Can the UK and London maintain its lead?

The U.K. is the No. 1 country in Europe for tech by many accounts.

In 2023, British startups raised $21.3 billion, their third-highest total on record, according to a report from Dealroom and HSBC Innovation Banking.

It’s the No. 1 location in Europe for funding — with France coming in second, raising $9.2 billion last year — although it remains well behind the U.S. and China.

In the mid-2010s, the U.K., and London in particular, saw a boom of startups in financial technology, or fintech, given the city’s importance to the global financial services market. Since then, major companies across different sectors have developed, spanning food delivery to cybersecurity.

The U.K. was also the birthplace of two, now foreign-owned, major tech firms: chip designer Arm and artificial intelligence firm DeepMind.

This startup ecosystem, along with its top-tier universities and international investors, enabled the U.K. to become a major tech hub.

But its status could be under threat.

The country is facing a slew of challenges, including the fallout from its EU exit, which formally took place in 2020, and very low numbers of tech stock market listings.

Meanwhile, other European countries are making a play to become the No. 1 tech destination, namely France.

In the latest episode of CNBC Tech’s “Beyond the Valley” podcast — which you can listen to above — Tom Chitty and I discuss whether the U.K. can maintain its lead as Europe’s top technology hub and the challenges it faces ahead.

If you have any thoughts on this or previous episodes, please email us at beyondthevalley@cnbc.com.

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Here is a transcript of the “Beyond the Valley” episode released on June 11, 2024. It has been edited for clarity and brevity. 

Tom Chitty

Since the start of the year, Arjun has traveled around Europe speaking to the leaders and innovators in tech. And now we’re going to dig a little deeper. Over the next few weeks, we’ll find out what’s happening in some of Europe’s key tech hubs with the help of a special guest, who will help us understand its inner workings and the challenges it may face. This week, we start with the U.K. Arjun, before we introduce our guest, it was your suggestion to do this series. What do you hope our listeners will learn from it?

Arjun Kharpal

Are you saying if it goes badly, it’s my suggestion?

Tom Chitty

You’re to blame.

Arjun Kharpal

I take that. I’m hoping that we give an insight into what’s going on in the world of tech in various parts of Europe, because, you know, each region has its own strengths, its own weaknesses. And more recently, with the sort of explosion of AI, we’ve spoken about so much. So there’s some interesting things happening in and around the European tech scene as well.

Tom Chitty

Do you think it’s a time where it seems very excitable?

Arjun Kharpal

The founders and CEOs I’ve spoken, I’ve always asked them this question: Europe pretty much lost out in the internet age — the big U.S. tech giants — is this the time Europe gets a chance to catch up? And they’re all very, of course, as you’d expect, very excited. This is a chance Europe can pull out some pretty big companies. But you know, that’s the vibe that I’m getting right now.

Tom Chitty 

Okay, let me introduce our special guest. Sanjot Malhi. Malhi is a partner at venture capital fund Northzone. He’s been there for a year and a half. And I’m gonna get you, Sanjot, to explain what Northzone specializes in, where its key focus is. But first, I want to find out about your former career as a professional athlete having played football professionally, as well as club level cricket. Sanjot, talk us through it.

Sanjot Malhi

So I mean, most of my childhood was centered around sports. Not around technology or anything of the sort. So yeah, I played club cricket. So I grew up in the Netherlands. I was born in India. I played club cricket. I grew up in The Hague. So I was captain of the Hague Cricket Club. The Netherlands, as you know, is not a cricket major, so it’s not such a big deal. But then I played football the most.

Tom Chitty 

Okay, before we get into it, we have, of course, got to do stat of the week. It’s not that complicated. Arjun will come up with a stat. And we have to try and guess what that stat refers to? It will be related to what we’re talking about in this episode.

Arjun Kharpal

£953.7 million. That’s the stat this week.

Tom Chitty 

Okay, Sanjot, first and easy question to start off. If you could rank Europe’s tech hubs, what would be your top three?

