Where’s the best place in the world to be a fintech startup right now? It’s either London or New York – the answer depends on who you ask. EY ruled for the Brits in its new report on the ideal ecosystem for fintech companies, placing London ahead of California and New York, respectively. The Silicon Valley – San Francisco hub is undeniably the world’s number one startup hotbed in general terms, but even there, people will concede that it’s not where it’s at for fintech – there’s more going on elsewhere.
But make no mistake: Silicon Valley has a lot to offer fintech companies. Digital Shadows is still a London-based startup, but since March of last year, CEO and co-founder Alastair Paterson has spent most of his time in San Francisco. The cyber security intelligence company, which works with major financials and other corporates to help them ward off threats, is making a big push into the US. That means having a person on the ground across the pond.
“We’re growing pretty rapidly,” says Paterson, as he tells me Digital Shadows has just hired its 60th employee. “The goal is to double that by the end of this year.” We’re sitting in Digital Shadows’ San Francisco office, located within the cool, eclectic surroundings of the WeWork coworking space in the Financial District. Two competing influences loom over the Digital Shadows staff: on the one side a poster reads “This is Anfield”, and on the other: “New England Patriots”. The CEO is cheerful despite his jetlag – he just got in from London last night. He likes living in San Francisco: “I can walk to work in 25 minutes from North Beach. … I can get to Tahoe to go skiing, and just across the bridge you have Marin, which is great countryside. The food here is great, and so is the weather.”
Digital Shadows’ US push
But the California sun wasn’t the deciding factor when Digital Shadows decided to establish a San Francisco outpost. The operation is split between the continents, but sales and marketing are led primarily out of the US, confirms Paterson, while product and engineering is headed from London. “We really just started out in the US this year. We raised our series A – $8 million – in February 2015, and that really gave us the [push] we needed over here. But last March I was the only US-based employee, and we built everything from there.”
Digital Shadows’ US presence is also a signal of the company’s ambition to make a mark in the global security software space, says Paterson: “We want to be one of the main players in the industry. That’s why it’s important to be here. The US market’s the biggest, and we’re keen to take a big chunk of it. … We’ve beaten all our targets over the past year: in 2015 we had over four times the revenue that we had in 2014. About half of that has come from the US.” Now it’s about building scale, asserts Paterson, reaching more markets and industry verticals, and building on channel partnerships and strategic relationships. (We wrote in more depth about Digital Shadows last summer.)
San Francisco’s growth-stage advantage
The choice between San Francisco and New York as Digital Shadows’ American base was a tough call, says Paterson: “There are more clients, potentially, for us in New York, but there are more partners for us here. Our investors are here, so they can help us.” The eight hour time difference does make it harder to line things up with London, but on the upside, it helps make the company a 24-hour operation for customers.
The fact that San Francisco is the global hotbed for startups made the West Coast the top choice for finding investors. But Digital Shadows has not found the Valley to necessarily have the same advantage when it comes to hiring developers: “The developer type is now incredibly hard to come by in the Valley, and actually, much easier for us to obtain in London. There’s no question of moving our engineering here – that wouldn’t make sense.” This is one of several reasons why London has a lot going for itself as a startup hub:
“London has tremendous support for very-early-stage startups right now. You have tax breaks like SEIS, you have Innovate UK grants; we benefitted from both of those. … London is drawing on a tremendous talent pool, in the city itself but also from Europe,” says Paterson. “You can go around London in a day and see six multinationals at their headquarters, and the same is the case for New York. Here [in San Francisco], you just don’t have that sort of industry.”
But the choice to establish a San Francisco presence has been vital for plugging into a community of investors and peers. This would have been difficult in London for a company like Digital Shadows, which has been around since 2011 – it’s no longer a scrappy upstart: “The funding isn’t there in London for Series A onwards. Valuations are not so good; the competition isn’t there. You’re going to see, I think, a bit of a crunch.” While there’s solid seed stage support in London, particularly for fintech, the problem comes once companies grow and need to raise bigger sums, explains Paterson. That’s when the option to move out to the West Coast starts to become appealing – as was the case for Digital Shadows.
London is the early-stage fintech leader
“Since 2008, the UK has grown in stature to be the global fintech capital. We estimate that the UK fintech sector represented c£6.6bn in revenue in 2015, and attracted c£524m in investment,” concluded a new EY report from February. London was found to be the world’s most nurturing environment for fintech startups largely because of its highly conducive policy scheme, with support from regulation, government programmes, and favourable taxation. The UK also scored highly on access to talent, and reasonably well also on available capital, and demand from consumers and corporates.
The reason why California came second in EY’s ranking was solely down to a much less favourable policy scheme, as the West Coast actually beat London on talent, demand, and capital. New York, which came third, scored mostly on par with London, but the regulatory environment pulled down the overall score also here. Singapore, Germany, Australia and Hong Kong made up the rest of EY’s table.
Because Silicon Valley may not know more about fintech than London, but it knows a lot more about funding growth company. Lack of access to growth capital beyond the initial stage is usually cited as the reason when British companies go west. If the UK is to maintain its position as a leading choice for fintech companies, this issue will be a key challenge as British fintech startups come of age. “The UK appears to have robust access to capital at the early stage, although growth capital appears constrained,” concluded the EY report. “Interviewees reported that weaker growth financing is partly due to the lower risk appetite exhibited by the UK venture funds (relative to the US), which tend to represent institutional money rather than the reinvested proceeds of successful entrepreneurs.”
Kash’s case for the West Coast
Even San Francisco techies will readily admit that New York or London is probably the better choice for fintech companies. But that doesn’t mean there isn’t a growing presence of fintech in Silicon Valley. Kaz Nejatian, co-founder of Kash, chose to run his payment technology startup from San Francisco, despite originally having lived in New York: “A lot of our investors are here in San Francisco. Our biggest investors are all within walking distance from where we are sitting right now. A lot of our clients are here, and big company tech departments are here, Decisions are made here,” said Nejatian when we met in San Francisco in January. (We wrote about Kash in more depth earlier this year.) “For that reason, it makes sense to have a San Francisco presence at least. There’s a certain amount of serendipity that happens in the Valley that doesn’t really happen elsewhere.”
Having founded Kash in 2012, Nejatian originally came to California in 2014 to join Y Combinator. He points to fellow YC alumni GoCardless as an example of a UK fintech company which went back to London (and has stayed there ever since) at a time when this was a much more controversial choice. “When they moved back, GoCardless was one of the originals [to choose London over San Francisco],” says Nejatian. He’s quick to add that London’s reputation as a respectable fintech innovation hub has come a very long way since then, boosted by the UK’s conducive regulatory environment.
While Nejatian won’t quite go so far as to agree with what another techie there told me – that there’s so little fintech in San Francisco they don’t even call it fintech – Nejatian concedes that the West Coast brand of financial startups does look a little different. There’s three kinds: “Firstly, there’s a large body of companies that do software services for financial institutions. Secondly, there’s a bunch of bitcoin companies.” This is the biggest segment. “Then thirdly, there’s the companies that would be called fintech in London.” Kash, which has built its payment technology from scratch, falls into the latter category.
But the Valley is by no means sitting around twiddling its thumbs while London and New York is gaining ground in fintech. “There are quite a few ‘real’ fintech companies coming out of Y Combinator every year,” says Nejatian. There are also a growing number of Silicon Valley investors, venture capitalists and incubators specialising in fintech. It makes sense: global fintech investment tripled in 2014, to $12.2bn, compared to a 63% growth in general venture capital investments, according to Accenture. So it seems about right that Silicon Valley – the most powerful startup hub in the world – would want to make sure it gets a good piece also of this action.