UK eupk u c , p, k p.W Us b cu b UK up, b u p Us k.

t c b u p w pc p UK vC u c z, pc . i, k p p b u qu cp wc p, cu u ubjc .

i o o u o?a pc u u b cu w u u puc uc. s pc u pc w cu , bu b . o p pb pc b w up c cu w up.

2 LOwer retUrns when exiting sUccessUL cOmPanies

t c p p pc p b b

cu uccu p cp. t u pc vC ; p , u pubc (iPo) u qu k bc , u .

a oppou o UK?acc c c pub b BvCa,10 iPo ucc uc Us eup cp c w c k ccu, u uc k Us.

ou c iPo ucc u b Us UKc u, , ucc c iPo w Us

p cp w UK p cp11

(u 13).


22/39



u 13: s o poolo op iPO o Us UK o*

do UK op pou poo u?rc u ck qu qu k w p p bw eU Us u cp pc. t cu u b: eU u cc cp ck, cp c b u k, u up c ( c, nasdaQ p).12

C w , w UKUs pc p c ub iPo cqu u c(u 12). t u z b c u ub .

s w p c u c u UK pubc k, pc ck c b w pp c cp:

I you list on the London Stock Exchange or the AIM as a tech company, good

luck trying to get good research to cover you and basically help you build up an

institutional investment base. Youre much better o doing that in the US. You have to

replicate everything that the US has done, and by the time youre done with that you

might as well list the company in the US in the frst place. The same way i youre a

mining company, youd be silly to list in the US, youd be much better equipped listing

in London.

hu Kj

0.15

0.05

0.1

0

Percentage

Share IPO Share IPO US Share IPO UK

UK GPs US GPs

*t b u c w UK p (gP) pp bu UK bu.


23/39



What does cause us more angst (is) the lack o analyst coverage in Europe, so that

when you do have mature companies and you want to take them public, you get a

better reception on NASDAQ in New York, than you do in London

a UK vc

s w p iPo ccu UK, wucc w c:

I you had three decent exits, tech company IPOs on the LSE (London Stock

Exchange), the oodgates would start to open.

a Us vc

Its probably a time solved issue... the more exits that do occur in Europe the more

high net worth individuals, more entrepreneurs are going to come back into the

market and seed it weve had a ew, Skype and the likes, who have come back in

and are doing those type o things, but theres just not enough o them, not enough

big ones or us to fnd the exit partners . I youre looking at really big exits thenyeah, the US is probably the only market, but Im sure thats going to change

so J

a u vC u 88 p c Us p c cu c uccu b p c c ub c u cp, cp w 72 p c p.13 i c u nasdaQ, Us p qu k, p, qu ppu. eup cp, ck qu c, k , wc uc iPo.14

iw c nasdaQ pcu k cc,cu UK pu c k iPo Us. P k c Us pu cp cp Us:

Sometimes we require UK startups to reincorporate in the United States, but I think

thats more because eventually the hope is to have them go public on markets and

exchanges that we have more experience in and probably inuence over.

a Us vc

op w w w . s u uccuUK cp Us UK c, cp UK Pc. o , u u, UK pu wpc p cp p c w b b:

The good news is in the long run people do come back. When they come back they

bring all o that DNA back with them. I enough o it starts circling back, you can

actually jumpstart an economy or an ecosystem. Thats what were starting to see

here in the UK, there are people whove gone out to Caliornia and theyre slowly

returning back.

hu Kj

i , k b p c UKUs pc p, pcu uc p ck k c cp c cp b pcp . i cw up c Us w c pb

ppu UK.


24/39



3 ewer gOOd cOmPanies tO invest in

t p p p u b , UK u u

qu , p cp cc qu Usp. t cu b bcu cp uccu ccc, bcu wc cp p c b w.

t c w p b w pjc. a w w c cp u c b u UK, c cp uc h skck. hw, w w pc u cp w k b uccu Uscup.

a UK up l bl o pou oo u?t c pc ck b UK pu, k . a c w bw cp k b cu, b u .

s u z Us b Us cp b bu. o c eup up w c w b c c k Us.