Sanjot Malhi

Yeah, so I tend to be quite numbers driven. So my top three would be the U.K., Germany and France, in probably in that order. And the reason is, if you look at 2023’s venture funding landscape, the U.K. was around 22, 23 billion [dollars] in VC funding and the next three combined in Europe are about equal to that and that’s Germany, France and Sweden in that order.

Tom Chitty 

I’ve read in the last couple of days that France is coming to take the U.K.’s crown. Is that just hyperbole? Is that scaremongering for us?

Sanjot Malhi

Look, I don’t think it’s a zero-sum game. Zero-sum headlines are great because they get eyeballs. If you pit people against each other; it doesn’t need to be, right? Innovation is unlimited if you do it right. So I don’t think crowns have to be taken from one another. I think both can be great tech hubs. And they hopefully will be if you look at the early signs.

Tom Chitty 

And we’ve talked a little bit about where the U.K. is within Europe. Sounds like it’s No. 1. Where is the U.K. globally, though? Because I imagine it’s not No. 1.

Sanjot Malhi

Yeah, no, it’s not. Just to be blunt. Yeah. So I’ve had the pleasure of now, having worked in investment across North America, Asia and Europe. If you look at the great tech hubs around the world, San Francisco, Beijing are up there. Just, if you look at the 1,200, 1,300 unicorns around the world, the vast majority are between those two cities, really. So it’s very, very concentrated. And then you have Tel Aviv, Bangalore, southeast Asia, and Latin Am now coming up as well. And Europe, of course. Europe has about 160-odd unicorns, and the biggest hub within that being the U.K. with 50, or 60. So to answer your question, no, it’s not the biggest in the world. But it’s not insignificant, right? If you look at it, and things are trending, broadly speaking, in the right direction, if you look at the capital, the quality of the founders and really, even, outcomes in terms of companies being created

Arjun Kharpal

Sanjot, just back to the U.K., you know, in the 2010s, mid 2010s, it’s all about fintech. People said London, in particular, is a financial hub, it’s got that sort of history. On top of that, you know, it’s got good pools of capital. At that time, it was part of the European Union, so access to the single market. What now as you look at it in 2024 are the U.K.’s, more broadly, strengths in tech?

Sanjot Malhi

It’s a good question. I think most tech hubs tend to develop around industries where they have incumbent advantages. And London for obvious reasons, has had that in financial services, like you said, so it’s not surprising that fintech was the first sort of starting round for tech activity. But you know, going back to my earlier point about global hubs, if you look at most of these global hubs, they develop in similar manners. So the first sort of wave of innovation comes around whatever is most natural, whatever has been done for the longest time here, it’s financial services. But once you have these large companies here, you know, the likes of Klarna, and Monzo, and others that have come out of that wave, you get a second generation of entrepreneurs, who then tend to solve issues that they faced, because now they’ve grown up in these tech environments. And so they’re facing very different issues to the first generation. And so I think, going forward, you’ll see much more tech-heavy, deeper-tech kind of problems being solved. And that will probably reflect in that makeup of the verticals.

Arjun Kharpal

And what’s happening with venture funding here? Is the recovery taking hold in the early part of 2024 in the first half at the moment, or is there still a bit of caution, given some of the broader macroeconomic headwinds? Of course, in the U.K. we have an election upcoming too?

Sanjot Malhi

So I would say 2022 was probably the worst of the cycle, where we kind of peaked. I mean, I was previously at a firm that did both public and private investing, so you know, it was a good vantage point to see both sides of the equation and things really went downhill at the end of ’21 and early ’22. And it stayed pretty bleak for most of that year. But if you go back to ’23, we’re already seeing growth in terms of funding, which is very good to see. And you’ve seen early signs of the recovery. I think the U.K. is up 30, 40% year-on-year, France is up the most, to your to your point, almost 50%. So I think there are early signs of recovery in ’24. The numbers remain to be seen, but anecdotally, you feel it when you look around; big, big rounds happening, the likes Wayve, even in the U.K. So I think there’s early signs of it and we’ve had an IPO today, which which is kind of a big milestone. So I think things are trending in the right direction. 

