Startup general interestVenture Capital

Critical mass and the London startup ecosystem

By March 8, 2016 One Comment

Often results are not linear. You get a little bit more mass, and you get a lollapalooza result.

Charlie Munger

Critical mass is a term that gets bandied around a lot in the startup world. A common use case is to describe the point when a company reaches sufficient scale that it achieves profitability. Another is the point where a network or ecosystem has sufficient supply and demand that the user experience starts to work. Most networks crack this chicken and egg problem by using a hack of some kind to get either supply or demand in place. AirBnB famously scraped Craigslist to get their business started and here in London Hailo built a social networking app for cabbies as a way to get drivers on the platform before they had any users.

Without hacks like these networks and ecosystems grow slowly, and that’s what’s happened with the startup ecosystem here in London. There have been many successful government and Brussels sponsored initiatives to help get us towards critical mass, but there’s no getting away from the fact that it takes time to build a startup ecosystem. Silicon Valley got properly started in the 1950s and 1960s whereas we have only been going since the late 1990s.

Inevitably we have been sub-critical mass for much of that time, and it’s been painful. Many of our best entrepreneurs have taken the difficult decision to leave their home country and go to Silicon Valley because the startup ecosystem is stronger (most importantly, because there’s more finance) and the companies that remain have, on average, found it more difficult to raise capital, often resulting in smaller raises, less ambitious plans, and slower growth.

Over the last year or two I’ve felt that changing. It’s not possible to define critical mass and therefore to pinpoint the moment it’s been achieved, but the recent proliferation of new startups and new funds (including ours) feels like Munger’s lollapalooza result. High failure rates are part of the model, so it should never be easy to create a company or build a fund, and that remains the case, but it has definitely got a lot easier recently, at least in part because the volume of investors and high quality founders reached a point where there was lots of opportunity for everybody and confidence spiralled.

The other reason financing companies got easier recently is because the markets were hot last year. They are less hot now. It will be interesting to see if our ecosystem has the depth and resilience to stay at or above critical mass, or whether we will dip back below.