Next big things on the internet?

Facebook is expected to float this year. Can UK dotcommers keep up with the pace set by the US? Laura Chesters reports

In the fast-moving world of technology, 2012 has seemed like a long time coming. There is one reason for that: this is the year Facebook is finally expected to make it onto the stock market. The new wave of hot internet stocks to brave the public gaze – LinkedIn, Zynga and Groupon – have merely been the warm-up acts. Now that the social media giant is limbering up to sell shares to the outside world, there are two questions to ponder.

First, can a website with 800m users and revenues of only $2.5 billion in the first nine months of last year really be valued at $100 billion? And, second, will Britain ever produce anything approaching such a global digital success?

The answer to the first question is probably, and to the second, probably not – but it won't stop a new generation of dotcommers from trying. The $300m injected into Twitter by Saudi billionaire Prince Alwaleed bin Talal shows there is plenty of money around for the right idea. Just don't expect Square Mile investors to join the rush. "The City of London has never been known for understanding technology and has never matched Silicon Valley's tradition of knowledgeable investment in technology start-ups, just as the UK government has never matched the vast investment made by the US government," said Geoff Mulgan, chief executive at the National Endowment for Science, Technology and the Arts.

The UK government is heavily promoting its commitment to Tech City – the area around Old Street in East London that is populated by technology firms. However, advice and funding are just as important as the physical space for new businesses.

Key to growing these businesses, according to one venture capitalist, is creating clusters of firms to support each other. Too often Britain's brightest technology successes have been isolated incidents, such as data-sorting firm Autonomy, sold to Hewlett-Packard for £6.6bn last summer.

Julie Meyer, chief executive of investment firm Ariadne Capital, said: "The problem in the UK is that the big companies have not created the network of companies around them – the ecosystem for others to thrive. We need to create broader networks for those that are just starting out." But there is evidence of certain sectors showing signs of creating a 'scene', such as financial services, where quick loans firm Wonga has made a splash.

"We have seen the growth of [mobile money firm] Monitise – a nine-year-old company that is a game changer and a global leader now in this sector," added Meyer. "The UK is good at financial services and we now have, I think, an ecosystem of these companies growing and innovating here."

Nasir Zubairi, founder of EuroTRX (see box below), said: "Incentives and costs are such that banks would rather allocate capital to investment banking operations or to lending to large corporates rather than to small firms."

Simon Prockter, founder of housebites.com (see below), said the key is to self-fund first.

"I invested everything I had in my business," he said. "We won't scale up too quickly. You need to sell everything you own before you start raising money. That way, you can get it to a point that the venture capitalist investors won't screw you for a large equity stake."

There are signs that fund-raising will become easier this year, as Silicon Valley Bank gets ready to open its doors fully to new business in London. But raising capital will never be as easy as it is in San Francisco, where a flock of business angels pour cash into start-ups almost as a hobby.

More than 50 years after it began commercialising technology created by the city's university, Cambridgeis the largest high-tech hub in Europe, even though it is still only about three per cent of the size of Silicon Valley.

Britain has its digital strengths, but Facebook has little to worry about on this side of the Atlantic for the time being. However, it won't stop the latest crop of entrepreneurial start-ups from trying to become the next big thing.

shopow.com

Friends Kevin Flood and Mike Harty launched a business combining price comparison with social networking last year. Their creation, Shopow, has 30,000 members and has so far signed up 27,000 businesses, including John Lewis, PC World and Asda, to sell products through the site. Flood and Harty, who met at Leeds University, get between 4 and 12 per cent of every sale made through the site. It relies on friends within a network to recommend and review products in the belief that people are more likely to buy something that has the backing of a friend than a stranger. The founders, both in their twenties, used contacts in the business world to find angel investors.

housebites.com

Housebites was set up three months ago after another online idea failed. Founder Simon Prockter creates bespoke food takeaways for people fed up with poor food or bad service. Housebites, launched in London, has secured a group of chefs to cook on demand and deliver the food direct to their neighbours. Prockter founded and sold SpeedDater, and was looking for another opportunity. He secured angel investors, including Michael Birch of Bebo fame, and initially raised funding for a Come Dine With Me idea. But the project flopped and his backers wanted their money back. It was at the eleventh hour that he came up with the housebites.com idea, and luckily the investors bought it.

sofa.com

The former owners of an upmarket food-delivery firm, Deliverance, have set up a new business selling furniture. Pat Reeves and Rohan Blacker were looking for a higher-margin business idea that required fewer physical premises. In the end, they settled on sofas, and now take more than £10m in sales a year. Reeves says: "To set up, you need to find a clear business model that is sufficiently different and offers a good opportunity to make money." He adds that entrepreneurs should make sure they buy a decent domain name. Reeves and Blacker used money from their previous business to start up.

euroTRX.com

Banker-turned-small business owner Nasir Zubairi is raising money for European Trade Receivables Exchange, an online alternative to banks for small businesses. It allows them to obtain the cash they need rather than waiting for invoices to be paid. Small businesses sell their invoices for below face value to investors who get a return on their money when the invoice is paid and the website provides the contract and the network for it to happen. Zubairi says: "While working with banks I became frustrated with the bureaucracy and the lack of agility. Technology shouldn't just be an enabler of business strategy, it should be a driver." He set up the business with founding partner Peter Davies.

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