Arjun Kharpal

What are the thematic, then, that are prominent at the moment for you, as you look at the investment landscape in the U.K.?

Sanjot Malhi

Yeah. So we we tend to be [a] very, very bottoms up sort of fundamentals-driven investor, especially on the later side, which is what I do. So we look for real problems being solved, frankly. And if you look at the big trends, AI is a big one. But for me, AI only matters if you’re solving real problems. AI for the sake of AI is not very interesting. But it will remain a big, big trend. And then, of course, you have software as always, but I think we’re increasingly seeing a lot more hardware, as well, in sort of real-world problems. And I’ve lately been seeing even quantum, especially in the U.K., which is really fascinating.

Tom Chitty 

When you talk about 2022, obviously, being a bad year, let’s go even further back to 2016 and Brexit. How has if at all, Brexit, affected the U.K. tech scene?

Sanjot Malhi

Yeah, so if you think about what creates a tech hub? I think the most important and fundamental thing is talent. And then there’s capital. And then there’s you know, regulation and so on, things that flow from there, but really, it’s about the talent, that is where it starts. And so I think the biggest thing it’s affected is the inflow of high-quality talent. There are bigger barriers to people coming in and working in the U.K., because of Brexit. I think the U.K. has had very good policies in terms of, you know, visas being more available and streamlining visa processes, especially for tech workers and so on. But I do think that there’s a lot more that can be done to sort of streamline that and make it more accessible, and therefore, you know, a more thriving sort of tech environment.

Arjun Kharpal

Are there other challenges at the moment, as you see them to the U.K. tech landscape? Is it around, for example, some of their lingering issues from Brexit? Or is it around government policy or anything like that?

Sanjot Malhi

Yeah, this is probably a fairly boring answer. But I think one of the best things a great government can do is create just an enabling environment for innovation and then get out of the way. Because sometimes, one mistakes activity for productivity, and there’s almost a political need to be active and create regulation when it’s not necessary. So I think it’s important to protect the public. And so to that extent, regulation is important. But beyond that, I think it’s really about creating an environment that lowers the hurdles for talent, capital, inflow, company formation, failure, you know, clear bankruptcy laws and things like that. So that, sort of, virtuous cycle that enables people to start up and create new companies, I think, is ultimately what is required.

Arjun Kharpal

So are you suggesting at this point [it] sounds like there’s a bit too much regulation in certain areas in the U.K.? … Because I remember … going back to those days when we’re talking about the fintech boom in London, the FCA at that point was seen as quite a forward-thinking regulator, they created the sandboxes and various other things that allowed firms to experiment with a lot of financial technology products. And they were quite well regarded. I haven’t necessarily heard the same about the modern-day FCA. And also, you know, there’s a lot of criticism of the Competition and Markets Authority and how aggressive they’ve been. So when you talk about the regulatory front, when you talk on that, is there something at the moment in the U.K. that could be improved? Or you feel that’s too burdensome?

Sanjot Malhi

Yeah. Look, I mean, I’m really no expert in regulation. So I’ll refrain from commenting on specific sorts of political policies. But generally speaking, if you look at Europe, it has a history of creating more onerous regulation than some of the other tech hubs, namely the U.S., you know, which is far more, sort of, laissez-faire in many ways, which enables innovation. So that’s, I guess, where my point is coming from, and I think the U.K. has traditionally been part of that European ecosystem. I think governments have gotten that, including the present government, and recognize the need to create a more streamlined environment. But if I’m being honest, the reaction has been missing behind that sort of, you know, political fervor, if you will. We haven’t seen enough to create that environment. I think both parties have already announced that they will be, they’ll have an AI policy. I still don’t know what that means. But you know, [it] remains to be seen what that entails. 

Tom Chitty

We’re recording this on Tuesday, the 11th of June, just to be clear. And this morning, we had quite a big IPO, which you covered extensively, Arjun. When it comes to IPOs, in the U.K., [it’s] pretty underwhelming of late. How big was that? Arjun talk through the listeners what happened this morning.

