Venture capital billions take over London Finance

(Bloomberg) – During the heyday of the City of London in the 1980s, most well-bred investment bankers paid little attention to King’s Cross, then a seedy, drug-ridden den of vice a few miles from their halls of worship. market and their wine bars. Today, the district attracts tech giants, startups and global investors, even as the centuries-old heart of London’s financial world still stands still.

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At the heart of the revival is Alphabet Inc., which built Google’s £1 billion ($1.24 billion) UK headquarters and hosted the DeepMind artificial intelligence powerhouse in the region. The UK base of Meta Platforms Inc. is nearby. Early investors LocalGlobe and Balderton Capital are locally based; they have funded fintech companies ranging from Wise Plc to Revolut Ltd.

Startups are springing up in a neighborhood that appeals to a young, diverse crowd with sleek, modern shops and restaurants. In the city, pubs may still be busy – when workers are in their offices – but public listings have dried up, weakening the appeal of traditional finance. Staff have taken notice, with 57% of new hires in venture capital jobs in 2021 leaving investment banking, according to recruiting firm Dartmouth Partners. Venture capital firms hired more juniors in 2021 than in any other year tracked, Dartmouth said.

The changing fortunes of the two areas highlight the changing face of London’s financial sector, an industry that has powered the British capital for centuries. A growing disparity between private and public markets affects everything from where people work to the future of retirement investments for Britain’s young workforce.

It is a revolution with an international face. Companies like Sequoia Capital, Silicon Valley’s biggest venture capital outfit, and its US rival General Catalyst opened offices in London last year, creating teams to seek European deals and invest more and more. early in UK and continental businesses.

“The UK is a great place to start a business now, from a talent and funding perspective,” said Alex Lim, managing partner at Blossom Capital, an investor in $40 billion payments company Checkout. .com, the UK’s most valuable startup. The country is still behind on several US sites, said Lim, who recently moved to London from California. “But it’s catching up fast.”

UK-based startups raised $9 billion in the first quarter of 2022, according to KPMG’s latest Venture Pulse report, continuing a steady ride that has seen venture capital funding eclipse public markets over the year. elapsed.

A government-backed report found that in 2015 the City of London produced £46.7 billion worth of goods and services, just over £3 billion more than Camden and Islington, the London boroughs that are home to King’s Cross. It shows the balance is tipping, says Saul Klein, co-founder of King’s Cross-based venture capital firm LocalGlobe. The City of London is being eclipsed “for the first time in 2,000 years”, Klein said. “That’s when this area becomes central London.”

The boom is at least partly guaranteed by Britain’s own government, which launched a rescue fund for startups, the Future Fund, at the start of the pandemic in early 2020 and pumped £1.14 billion into 1,190 businesses through convertible loans. It now has a stake in 335 of them, the British Business Bank, which administers the fund, said in a statement.

They include Century-Tech, an AI education specialist; Ripple Energy, which allows customers to own shares of a wind farm; and Vaccitech Plc, a University of Oxford spin-off that designed AstraZeneca Plc’s Covid-19 vaccine. Vaccitech listed in New York a year ago.

Why are companies not listed in London?

In the City, things are very different. London may lead all other European cities with $25.5 billion in fresh investment for unlisted tech companies, but it’s proving harder to convince highly-rated deals to go public in London.

“The UK is still by far the largest venture capital market in Europe and continues to strengthen,” said Ed Lascelles, partner at venture capital firm Albion. “But when companies get to a certain size, sophistication, the amount of money available to them is just much greater in the United States than anywhere else.”

Higher valuations in the US are prompting UK startups to list across the Atlantic, including electric vehicle maker Arrival SA, e-health company Babylon Holdings Ltd. and used car dealership Cazoo Group Ltd. This means that most of the returns generated by these UK companies are restricted to US equity investors.

“Institutional investors in the United States are the ones who really accumulate value,” said Dom Hallas, executive director of startup advocacy group Coadec. More from the London markets:

  • UK companies want to register anywhere but London now

  • London is looking for a way to bring its stock market out of the past

  • The creation of a new government-funded Moonshot model

To be sure, global listing activity is down in a year dominated by worries about rising inflation, interest rates and Russia’s invasion of Ukraine. UK initial public offerings total around $793 million this year, after posting their worst first quarter since 2009, according to data compiled by Bloomberg. Only three London bids, all by special-purpose acquisition firms, have raised more than $100 million.

This in turn is starting to drive down the lofty valuations of fast-growing startups, and there are signs that 2022 will be a subdued year in private tech markets around the world, including the UK. A massive tech sell-off makes venture capitalists more cautious about funding startups. But steep market swings are also discouraging unicorns considering an IPO, pushing them back to private fundraising.

Where are the finance jobs in London?

This abundance of the private side is attracting venture capital talent from traditional banking jobs, despite the attractive salaries and bonuses of long-established companies.

When the pandemic hit, Lily Shaw worked in the currency trading desk of JPMorgan Chase & Co. Two years later, when the offices reopened, she had taken on a new role as a seed investor at the North American company Omers Ventures.

“Sitting on the floor watching quants code my work, I often found myself wondering why I was in a seat where my personal opinions probably wouldn’t even matter five years from now,” Shaw said.

Shaw admits she is now behind former colleagues in terms of compensation, but says she is highly motivated by the work she does. “Now I spend my time meeting a group of interesting people who are designing solutions to build a better future.”

Lizzie Louis, executive director of Dartmouth Partners, talks about a “candidate-driven market” in which Gen Z candidates have a different view of employment than Millennial predecessors, and capital growth- investment means there is a wider range of jobs available to them. .

“Investment banking is no longer the only option for this talent pool – they have several alternative and attractive opportunities available,” Louis said.

In the City itself, the leaders see no reason to panic. Venture capital-backed start-ups directly benefit investment banks, said Julian Morse, CEO of Cenkos Securities. “Venture capital tends to come first and if they are successful they are ready for the public markets. These are different stages of the risk profile.

Alasdair Haynes, CEO of Aquis Exchange Plc, was unimpressed with the rise of King’s Cross and venture capital. “Anything that adds to London’s status and growth is ultimately good for the ‘City’,” he said.

“The City is a concept as much as a geographical place.

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