The number one challenge that all European startups have is that its difcult to see

the same interest in changing the world that youve seen in US entrepreneurs, where

they always think big . Its rare that someone starts a company in Europe thinking

the world is my oyster and Im going to go or the global opportunity.J cl

a pc pu k, cu w pu,w c bw Us UK up. BvCa/vusuc15 u pc c bw Us. t u c pp w u w pubcku u 35 p c Us u 15 p c eup, w , c 1995.

do UK up op o o?t wc up p cu c uc ppu

up; b c; w pp cc; cuu; u c ; cc c.

s c c k uc c b up : cc cu cc c.U uc u b w u w b.

lk b pu k, cuu pc pu u w pb c cu kk.

a ub w wu k c c p pup c p , u cuu UK.


25/39



Theres more that can be done around educating UK entrepreneurs on having a less

parochial view o serving our domestic market and thats it, which then goes back to

the earlier point about British entrepreneurs tend not to be quite as ambitious.

i mk

On the west coast, i you started a business then it ailed and i you learned

something rom it then you werent a ailure, you were an experienced entrepreneur.

So I think that whatever the government can do to try and encourage that mindset

would be valuable.

d hok

sc s dJ ep u c upp p UK:

Early on in the valley, both technical and business operators who had been made

fnancially independent rom an exit event at a startup, invested back into the

ecosystem. They gave back by investing into, mentoring and going to work at the

new crop o startups. Given the tech market is much younger in the UK than in SV, weare just moving into that second phase where we have repeat entrepreneurs who are

putting back into the ecosystem.

hu Kj p cc bu p cc p:

One o the big strengths in Caliornia and Silicon Valley is there is a cadre o

people who are not ounders o businesses, and may not even be the frst ten or 20

employees, but know how to join a company either as employee number 30 or 50 or

100 and help take the company to 1,000 people, 10,000 people, 20,000 people. ... I

you happen to hit a good idea, theres no poaching ground or great talent in Europe.

New York has the same exact problem and New York is slowly building this up.

h vu pp b c bu bu, Us. t b b UK , bu , pp uccu, u ck bck bu up UK.

a p cbu up cc c. op cu p w . s c u, b, c u. o c u k, c w. hw, pc p, wc wu b b u pc .

s u w ck cp uc ck w buw b k u UK pu ppc

u cp c p.

t w w UK c p UK g p pu w pcu p eis seis*c.

In terms o earlystage capital, I just dont think theres a shortage. I really do, and I

think the UK is, rom a policy perspective, like high level as good as it gets. The US

is behind on the Founders Visa, the US is behind on Capital Gains Tax, and the US

doesnt have the same incentives on SEIS.

sul Kl

a j pc UK Us u, wc p u c.

*s ep i sc c bk w pu -up bu, cp uccu eis c .


26/39



5 regULatiOn and UK digitaL startUPs

w ou o u Us o pp o o o

u upo UK u pl, o

up o, l ulo i l u.

t pb u u pc u c:

1. ru c w u cp u cp,wc b w c c c.

2. ru c up, c b w cu u uc b c .

3. ru c k, wc wu u c u pc

U w, c w vC u pu cc u c u. hw, pcp c u c p c p u up. c, b u ccup , bu wc w. o c, b cc bu u , kw w . o c b u pb w cp u k u u b.

ru cp up u w c pc w pk . i , w, pc up p , w p ppu p.

i pub pcp u c up cu fuc c?

C w c u w p uc k bu. t c c uc qu , bu b uc p c .

