My call: software companies can't take off well in financial centers
With this very post, I don’t only mean to please Vincent who wants me to write techie stuff about everything I see/do/think, but I should try to make my point about financial centers: unless you target clients that concentrate there, financial centers are bad cities for local software start ups. In other words, software start ups can’t take off well in financial centers like Tokyo, Shanghaï, London, etc.
As some of you may have read, I was in London recently. And there aren’t many software start ups in London. Fortunately or not, I didn’t have to bother too long wondering why. Through meeting my fellows living there, it became quite obvious that one overwhelming industry sucks all talents: finance.
Why is that? Well, for some people finance is a passion, and for the rest and bulk of them, it’s all about the paycheck (a very honourable and objective criterion in my opinion). Finance pays well, which makes competing industries like the software industry struggle to hire top-tier talents – especially software developers.
On top of this, financial institutions may provide some very interesting IT assignments (eg rapid developers: software developers who sit on a trading desk and hack code to meet immediate market demands) as information management truly is their core business. The IT department in any bank is a key competitive driver, with massive budgets (eg JP Morgan spends US$ 7bn per year in IT R&D, an amount equivalent to the one of the leading technology company worldwide, namely Microsoft) enabling many creative options to be explored and performers to be retained in these (relatively) exciting projects.
However, the job will never be as fun as in a software start up. Although financial institutions regard IT as strategic, IT is and will remain a cost center in their economics. Those who are and will be treated best in all banks are bankers and direct P&L contributors.
Conversely, in software, techies contribute with their work to improving the very core competencies of their company.
Well enough blabla. My whole point is that financial centers like Tokyo, Shanghai, London and New York don’t offer a proper environments to software start ups developing fast. Software start ups actually find it too hard to recruit cheap, a necessary step to lower the cash burn rate before the breakeven point is reached.
Not convinced, uh? Then, why is Bangalore thriving compared to Mumbai (software wise)? Why isn’t there even one international software player from Japan? Why is Paris so well vs. London since the Eurostar was born? Why are Boston (MA), Austin (TX), Vancouver – Seattle (WA) and the Silicon Valley (CA) outperforming New York New York in the United States (still software wise)? Why is Beijing (see MS Lab in Beijing) catching up in software vs. Shanghaï?
I went to check further, in the Truffle 100 2006 league table, which ranks independent software vendors in Europe on a yearly basis, and out of the 15 leading software companies in Europe, 7 are located in the UK, and only a single 1, Misys, is located in London! Guess what by the way, Misys sells software for the financial industry – so being in London appears pretty wise as this is where their customer basis stands.
These 7 leading UK software companies are:
- Sage (business operations software, HQs located in Newcastle)
- Misys (located in London, but since Misys does software for the banking and securities trading…)
- Isoft (software for the healthcare industry, located in Banbury, Oxfordshire)
- Northgate (located in Herts, software for organizational efficiency)
- Dicom (founded in the Canton of Zug, Switzerland; electronic document management software)
- Torex Retail (headquartered in Banbury, Oxfordshire)
- Anite (founded in Slough, Berkshire)
In comparison, 3 out of the 4 biggest French software vendors (BO, Dassault Systems, GL Trade) were founded in Paris or its outskirts, and one (CEGID) is headquartered in Lyon, a French city where the software industry has been growing at a 2-digit rate for a decade. Another comparison: why New York is so bad in software? Isn’t New York a city where many top people converge, where one may find all sorts of talents?
So, to repeat myself, unless you target clients that concentrate there, financial centers are bad cities for local software start ups.
Can anyone think of a counter example (I can, but so far, shh)? What are in your opinion the key competitive drivers for a geographic area to be a good place for software start ups to grow?
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Interesting observation…
But if you enlarge the spectrum of your analysis from software start-ups to start-up companies in labour-intensive industries generally, you might get to the same result.
I think one of the reasons may be found in the cost structure of young companies. They are (almost) always short on budget and fix cost takes a high percentage of their annual spend as production – i.e. human input- remains low in the beginning.
And if you drive your analysis a little bit further, you will find out that spend on real estate makes up a very important part of these fix costs. And as real estate in big capitals is almost always very expensive, start-ups in labour intensive industries prefer to settle in cities with lower cost, in far suburbs of such cities (Hyderabad near Delhi) or in clusters (Silicon Valley).
If you want to compare some annual occupation cost figures (Source: CB Richard Ellis, Global Market Rents Study 2006):
London West End: 212 USD/sqm
London City: 145 USD/sqm
Bombay: 106 USD/sqm
New Delhi: 81 USD/sqm
New York: 62 USD/sqm
I ‘ll try to find some figures to compare with technological centers and clusters because they don’t appear in the Top 100 worldwide rankings…
A logical argument and a good article. But to me ‘tech’ is not only ‘development,’ it is also financing and sales and whatever is necessary to build up a start-up/company. So by your argument, which I think is sound, financial centres will either be strong in the financing of tech, or in some cases, the development of tech for the exploitation of finance. Since software is such a global industry however, it wouldn’t surprise me if 99% of the development was done elsewhere also, and Sage was just there for support/sales purposes.
My call for ‘tech per location’ should then be read broadly, for tech is everywhere in some shape or form.
Nice addition, Rupert! There are indeed multiple variables that appear relevant to explain the presence (or lack of) development-companies. One is certainly cost, and another access to the proper resources (human or otherwise).
Rup> I don’t personally think that the cost of renting is a success factor in the development of software companies.
As Vincent points out, what matters is the availability of human capital at a reasonable price. Then I guess it’s the proximity of potential clients. And maybe thereafter would rents come.
Moreover, you mention Silicon Valley as a low cost rent area. Rents in the Valley are just crazy, just as crazy as the craziest place in the world as many companies (not only start ups, but rich established companies too) want to establish or expand there.
In this respect, the high rental prices in the Valley represented a few years ago an opportunity for San Diego and Austin to become clusters – an opportunity they successfully accepted to undertake.
In fact, I mentioned Silicon Valley as a low cost area. And in the beginning it was one. Today things have changed and small start-ups can’t afford to settle there anymore. But as you wrote in your post on the “French Silicon Valley” near Grenoble, new technology centers like this one are growing.