Arjun Kharpal

I walked into the London Stock Exchange, there was confetti everywhere. The team at Raspberry Pi, this is the company you’re referring to, a British computing startup been around since 2012, selling these single-board computers, initially started for hobbyists really. Now they say their biggest market is industrial uses. It’s a pretty small IPO, when you look at tech IPOs more broadly, particularly if you look across the pond to the U.S., you know, it’s a pretty small IPO, I think the valuation in the end was just north of £500 million, so it hasn’t even hit a billion dollars. But it was obviously a big deal for London, which as you mentioned, has just had a dearth of IPOs, and particularly in the tech sector. So there was a lot of excitement around it, the CEO of the London Stock Exchange was around all the executives. So there’s a lot of excitement, [a] big party. I was on the roof. I was on the roof, had a great view.

Tom Chitty 

But you weren’t under the confetti?

Arjun Kharpal

No, I heard it pop off. I wasn’t allowed in that area.

Tom Chitty 

So I suppose, just talking about that, I mean, is it something that we should be taking note of? Is it a huge boost? Or should we just temper our excitement?

Sanjot Malhi

Yeah, so I think it’s more symbolic than anything else. Like Arjun mentioned, it’s not big. If a unicorn were to go public, it’s not even hit that scale. So in the grand scheme of things, it’s [a] fairly mid-sized to small IPO. But it is symbolic, it is tech, it is in London, and we haven’t seen many of those. If you think about IPOs and capital markets, they are, in some ways, the ultimate network effect businesses, right? It’s a little bit of a cold start problem, you need high-quality businesses to want to list. You need deep-pocketed investors who can deploy large sums of permanent capital. And then, third, you need really intelligent investors in those specific sectors, in this case, tech, that understand the nuances that the U.K. has been missing all three. And therein lies the issue.

Tom Chitty 

And how does it reverse that then?

Sanjot Malhi

Yeah, and that’s why, you know, I said, it’s a little bit of a cold start problem. It has to start somewhere. I reckon it’ll start with somebody that’s large, a company choosing to go public here for whatever reason —that might be political, it might be something else. And that kick starts other things in that ecosystem. Because the big mutual funds are all here, fidelity is here. And Franklin Templeton, they’re all here. It’s just that they haven’t had an opportunity to deploy large sums of capital and buy high quality companies. Maybe it could be one of the Chinese, like Shein listing here, and that could potentially be a good effect.

Arjun Kharpal

I have a ton of questions. First one, I mean, how big a snub was the Arm IPO in the end? You know, this is a British company. There’s questions whether the British government back in 2016 should have even allowed this company to be sold. I was in the room at the press conference at the time, [Softbank founder] Masayoshi Son was there. This is one of the most critical semiconductor firms in the world. And now they listed in the U.S., that was a big blow, right?

Sanjot Malhi

I mean, it’s a blow but it’s also somewhat symptomatic of what I just said, right? So it doesn’t necessarily surprise me, also it is Japanese owned right? It’s not really U.K. owned. It may have been started here but it’s owned by Masa and Masa made the call to list in in the U.S. and perhaps with good reason because, you know, like I said, the access to that quality of capital doesn’t exist. But I think somebody has to make that leap. And then the rest follows. It may not be Arm because again, Softbank has its own problems. So you know, they’re protecting their downside more than anything else at that point. And so they were taking the safer option, but it will take somebody to, sort of, make that leap. And I think somebody will.

Arjun Kharpal

I know talking about rules is boring, but sometimes it’s important. The London Stock Exchange in particular, and the regulation around listing in the U.K., has been criticized quite heavily by tech companies around things like foundership, dual-class shares. One of the things that struck me this morning when I was covering the IPO was today, Tuesday, 11th of June 2024, is [the] conditional listing of Raspberry Pi. So only institutional investors effectively can buy up shares. And then it goes on to properly trade three days later on Friday. For the retail investors at this point, we had a 30% pop on the price, the retail investors are sitting there going well, I’ve missed out that whole chunk if it continues to go up. Those kinds of things, I think, really grate tech founders and CEOs of larger companies when they look to list here. So it’s an issue with a whole reform of listing rules here in the U.K., which needs to be carried out, right?