There are so ew regulations that will have a meaningul impact on the likelihoodo success o any given company. Little companies live and die on all sorts o other

things.

d hok

hw, w c u u p . o u c u c b cp, k cu u cp c:

I dont think it is that much worse (in Europe). I guess its just theres certain doors or

roadblocks that maybe dont exist in other markets that exist here. That you eel like

you have to jump through hoops, whereas maybe in the US you dont have go throughso many hoops.

m Lju


27/39



W k pcc bu u c UK i cp,w u UK, eU. s bu c b u cp w juc, pcc cu u.

t pcu c cp eup k, wc u c cp c, w cp 27 u c.

There is no EU wide regulation or startups, you know. Startups are regulated by

national laws and regulations, i any, because there is no dierence between a normal

startup in technology and the startup o a momandpop shop, in the legal orm o

a company.

go nol

immigratiOn

Pu c pc b u cc uc bu up. Cqu, u p UK cpc ppu. ec u b UK cp w c k pu c .16 a u ubck up Us u qu w u cu b .17

i u w p b w b cucc c p UK c. t UK g uc epu v gu epu v u UK cp pc. iw p p:

You guys have been very, very supportive o startups and thats antastic. And the

act that you guys have the Entrepreneurs Visa beore the US, by like six to nine

months. I applaud what your Government has done.

J cl

n, w cc bu u c upp qu w cp, pc cc u eU:

This might be the biggest issue or our companiesthe biggest complaint is always on

the visa issues, getting a visa or an Eastern European developer. I theyre not rom

EU, its really difcult to get them in. It just takes too long and time is your enemy at

a start-up because there is someone else doing what youre doing and you have toexecute, you work six, seven days a week and pretty crazy hours. So i youre held up

hiring a python developer or six months, you could be toast.

so s

t cc ppc pc pu, pu c uc u, pb pc c buucc.18

iw u Us c , w, u w pc :

There are occasionally issues around entrepreneur visas and getting good talent intothe right country, but I think that sounds like its an equal problem on both sides o

the Atlantic.

i mk


28/39



exit marKets

e k cuc b u u , w

p w cp p cp. e c u u iPo ck c. a u p iPok, c cu u.

a j b iPo c cu w.19 t pbb iPo w c , k c up20 c u w j (65 p c) pu pc iPo c Us c .21

ru c cp b k i Pubc o pubc qu k p u pb qu pc bck p. hw, cu p, u

c c c qu k.

W k u w pcu c b b w, c k c w p b cuc upp UK c c:

Ive got a couple o companies that were considering taking public and were having

huge debates about whether we take the company to the UK or the US... both o

them are going to end up going public in the US just because Im sure that its easier,

we eel like the markets are more open and more receptive. I dont know how much

o that is regulation but its defnitely just a sense o the way things are.

a Us vc

C w , u pu 11 p c ccpc qu b bc iPo c, b c uc pubc k u p iPo.22

t l sck ec (lse) aim k b k UK iPo, u w c cp c . t lse c uc w h gw s cb u. a cp w u 300600 , k wb cc f (u p b ).

W w h gw s w wc, w ub w wu u. iw wc u

c:

I think it tries helpully to address one aspect, but in an incomplete way... It comes

back to my same question, how are you going to get the analysts to spend their time

looking at these companies and understanding them? That said, anything that sotens

the admission criteria I think is helpul.

a UK vc

mk c bu b b w b cwu b p:

Theres probably a lot o marketing that needs to be done... in order to have the listing

markets available in Europe you need people to invest in those markets. So its aquestion o [companies] choosing to go with the US or with something (developing)

in Europe.

wll vz


29/39



hw, p ub k c c b cp b u :

I dont even know i the Government could intervene, I think its also a matter o the

investor base becoming educated and as a result the analysts would then ollow, the

banks would ollow. Its more than just opening up the public markets.

a Us vc

case stUdy: aLrescO, a UK sOtware cOmPany seeKing a Us iPO

ac UKb w cp c u cp b UK Us u. t c uc pubc w iPo Us, w Ceo w wu b b Us.

