London’s tech startup scene is hot — just don’t compare it to Silicon Valley

Down a flight of stairs, past a photo of British mod icon Paul Weller, and into the basement of Google’s campus in the ultra hip area of East London, sit Britain’s home-grown budding Kevin Systroms and David Karps (well, at least wannabes). On a weekday afternoon, almost every seat, desk, couch and stool in the free co-working café in Google’s basement is filled with young web and mobile entrepreneurs, hunched over their laptops, building decks, and chatting excitedly about their next big idea.

Google London Campus, image courtesy of Google.

Google London Campus, image courtesy of Google.

Every major city it seems these days has its techie hubs, but London’s tech scene has been steadily growing over the past several years. That growth is being driven by a combination of increased government support, attention from international internet giants, a handful of early startup successes, a growing venture capital ecosystem, an adjacent London financial sector that’s starting to take notice of tech, and an early adopter city that’s not unlike the one in San Francisco, which enables the Valley’s startups to access some of the world’s most engaged beta testers.

It’s way too easy to make the comparison between Silicon Valley of a few years back and the East London of today. Many of the London entrepreneurs I’ve met with since I moved to the Shoreditch area of London for the summer to grow GigaOM’s coverage of the London tech scene warn me away from that simplistic “the Valley of Europe” discussion. Please don’t write one of those X is the new Silicon Valley stories, one founder practically pleaded with me. Needless to say, X could be anywhere these days, from New York, to Sao Paulo to Berlin, to New Delhi.

The growth of London tech

But something’s clearly been brewing for a couple years now. To Simon Thethi, the founder of the news site that launched in January of this year to cover London tech, Tech City News, it was clear even back in 2010 that London was starting to develop into a buzzing tech hub. But now it’s really got an energy that makes it stand out, says Thethi, while we sit and drink coffee on the rooftop terrace of one of London’s many membership clubs that the tech community seem to often use as meeting space.

The Shoreditch Grind in East London

The Shoreditch Grind espresso bar in East London

“Tech City” is a name for London’s tech scene that’s emerged – like most city trends do — both organically and through a little inorganic help. The U.K. government is investing 50 million pounds ($70 million) into building out Tech City and attracting tech companies to the region from Microsoft (s MSFT) to Amazon to Qualcomm. According to London Partners, a group that promotes Tech City, there’s 3,000 tech companies in the condensed area of East London, which they say makes it Europe’s fastest-growing tech cluster. London and Berlin have a healthy rivalry going on over which city’s tech sector is bigger and growing more rapidly.

Internet giants, too, are investing in London. In addition to Google’s London campus, which opened a year ago, the giant search engine has its British headquarters in the Victoria and Holborn districts, and is building out a billion-pound campus in Kings Cross. Facebook has one of its largest offices in London, boasting 29 open positions. Jobs are one of the key reasons that the British government is aggressively promoting the tech sector, in the wake of Europe’s recession.

But London’s got its own unique slant to the startup wave. Given that London boasts a huge financial industry, a thriving media sector and some of the world’s largest advertising and design firms, it’s natural that London startups would gravitate to these areas. It’s more New York than Silicon Valley (oops, I did it again). At an event thrown earlier this week by the BBC’s commercial division, BBC World, the media company announced its next class of six digital media startups that would join its accelerator program, BBC Labs.

An emerging sector

Still, London’s tech scene is decidedly still emerging. The biggest homegrown startups, like game company Mind Candy, on-demand ride startup Hailo, social chat platform Badoo, and music recognition company Shazam, aren’t blockbuster global brands yet and more importantly haven’t created a wave of millionaire VPs like Valley internet firms Facebook, Google and PayPal. The creation of wealth through these Valley web exits delivered (and are delivering) the next wave of founders (see the PayPal mafia).

London has yet to kick off that wave. And it is still waiting for its first billion-dollar tech company. Mind Candy has been eyeing an IPO, which could be “Tech City’s” first flotation. But the worst thing that could happen for the East London tech crowd is if a homegrown company like Mind Candy went public in New York and even moved operations there. The message would be: Once a startup gets big enough it outgrows London.

The official Silicon Roundabout, which was originally coined as a joke.

The official Silicon Roundabout, a name that was originally coined as a joke.

There are also a couple of cultural disconnects that seem to be holding back some of the growth of London’s startup scene. One of those is what entrepreneurs describe as a lack of aggressiveness in scaling companies for the big exit – selling at the first offer instead of building startups into billion-dollar businesses. Several entrepreneurs I’ve spoken with this week say this is a key hurdle that is holding back London web startups from reaching that billion-dollar threshold.

Another is the omnipresent — and very natural — fear of failure, which is prevalent in most early startup scenes, but has somehow been shaken out of the pivot-loving, failure-embracing crazy founders of the Valley. Fear of failure can harm a startup ecosystem because entrepreneurs and investors are less willing to take big risks, which leads to less disruptive ideas.

As more successes emerge from London’s tech hub, many of these hurdles will likely be cleared. But for now, Tech City has a whole lot of potential that’s still waiting for some big payoffs.

We think the city has enough tech potential that we’re holding our second annual Structure:Europe conference in London in September, and we’re looking for cloud-enabled and cloud-focused startups to join our Startup Zone. Contact us if you want to learn more.