Sanjot Malhi

I think it is a bit of that. Most stock exchanges lag behind the U.S. in terms of listing rules, to your point, the U.S. is definitely the most evolved, they’re more accommodating of sort of venture-funded companies, if you will. Again, going back to the global landscape, the same used to be said of China if you went back a decade, the same used to be said of India five years ago, literally the same thing. And now, people are talking about non-Indian companies listing in India, because that stock exchange is so, so valuable and so attractive. What changed? One, the Indian government said, loss-making companies can now list which was never the case. And then second, somebody just made the leap and said, you know, we’re gonna go list and then the rest followed. I think it’ll be a bit of both in the U.K. as well, where it will take a government that changes a couple of the big things that you mentioned, and then you know, somebody listing, and the rest will fall in place.

Tom Chitty 

Startups in the U.K., we hear a lot that the environment isn’t particularly supportive, at least from the U.K. government, and that they could be doing more, that’s obviously their take on it. Where do you see the U.K. government on that front?

Sanjot Malhi

Yeah, I think it goes back to, sort of, the people aspect, I think that is probably the biggest hurdle here in terms of creating employment. So now, the U.K. startup scene employs about 1.8 million people. So it’s not immaterial, it’s significant. And that’s gone up about 4x since 2018. So the growth is really material. People used to say that, you know, there’s no vote bank in tech and so politicians didn’t care about tech as much. I don’t think that’s the case anymore. So I think people, the sort of political class, is taking notice of that. And to your point, I think what can specifically change is employability laws, the ability to attract more talent, retain more talent, make it much more streamlined, to create option pools, award people with equity and the treatment of that equity should be at par with public equities, all of those things, I think, have to fall in place for that ecosystem to work. So in short, I think it’s really about the people aspect more than anything else.

Arjun Kharpal

Sanjay … I want to talk about government’s role. One thing that struck me when I visited France, when you look at Viva Tech. It’s a big show, we know that, but the French government ministers and even [Emmanuel] Macron himself, the president, is in attendance. Just this past few weeks ago, he gathered a bunch of CEOs, from technology companies, and leaders together. And whilst a lot of this, you know, can be seen to be perhaps showboating, there is a genuine feeling that actually the government is throwing its full weight behind the force of France’s tech sector. I don’t think it’s any surprise, you’ve got companies like Mistral AI … etc, raising large sums and being kind of thrust into the spotlight. The U.K. just again, looking from the outside, feels like it wants to talk about tech, it wants to say we’re a leader in crypto, we’re a leader in AI, in all these areas, but the action and that kind of level of support, hasn’t felt [like it’s] there. Is that an accurate reflection in your point of view? Does the U.K. government need to be doing more in a similar vein to what the French are doing at the moment?

Sanjot Malhi

So I think the correlation is certainly that if you have a tech-forward leader, who’s the head of state or head of government, I think it certainly helps, right? It’s been the case around the world again, wherever you look, China, India, the U.S. and Europe now in France, and I think Emmanuel Macron is definitely somebody who is very tech forward and forward leaning on technology. It feels like the prime minister here is well, there’s obviously different sort of, I guess, political complexities in every system that hold different leaders back, but ultimately you want a tech ecosystem that is removed from politics, right? So no single individual, even if they happen to be the head of state should be able to move the needle that much ideally speaking, right? In the U.S., if you look at San Francisco, [it] doesn’t matter who the president is. They have built AI, they have all sorts of innovation, they have all funding flowing. And that’s the ultimate state that you want to arrive at. But yeah, I think France has done a really great job. But at the same time it is today, it’s still very, very early days, right? I mean, still there’s only one company that everyone mentions, when you think of it. It’s just Mistral that everyone’s talking about. So the repeatability of that remains to be seen. And if you look, markets are down in France today, because of the European election and the results there as well. So you don’t know what happens. But ultimately, you want a tech ecosystem that is removed from politics. But yet, you need a government that is supported throughout.