In the last ten years, rather than the Internet dispersing expertise its actuallymade it ocus more and more on the valley in particular, and the US market. So

all the people that would ollow a company like us over the years have relocated

rom New York and theyre in the valley now, all the fnancial analysts are going

there. So its sort o a vicious circle, i the expertise and analysis o our type o

company are not there. Given the route we took and then with our backers

having US backers as well its virtually inconceivable that wed do an AIM exit.

Jo Poll, alo

cOPyright

Cp c cu w pc . a ch w , w cp p cu c, can constrain third parties wishing to access or innovate on top o this protectedknowledge or content, with potentially serious economic and social costs.a w u, bc b c , w p c bc c.

i b u uc cp w ppp , k ccu u cp; bw c cp c ; pu w cp w cu .23

rc c u ck c fb cp c pc eU. p, c w cuc cub c cp c g c w w c uc p cp cp pc w w b p cp c.24 C, cu c Us c w w p cub c w c w u c .25s w c cpb bu c pc b :

I ever there is a company in Berlin or in London, the company has to be so good that

it would make it worth clearing the copyright hurdle. And i its streaming involvingcopyright material, other materials or whatever, it has to be even better. But i we

think its a gem, then well take the risk.

J cl


30/39



s w c w eup up juc pp up, pc k k puu w:

I think there are major chilling eects particularly in the EU, because o the patchwork

regulatory scheme thats been set up. I you want to build a product thats got a

strong consumer base in Europe its a lot more difcult to tap into the 450 million

consumers, who do still have a lot o buying power, and do buy stu.

e goo, h Lb

Even Apple have ound it really, really hard to roll out iTunes across 26 dierent

markets, its not a single market. That is due to the complexities associated with

content and rights holders on one side, and also the payment systems on the other

side.

Jo Bo

sp u uu u cp u, w

cb pb w c cp c. s cu cu c c c.

Any startup dealing with trying to develop a platorm or distributing copyrighted

content, obviously has problems, not just when you get into technical details around

data and text mining, and all those quite niche areas o copyright, and ormat shiting,

but then also around licensing and having to deal with collecting societies.

s Kll

t pb cb b c c w p w up p.

s w p ck c u u b c, c uc bu .

Were actually pretty careul about it, so we avoid businesses that provide other

peoples copyrights. We dont want to get in to that complicated structure.

m Lju

data PrOtectiOn and Privacy

ic, i pc b p u .

t w ukw ppu u cu bu,cu k . Bu u cc u c, pc b pu, qu qu u u u u pc. sk bc c b cu k. d pc u u cu pc pc b cc cc u wc p bu bu u . t p c k u p c w cp p u p p cc p:26


31/39



Certainly running the largest video adtech company in Europe in that environment is

kind o painul without doubt. It would be great i there were privacy laws that both

protected the consumer but understood that i you put some barrier to business that

is especially bad and business will suer, but thats not how European leaders think.

J cl

t eU w b c Us pc: Us u u pc pc. rc u eU Pc ecc Cucdc 2002 w c w u c u cp cp pp $249 c p, cp w Us.27

au UK w pck u pcu b p b pbc, pc b c up cc c :

The problem is government thinking wrongly about how companies monetise the

data thats shared by consumers, and the way that consumers derive value rom data

exchange...there are seriously amazing companies that are doing great things with

data and I dont think they can survive a German style privacy regime.

e goo

m, cp eU c p uc w p 2009 d Pc dc ( ck w),wc b cp b pc c u b cc u c. eup eU ck w uc u up, p:

This EU cookie law was a pain. Advertising tech companies or about six months had

to double check this cookie stu this added riction, as they had this extra level o

checking.

hu Kj

au uc c ppc, w p w pc bu , w uc bu p.

t w cc bu ppc d Pc dc b pp.

