In a wood-panelled auditorium in central London, a procession of entrepreneurs are explaining to more than 100 investors how they will change the world. They just need a few million pounds first.
One promises to solve hair loss with a gadget in a cap; another will make fabric out of CO2: all come armed with PhDs, slick presentations and rictus grins.
Depending on your viewpoint, this is either a sign of Europe’s flourishing tech scene or further evidence of the investment bubble that fuelled bloated valuations of Uber and WeWork and looks set to burst – with potentially disastrous consequences for the economy.
The founders gathering in King’s Cross recently have all come through the six-month Entrepreneur First (EF) programme, which brings together ambitious individuals in the hope that they will team up and build the next Google.
The investors are venture capitalists (VCs), willing to bet on early-stage companies that comprise little more than a pair of founders with a big idea.
Dr Hira Singh Virdee, for one such firm, takes to the stage and explains how his company will solve the problem of satellites running out of power by shooting lasers at them.
Betting on these companies is a high-risk strategy. Matt Clifford, co-founder of EF, says: “You probably lose money on seven in 10, you do a little bit better than breakeven on two, and the last one you need to knock out of the park.”
A decade ago, most investors steered well clear of the VC market, leaving it to the professionals. Then central banks around the world slashed interest rates to drive a recovery following the financial crash. That made it harder for investors to get returns, pushing them into areas previously seen as far too risky.
Funds flowed into VC, where assets under management almost doubled between 2008 and 2016 to $524bn (£414bn), according to data provider Preqin. With billions in their pockets, investors went on the hunt for startups hungry for capital.
With so much money sloshing around the system, funding rounds got bigger and bigger. Critics say that has left startups with money to burn and no need to show how they will ever turn a profit.
Martin Kenney and John Zysman of the University of California say this has fundamentally changed the rules of the game. In a paper on entrepreneurial finance, they argue that investors with deep pockets can now take huge bets on loss-making companies and continue to fund them until they crush the competition.
Kenney and Zysman say the current system does not just encourage but demands a drive for breakneck expansion. “In fact, a startup that does not grow as quickly as possible is soon overwhelmed by the startup with more capital and more reckless investment.”
They argue that many of the companies hailed for disrupting entire industries have done so by raising huge amounts of VC, which allows them to undercut their rivals.
Uber, for example, can charge less for rides and pay its drivers more because it raised more than $22bn in VC.
Prof John Colley, associate dean of Warwick Business School, says: “The minute you have to charge market rates and pay drivers the normal rate, you’ve got a problem.” Although plenty of taxi firms have folded, he says barriers to entry are so low that competitors will quickly re-emerge when the funding runs out and prices return to normal.
For their part, consumers will either have to pay up or cut down on taxis, takeaways, and any other services made artificially cheap with VC money. Colley expects more of the latter. “If you have to pay the full amount to get your Subway sandwich delivered to your home, you wouldn’t do it. That’s the reality.”
That, he says, will have an impact on jobs. “Those industries of home delivery and very cheap taxis will probably reduce in size quite significantly. They’re both incredibly big employers.”
So when will the bubble burst? Many point to the implosion of WeWork – once a poster child for the VC investment boom – as the beginning of the end.
Deals are already shrinking in size and number. Since January, the amount invested by VCs has dropped 23%, compared with the same period last year. In the UK – although amounts invested remain high – the number of deals fell by 15%, according to Preqin.
Alice Bentinck, co-founder of Entrepreneur First, says: “It’s reasonably recent that the WeWork and Uber stories are coming through, and maybe we will see a correction at some point in the nearish future.”
For now, she says, the money is flowing freely. “We’re still seeing valuations go up and up and up, even for these very, very young companies.”