Arjun Kharpal

Yet it’s so hard these days, tech and politics are intertwined. The battle between China and the U.S. over various technologies from AI to semiconductors, it’s very difficult these days for that to happen. And it’s almost as if governments need to, or feel the need to, be involved, in particular areas, I guess, where they see strategic importance, whether it’s around semiconductors, military applications, AI, right? And so it’s those areas they’re getting involved in, but you don’t necessarily want them to be involved in some of these other areas.

 Sanjot Malhi

Yeah, no, I completely agree. I think the strategic elements remain and will always remain, right. And … some of the geopolitics is becoming more complicated with the Middle East, and so on and Ukraine. So that is understandable. But for the rest of it, it shouldn’t require so much of the government’s heavy lifting to do it. Ideally, what the government should create is fostering the innovation, which is education, the laws that enable company creation and bankruptcy, they encourage FDI those are the fundamental things, the boring stuff that the government needs to do. But, you know, I think the problem with democracy, which we all love, is that it is prone to populism, right? And so they tend to go toward what makes for the best headlines. And, you know, FDI rules don’t really make for great headlines.

Tom Chitty 

Last question from me. Looking ahead now for the U.K. tech scene, where do you think they could hang their jacket? That’s the area they should be aiming to be a real leader in?

Sanjot Malhi

I think several things. AI definitely. Again, going back to the education hubs, I think the U.K. has amongst the best technical education institutes in the world. So AI and software in general, for sure. I think forward leaning, we will see quantum create a massive leap. And I think the U.K. will be a very, very important hub in that and we’re seeing early signs of that. And then even hardware because of that sort of deep tech understanding and education and even climate tech. I would say those four are probably the ones that come to mind.

Arjun Kharpal

And just the last one for me, just because you mentioned AI and you know that’s the topic du jour. Yeah, DeepMind is the company everyone talks about when they talk about U.K.’s AI scene, and it’s obviously owned by an American firm, Alphabet. Does the U.K. have what it takes, in your view to produce a global AI giant?

Sanjot Malhi

Yeah, I mean, I hope so because it affects my life. But look, I mean, we’re in the infancy of AI, right. And we forget that. It’s literally day zero of what the new version of generative AI looks like. And this is somewhat reductive, if you break it up into sort of the four big buckets of AI: No. 1 is hardware, closest to the metal, which is the chips and we’ve seen Nvidia rally. The second is the large language models, which is the Mistrals and Llamas of the world. Then I think there will be an infrastructure software layer built around that, the likes of Snowflake for specifically AI. And then finally, perhaps most importantly, the application layer, because we all speak about AI but it’s not as prevalent in our lives and businesses as it should be yet so there will be an application layer developing. The reason I’m saying all of this is because we are so focused on step one and two today because that’s all we see. Steps three and four, I think, is where the ultimate value capture will lie. And I think the U.K. has as good a chance as any to build something.

Tom Chitty

Okay, fantastic. Well, we’ll leave it there. But before we finish, we have, of course, got to do stat of the week. Have you been thinking about it? Because you seem very focused on the podcast, but you should have really been thinking about stat of the week.  

Arjun Kharpal

I think he knows the answer. I think your time’s done. £953.7 million is the stat.

Tom Chitty 

I’ll go first because if I’m gonna be wrong, then I don’t want to copy your answer. I’m gonna go with the amount of VC funding in U.K. tech startups for 2025.

Sanjot Malhi

I would say that is the amount of funding in U.K. AI startups.

Arjun Kharpal

That’s wrong. Little hint. It relates to last year. And it relates, I’ll just say, that the phrase Raspberry Pi, on the rooftop of the London Stock Exchange.

Sanjot Malhi

Money raised from IPOs last year.

Arjun Kharpal

There we go.

Tom Chitty 

I did concede, I was about to say the answer.

Sanjot Malhi

Too slow, too slow.

Arjun Kharpal

It was the amount raised via IPOs in the U.K. in 2023, down 40% from 2022, in which issuers raised £1.6 billion.

Tom Chitty 

Sanjot, thank you very much for joining us on Beyond the Valley. That’s it for this episode. But before we go, please follow and subscribe to the show and rate us if you’d like.