(the Data Protection Directive) presents a lot o problems or businesses or whomdata is essentially their product. They provide a lot o their services or ree but then

use the data to build upon the service or deliver advertising or things like that [data-

driven companies] are worried about the possibility that a lot o their business is

going to be withdrawn at the click o a fnger.

s Kll


32/39



s w bu cuc. t eup up pc u u w b p:

The right thing is or there to be an on going, active debate between a selregulated

or a selaware business community that is clearly putting the interests o consumers,

not just the business opportunities, at the heart o what theyre doing.

sul Kl

i u u kw c. i ,cp qu UK u, b uc cp k b cpw .

You have to start to think about those things rom day one and you have to think, not

about the lowest common denominator o privacy and data protection, you absolutely

rom the beginning have to think about the highest common denominator.cop Lukz

P u cp uc c, k pb ppc pc u pc k bu :

Its a bit like fnancial regulation, youre better o ollowing the regulations o the

toughest area because you know then you can do business anywhere. But the

problem is i the service is not a good service because o privacy and it becomes too

rigid, and, say, we cant do that or we cant do this, its going to be a big problem.

m Lju

BanKrUPtcy

d u u bu b c b pc c pu cuu Us eup. C w w Us , wc, pu w bu u pc, eup cu k puu. Cqu, pp k k pu p up cuu w c bu. iw b ac c cuu u k bkupc.hw, w pcu u b c UK.

W bkupc u cu p w uc u, fc , p b. rc u pu bkupcw u pu u cp28 bkupc w b p cu up.29 s (UKb) w UK bkupc u upp c u, pb cuu :

I dont think the laws a problem, I think its pretty straightorward, I think the cultures

an issue around bankruptcy.

so J


33/39



hw, Us p pc eup bkupc w b bu:

What I would say is that I think that bankruptcy laws in Europe are much more

onerous than they are in the United States, at least by our perception. So it again

has a lot to do with this challenge o how do you build a business quickly, grow it and

shrink it. Its about being able to hire and fre people, its about being able to go out

o business without it ollowing you past the ailure o that business.

d hok

acc Us, ck Cp 11 pc b u quck buc bck c b , bu c, pc b c w Cp 11 pc.

o Us w bu w ppwk w u pcp UK:

On the downward spiral, the Government did not make it easy and then to have

these random things turn up at my house every ew months is probably not very

good marketing or enterprise in the UK honestly it leaves a very bad taste in your

mouth or the company to have totally liquidated, or the accounts to be closed, or

everything to be totally done and then or years later youre just constantly reminded

o this by the British Government in the post....It constantly reminds me o a bad

experience.

a Us vc

LaBOUr and emPLOyment

ec u k c cu w cp pc bcu c wk .30i k p b cp u p fb wkc. Us pcu p bu c cc ucc up:

We had a huge amount o difculty being agile enough, because you couldnt let all

that many people go quickly. The company, eared litigation rom (the employees)

and so it saved a ew jobs in the short run, but ultimately collapsed the company

a Us vc

t w c u b c u p eup, pcuc, UK. n, w pc b, UKu u b u Us:

Employment law in the US is ar more avourable or business owners than it is in the

UK, its slightly harder to let go o people in the UK. Youve got a lot more legislation

to ollow, but thats only with the beneft o hindsight. Whilst I was still running my

UK company, I just thought thats the way things are and it was something you dealt

with.

UK pu


34/39



s c p u p up:

Most o the other red tape and stu really doesnt aect start-ups; theyll get away

with not having to worry about any o that stu. It becomes more o an issue as you

start employing sta and you grow, so I think or these earlystage start-ups, actually

legislation is not a limiting actor.

so J

s w c c cp u b w p:

Its a binary process, you move rom being sel-employed and its your idea to make

a commitment to run a start-up, and then all o a sudden youve got the move to

administering the PAYE scheme, which ew o these entrepreneurs would have had

any experience o and its quite burdensome.

i mk

a w pcu err (ep ru r) B k p pc.

tax incentives Or investment

t UK p c c cp, up . rc u c p : u vC u 35 p c b c pc cukk p c c ub c u cp.31

B ep i sc (eis) s ep i sc(seis)* b k uqu cp c w w p b UK p:

The entrepreneurs relie is antastic, people love that. EIS is amazing; its really been

driving investment.

so s

hw, c k eis w u b c cu Us :

Those are things which are sort o interesting, but similarly it doesnt solve the issueo showing me someone whos going to try and disrupt education, create a world

class hightech company. And i its genuine and theyre worth it, well give it a shot.

