East London’s Shoreditch district looks uncharacteristically idle on a warm, early summer evening. There is little sign of the ‘flat white economy’ of company founders, artists and freelancers that has breathed new life into its post-industrial maze of warehouses and red brick buildings.

Covid-19 has forced them from their usual coffee-powered busy routine – and, even worse, has sunk many of their ideas and start-ups. For some, it is an unsettling déjà vu.

History repeats

The global financial crisis left thousands of people out of work in the City, the heart of London’s financial industry, a decade ago. Little did they know that some of them would soon swap champagne bars for coffee bars and join the flourishing start-up scene just a few blocks away in Shoreditch.

Ten years on, London has emerged as the hottest tech city in Europe. While investment banking has never really recovered its appeal, start-ups and scale-ups have become the most coveted companies for young talent. 

Although hard to match, London’s experience is no exception. Start-up ecosystems have sprung up in cities across the world, with local investment promotion agencies (IPAs) often responsible for bringing in talent and capital from abroad. Now, however, Covid-19 has heavily tested the resilience of these ecosystems as many of their start-ups suddenly faced a zero-revenue scenario. 

Recovery potential

One thing the crisis did not hit, however, is belief of those who witnessed the rise of Shoreditch from the ashes of the financial crisis, that the future still belongs to start-up founders. “I’m pretty certain we will see a huge renaissance in the flat white economy,” professor Douglas McWilliams, founder of the London-based Centre for Economic and Business Research (Cebr), tells fDi. 

Mr McWilliams first coined the term ‘flat white economy’ in 2015, to describe the characteristic coffee culture of the tech scene flourishing in east London. But if Covid-19 has shut down the hundreds of coffee shops that have popped up around tech cities, it has also dramatically accelerated the uptake of technology across the board, laying the foundation for another digital economy boom. 

Assuming one in four workers will work from home in 2025, Cebr estimates that the UK’s flat white economy will almost double its value to £430bn ($543bn) in 2025 from £240bn in 2019, creating 1.2 million direct jobs and double that in total once knock-on effects are taken into account. 

Jobs under threat

However, the immediate outlook looks grim for both start-ups and their founders; even if home-brewed coffee has temporarily sated their caffeine needs, there is little they could do to combat the double whammy of a capital crunch and a drop in demand caused by the coronavirus pandemic. 

Inevitably, thousands of jobs hang in the balance. About 22% of jobs in the UK high-growth economy are under immediate threat, with 615,000 start-up and scale-up jobs at severe or critical risk, according to estimates by data provider Beauhurst. 

While a major challenge in the short term, it may well turn into a great opportunity in the longer run. “That means the talent pool of people available to found their own company or join an existing start-up has just gone up by 22%,” says Eric van der Kleij, the British entrepreneur that then-prime minister David Cameron called in 2011 to seize upon the grassroots development of a start-up ecosystem in east London.  

“The financial crisis created the talent pool while policy-making mobilised it and enabled it to become the engine of economic growth. Once again, this is the time to think of policy levers to inspire the unemployed to start their own businesses,” he adds.

Protecting start-ups

One way in which this crisis differs from the 2007-08 financial crisis is the level of recognition that start-up ecosystems have gained among policy-makers, as witnessed by the multibillion-pound rescue packages on offer that are designed to bail out the industry. 

With global talent and investment being major factors of success, IPAs everywhere have also been increasingly involved in the development and support of local tech scenes. “The whole start-up industry has such a big cascading effect that investors across the board find it very hard to ignore,” says Jayne KC Chan, head of StartmeupHK, an initiative launched in 2013 by Hong Kong’s national IPA, InvestHK, to help founders from overseas set up locally.  

“We want strong start-ups to come and make a difference in Hong Kong. It’s something we want to prioritise because they can scale up and hire people at a very fast rate. Start-ups will be one of the main drivers of  [post-Covid] growth,”  she says.

Elsewhere too

In Europe, Germany Trade and Invest (GTAI) has also been directly involved in attracting tech start-ups, founders and innovators over to one of the 12 thematic digital hubs the German government set up across the country in 2016. 

At a more granular level, Montreal International (MI), the city IPA for Canada’s second biggest city economy, expanded its mandate in 2018 to attract start-ups and talent from abroad in sectors where the city excels – a strategy that has paid off even in current market conditions. 

“Some segments of the start-up ecosystem, such as life sciences or food, are still creating jobs, while others had to pivot their market focus to adapt through the crisis,” say MI chief executive Stéphane Paquet and head of entrepreneurship Cédric Tawil. 

In Cape Town, South Africa, a flourishing start-up ecosystem has been growing around a few major investors, such as internet giant Naspers, Africa’s most valuable company. “We are in a strong position to move forward out of the crisis, led by start-ups developing new products and services,” says James Milne, head of investment at Wesgro, the trade and investment agency of the Cape Town and the Western Cape region, who also sits on the board of local ecosystem enabler Silicon Cape. 

Retaining start-ups 

Other IPAs are focusing on attracting capital to their already burgeoning pool of tech talent, so their best start-ups do not move elsewhere to scale up.  

“Covid-19 creates a perfect situation for large companies and start-ups to collaborate,” says Raido Lember, head of Invest in Estonia. “Start-ups can make big companies more efficient and, at the same time, big companies can provide start-ups with growth capital and long-term support.”

For example, Invest in Estonia courted automaker Daimler for two years, trying to persuade the German company to invest in Estonian start-ups. Eventually, these talks led to a $175m investment in Tallinn-based ride-hailing company Bolt in May 2018, which pushed the company’s valuation beyond $1bn.

Availability of venture capital is another key ingredient in the development of successful tech ecosystems, to attract scale-ups from other cities and enable tech companies to build an international presence (see page 28).

Coffee and hope

Back in Shoreditch, some coffee shops have reopened as the UK government eases lockdown restrictions. Drinks are takeaway service only, but still give London techies the chance to come together again. 

“Creativity really benefited London’s tech scene, and the lack of social networks makes it more difficult [for it to manifest itself]. That’s what we are not getting at the moment,” says Mr McWilliams.  

Isolation and market volatility have tested the nerves of founders across the globe, even as social distancing drives demand for digital solutions. They will have to quickly reset and relaunch if they are not to miss out on the renaissance of the flat white economy. 

Published in the June/July issue of fDi Magazine.