Ruby Tailor / BI
Blippar, one of the UK's most famous — or at least most media-friendly — tech startups may not be worth $1.5 billion (£1.19 billion) after all, according to an investigation of its business and finances by my colleague Shona Ghosh.
On its own this is not a problem. Plenty of tech startups lose money in their early years while they concentrate on perfecting their product.
But Blippar, an augmented reality app, is the latest in a string of high-profile companies that have taken huge sums of money from investors who, in hindsight, failed to do the due diligence needed on the companies they were ploughing cash into:
- Payment tech firm Powa was supposed to be worth $2.7 billion (£2.14 billion). But some of its investors' money was spent on parties with strippers and champagne before it went bust.
- The photo-sharing app Fling went bankrupt after taking $21 million (£16.6 million) from investors. The app's founder spent time partying in Ibiza, and was distracted by numerous girlfriends, while his business burned around him.
- Crowdmix, a music-based social network, went to the wall after taking $20 million (£15.8 million) from investors. Some of that money was spent on parties in Amsterdam and Austin, Texas. (Are you sensing a pattern?)
- Event-ticketing company YPlan took nearly $38 million (£30.1 million) before selling for about $2 million (£1.5 million) to Time Out.
- Mind Candy, once the darling of the London tech scene, took $23 million (£18.2 million) from investors but is struggling to justify that capitalisation.
- More seriously, Google came to town in 2014 with $125 million (£99 million) behind a special European arm of its Google Ventures VC fund, but couldn't seem to make it work. Ultimately it was wrapped into the global GV business.
- We hear that at least one more major tech name is on shaky financial ground, and Business Insider will report on that in due course.
To be clear, it is the nature of tech startups to fail. The fact that these companies are from London is irrelevant. This is a completely normal aspect of the tech world: Venture capitalists routinely expect nine of every 10 investments to disappear, in hopes that one of them blows up into the next Snapchat. That is the nature of the business, in Silicon Valley, New York, and anywhere else. There have been successful London unicorns — ASOS and Just Eat are both in rude health. And there have been some high-profile take-outs, such as DeepMind (by Google), Magic Pony (by Twitter), and ARM (by Softbank).
Rather, London's problem is reputational. It's a PR issue.
Powa, Fling, and Crowdmix weren't just unsuccessful. They were bad ideas from the beginning. Powa's tech never worked properly. And the latter pair — neither of which developed revenue models — were ideas that might have sounded good in the mid-2000s. Investors should have known to stay away.
London has been awash in money the last three years. Too much, some think. "I would say that London in particular and Europe has never had more access to capital in this sector. Never," Saul Klein, a VC at LocalGlobe told Business Insider. Klein has previously invested in TransferWise, Citymapper, TweetDeck, Zoopla, and Chartbeat. "I think I've also said you could take at least half the money out of the markets, particularly at the late stage, and there would still be too much money chasing too few good opportunities."
London is one of the three largest legs of the Western startup ecosystem (the other two being Silicon Valley and New York). Its fintech sector is bigger than that of any other city on the planet. But mentally, London feels smaller than either new York or San Francisco, in terms of tech. It's a world where everyone seems to know everyone else. Silicon Roundabout is geographically next door to The City, literally in walking distance. They all seem to be members of Shoreditch House, the trendy private club. That makes it more insular, more fragile.
VCs need to become more disciplined in how they invest, especially as central banks begin raising interest rates and making the cost of finding money more expensive. London is just like everywhere else — full of people who are happy to take money from investors who aren't good at asking questions.
The reputation of London depends on this. Word travels fast. But the stench of failure moves faster.
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