But well try to invest in the US as a frst order o priority.

J cl

t w u u w c u w:

I dont know enough about the specifcs o US angel tax breaks as opposed to the

early VC but I dont think theyre as attractive as they are in the UK. However, that

points at a much bigger problem which is a large part o earlystage angel investing

in the UK is driven by tax breaks as opposed to venture returns, which comes backto this point o thats a pretty bad thing, thats the tail wagging the dog, is peoples

investing to get a tax break as opposed to investing to see those companies grow.

i mk

*eis seis c b p w ic t , Cp g t Cp g t p.


35/39



t UK g r&d c sme. d cp c qu c, cu w:

Weve benefted a lot rom participating in the R&D tax credit scheme which I didnt

know o beore being advised o its existence by our auditors...that was very helpul. It

is somewhat bureaucratic to justiy the rebate and its always a bit o a slog explaining

that we do R&D to HMRC. Im sure that puts o some valid claims as well as provides

nice consulting ees or the audit frms, a simpler method would go a long way to

encourage more R&D investment Im sure, but its a good oundation and HMRC does

need to prevent abuse o the scheme.

Jo Poll

s w b seis r&d c w c. ow :

Tax advantage is great ... were still educating angel investors about SEIS, never mind

teams rom Italy, to know that actually the UK is a great place to come because itseasier to get investment. So I think we do have an advantage there, I just dont think

anybody knows about it yet, outside o the UK.

so J

s p , w upp cp , b c cp up c UK,32 bupp w u eis .

taxatiOn and Other issUes

t c c wc vC pu c p cp ( p c, cp cp ). t cp b u pp cp ubjc pcu , w u k c uk pu c pc. h c w cp cw cc pu.33

a b UK, w u b cp UK u:

The taxes are actually comparable with the US once you include Caliornia state

income tax, but its things like, i they have a amily the schooling is a lot moreexpensive. They would probably complain about the healthcare because they dont

get the same benefts, although as someone whos lived in both, its better here.

Capital gains tax, Ive never heard anyone complain about CGT, except or private

equity investors.

so s

o Us UK p cp p eup:

Taxes are horribly difcult and labour laws are just downright challenging outside

o the UK in Western Europe, I mean really, really challenging. Thats probably our

biggest issue Weve ound our experiences in the UK to be positive. I mean taxand the things that were complaining about arent wholly dierent than what were

complaining in the US.

L h


36/39



o w u pc u Us w w u, w pu Us u. t pb pcp UK p .

t u p ck p c Us eU.34 t UK p ep m ic cu upk pck p: w u c u uu, buucc. sw p pc up p ck p:

In Europe were still not too amiliar with employee share options, convertible loans

etc., but its slowly, slowly improving. I think a lot o start-ups today recognise the

need to give shares to co-ounders and probably also the next round o people that

they hire.

c Klbk

s w cu w Us cu u

u b u bw w p c pc u , cp c.

i UK, p w u ppc b cp p u pu w c bucp bc pc.

iw c pc, fc u w cu.

Us ppc, cpc w c:

Making sure that the tax regimes are reciprocal. Ideally, you want the UK to be theheadquarters and I dont have to dump something in the Antilles or somewhere else,

so that means Im going to be able to repatriate my cash, which is very difcult or us

to do in the United States, I think that would be helpul.

