This Week, London is Calling. Will VCs Answer?

If you live in Silicon Valley, you may be hearing more Briticisms than usual this week. The reason: 18 U.K.-based startups have descended on the area for a week-long schmooze fest organized by WebMission, a competition that identifies the fastest growing “Web economy” companies in London, then gets their founders in front of those who can help bring the startups onto the world stage.

The concept seems to work. According to organizer Zoe Webster, WebMission’s last two treks to San Francisco resulted in $50 million in venture funding for its startups. One of them, the four-year-old collaboration company Huddle, not only raised a $10.2 million Series B last year — including from Matrix Partners in Palo Alto — but it quickly, and smartly, opened a second office in San Francisco.

No doubt others with real promise would be wise to do the same for a variety of reasons, beginning with valuations.

“We’re definitely not seeing the same sorts of valuations that companies get in the U.S.,” says Elizabeth Varley, cofounder of TechHub, a workspace for approximately 20 Web startups in the fashionable Shoreditch area of London. “I hear a lot of people complaining about that sort of thing. ‘Look, if I go to the U.S., I’ll get a better valuation than I will do from European VCs.’”

It’s also the case that few VCs in London are funding seed-stage companies. (It doesn’t help that two of Index Ventures’ highest-profile London-based partners, Danny Rimer and Mike Volpi, are heading to Silicon Valley to open a new office for the firm this fall.)

“It’s very difficult to find and manage enough [capital efficient Web] startups for it to make sense if you’re a VC with a $500 million fund,” says Jasper Westaway, co-founder of two-year-old OneDrum, a desktop application startup that enables real-time document collaboration. 

“We have a lot of good angels” in London, Westaway notes, adding that most of them come not out of technology but investment banks and hedge funds where they’ve made “quite a lot of money.” But even that “angel action is just filling the vacuum” left by VCs, he says.

Not that staying in London is so terrible. On the contrary, even with a dearth of sophisticated tech investors, numerous Web companies have done just fine staying put, including the music streaming service, acquired in 2007 by CBS for $280 million, and two-year-old Tweetdeck, acquired last month for $30 million by Bill Gross’s UberMedia. (Tweetdeck had raised just $3.8 million from Index Ventures along with a long list of U.S. investors like Ron Conway, Betaworks, and Roger Ehrenberg.)

More, the London scene, particularly in Shoreditch – the geek equivalent of San Francisco’s South Park – is by all accounts more vibrant than ever. 

Varley talks of numerous networking parties that are “definitely less lavish” than during the late ‘90s fests, but also more focused, giving attendees more reason to attend. Westaway, who says Londoners are “scarily” good at social networking, ticks off a long number of events where entrepreneurs can meet throughout the month to compare notes and share ideas. Among them are Friday nights hosted by MiniBar, a several-thousand-strong networking group of Internet entrepreneurs.

And while London-based startups might not be benefiting from bubbly behavior, they aren’t suffering because of it, either.

Says Varley: “An issue [in the U.S.] that isn’t an issue in the U.K. yet is the ability of startups to hire the talent they need, without it being sucked out of the ecosystem by players like Facebook and Twitter that can offer salaries beyond what your average startup can offer.”

The pay issue “could be the biggest concern of a bubble effect — that it becomes unsustainable to be paying engineers those kinds of salaries,” says Varley. “Perhaps at some point, the people with the money will say, ‘We can’t keep doing this.’”