L h


37/39



6 cOncLUsiOn

t po up fu o u pl po o

UK Us, ll ppo o bo UK Us o o UK

k. i u u Us l o b ok

k u, UK u u b, u ou p

po blo Us u. ho, o bo fu ,

l b po UK u pl k.

Us u p w , u w p w UK, l pcu w p c w c p u up . W c ww k c W C eup, e

C u, pc b nw yk cu b pu p uc c b p p l.

i cu p p pc bw UK Us u cp, c w w c b p.o k: i pp w, pb UK bb w pc UK u, pu b UK cp cp Us k b ub iPo k.

t cp, c u pu , w wcup p, cp u , w cuu, p,cc c , cp.

i cp p u, w u ck c cc cp.t uc c ppp p u c c pb wu, w w p up p cp ucc.

hw, u c p, p cc c. t w u w pc bu pc cu pp. a bc cu p.

t c ppc qu pcc ppc:

pcp k. t w k ccu w u, pck, k w up cp .

t qu wk u b u p. tcu:

hw u c up c k.

hw c w p w u upppup w c b pc?

C u c b u pc c u cp pc?


38/39



endnOtes

1. l, J., Pk, y., C, l. B-Bc, a. (2010) ac d: vu cp pc UK Us.l: nesta.

2. gp, P. l, J. (2001) t vu Cp ru. Ju ecc Ppc. vu 15, nub 2,sp 2001, pp.145-168.

3. Cu, t. luk, e. (2006) t r vu Cp Bck i Pubc o: Cc, sc, mk Pw? ea 2005 mcw m Pp. ab ssrn: p://.c/ bc=604882

4. s h, t. Pu, m. (2000) t c bw puc k c : vu Cp.rw c su. 13, pp.959-984; gp, P. l, J. (2001) t vu Cp ru. Ju ecc Ppc. vu 15, nub 2, sp 2001, pp.145-168.

5. c h, m. (2013) a vC-bck . l: n.

6. W, ., (2013) vu Cp ru. B 21 b 2013. s: p://www.c.c/_c/2013/02/u-cp-u.

7. C, B., Kck, m. W, m. (2009) Bck UK vu Cp Us i: W c b? l: BvCa. ab : p://.bc.c.uk/b/cu/Bck_UK_vC__i___Us.p

8. c, w c u u uu ccc u , uc ub-ucc.

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bc.c.uk/b/cu/eup_m_rp_21J13.p10. ib.

11. n c c.

12. o, a., Puku, K., ru, m. Wk, t. (2007) vu cp eup: c p U.s. igu, g. n., K, m. Ku, r. (e.) (2007)vu Cp eup. l: e. Pp. 3-17. ab :p://.c/bc=1659311

13. BvCa d (2011) gb t vu Cp: s iPo k. ab : p://.bc.c.uk/b/cu/2011_gb_t__vu_Cp-UK.p

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bc.c.uk/b/cu/2011_gb_t__vu_Cp-UK.p

20. a mc 16

21. KPmg (2013) s-au iPo Wbc su Q1 2013. ab : p://www.kpu.c/b-p-u//2013/p/kp--u-p-wbc-u-q1-2013.p

22. ib.

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24. l, J. (2012) t ipc Cp Pc C c g vu Cp i CuCpu Cp. ab : p://www.cc./CCia//cclb//000000000642/u%20cu%20cpu%20w%20pp.p

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39/39

39 whO are the sUPeradOPters?

are gPs PresCriBing the latest drUgs

Nesta

1 Pu Pcl eC4a 1de

[email protected]/_ukwww.cbk.c/.uk

www.nesta.org.uk
mailto:[email protected]://www.twitter.com/nestahttp://www.facebook.com/nesta.ukhttp://www.nesta.org.uk/http://www.nesta.org.uk/http://www.facebook.com/nesta.ukhttp://www.twitter.com/nestamailto:[email protected]

unchaining investment: barriers to us venture investment in uk digital businesses

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