Taking Risk

I just spent a week talking with some exceptional students from three of the UK’s top universities; Cambridge, Oxford and Imperial College. Along with UCL, these British universities represent 4 of the top 10 universities in the world. The US - a country with 5x more people and 8x higher GDP - has the same number of universities in the global top 10.

On these visits, I was struck by the world-class quality of technical talent, especially in AI and biosciences. But I was also struck by something else. After their studies, most of these smart young people wanted to go and work at companies like McKinsey, Goldman Sachs or Google.

I now live in San Francisco and invest in early-stage startups at Y Combinator, and it’s striking how undergraduates at top US universities start companies at more than 5x the rate of their British-educated peers. Oxford is ranked 50th in the world, while Cambridge is 61st. Imperial just makes the list at #100. I have been thinking a lot about why this is. The UK certainly doesn’t lack the talent or education, and I don’t think it’s any longer about access to capital.

People like to talk about the role of government incentives, but San Francisco politicians certainly haven’t done much to help the startup ecosystem over the last few years, while the UK government has passed a raft of supportive measures.

Instead, I think it’s something more deep-rooted - in the UK, the ideas of taking risk and of brazen, commercial ambition are seen as negatives. The American dream is the belief that anyone can be successful if they are smart enough and work hard enough. Whether or not it is the reality for most Americans, Silicon Valley thrives on this optimism.

The US has a positive-sum mindset that business growth will create more wealth and prosperity and that most people overall will benefit as a result. The approach to business in the UK and Europe feels zero-sum. Our instinct is to regulate and tax the technologies that are being pioneered in California, in the misguided belief that it will give us some kind of competitive advantage.

Young people who consider starting businesses are discouraged and the vast majority of our smart, technical graduates take “safe” jobs at prestigious employers. I am trying to figure out why that is.

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Growing up, every successful adult in my life seemed to be a banker, a lawyer or perhaps a civil engineer, like my father. I didn’t know a single person who programmed computers as a job. I taught myself to code entirely from books and the internet in the late 1990s. The pinnacle of my parents’ ambition for me was to go to Oxford and study law.

And so I did. While at university, the high-status thing was to work for a prestigious law firm, an investment bank or a management consultancy, and then perhaps move to Private Equity after 3 or 4 years. But while other students were getting summer internships, I launched a startup with two friends. It was an online student marketplace - a bit like eBay - for students. We tried to raise money in the UK in 2006, but found it impossible. One of my cofounders, Kulveer, had a full-time job at Deutsche Bank in London which he left to focus on the startup. His friends were incredulous - they were worried he’d become homeless. My two cofounders eventually got sick of trying to raise money in the UK and moved out to San Francisco. I was too risk-averse to join them - I quit the startup to finish my law degree and then became a management consultant - it seemed like the thing that smart, ambitious students should do. The idea that I could launch a startup instead of getting a “real” job seemed totally implausible.

But in 2011, I turned down a job at McKinsey to start a company, a payments business called GoCardless, with two more friends from university. We managed to get an offer of investment (in the US) just days before my start date at McKinsey, which finally gave me the confidence to choose the startup over a prestigious job offer. My parents were very worried and a friend of my father, who was an investment banker at the time, took me to one side to warn me that this would be the worst decision I ever made. Thirteen years later, GoCardless is worth $2.3bn.

I had a similar experience in 2016, when I was starting Monzo, I had to go through regulatory interviews before I was allowed to work as the CEO of a bank. We hired lawyers and consultants to run mock interviews - and they told me plainly that I was wasting my time. It was inconceivable that the Bank of England would authorise me, a 31 year old who’d never even worked in a bank, to act as the CEO of the UK’s newest bank. (It turned out they did.) So much of the UK felt like it was pushing against me as an aspiring entrepreneur. It was like an immune system fighting against a foreign body. The reception I got in the US was dramatically different - people were overwhelmingly encouraging, supportive and helpful. For the benefit of readers who aren’t from the UK, I hope it’s fair to say that Monzo is now quite successful as well.

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I don’t think I was any smarter or harder working than many of the recent law graduates around me at Oxford. But I probably had an unusual attitude to risk. When we started GoCardless, we were 25 years old, had good degrees, no kids and supportive families. When fundraising was going poorly, we discussed using my parents’ garage as an office. McKinsey had told me to contact them if I ever wanted a job in future. I wonder if the offer still stands.

Of course, I benefitted from immense privilege. I had a supportive family whose garage I could have used as an office. I had a good, state-funded education. I lived in a safe, democratic country with free healthcare. And I had a job offer if things didn’t work out. And so the downside of the risks we were taking just didn’t seem that great.

But there’s a pessimism in the UK that often makes people believe they’re destined to fail before they start. That it’s wrong to even think about being different. Our smartest, most technical young people aspire to work for big companies with prestigious brands, rather than take a risk and start something of their own.

And I still believe the downside risk is small, especially for privileged, smart young people with a great education, a supportive family, and before they accumulate responsibilities like childcare or a mortgage. If you spend a year or two running a startup and it fails, it’s not a big deal - the job at Google or McKinsey is still there at the end of it anyway. The potential upside is that you create a product that millions of people use and earn enough money that you never have to work again if you don’t want to.

This view is obviously elitist - I’m aware it’s not attainable for everyone. But, as a country, we should absolutely want our smartest and hardest working people building very successful companies - these companies are the engines of economic growth. They will employ thousands of people and generate billions in tax revenues. The prosperity that they create will make the entire country wealthier. We need to make our pie bigger, not fight over the economic leftovers of the US. Imagine how different the UK would feel if Google, Microsoft and Facebook were all founded here.

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When I was talking with many of these smart students this week, many asked me how these American founders get away with all their wild claims. They seem to have limitless ambition and make outlandish claims about their goals - how can they be so sure it will pan out like that? There’s always so much uncertainty, especially in scientific research. Aren’t they all just bullshitters? Founders in the UK often tell me “I just want to be more realistic,” and they pitch their business describing the median expected outcome, which for most startups is failure.

The difference is simple - startup founders in the US imagine the range of possible scenarios and pitch the top one percent outcome. When we were starting Monzo, I said we wanted to build a bank for a billion people around the world. That’s a bold ambition, and one it’s perhaps unlikely Monzo will meet. Even if we miss that goal, we’ve still succeeded in building a profitable bank from scratch that has almost 10 million customers.

And it turns out that this approach matches exactly what venture capitalists are looking for. It is an industry based on outlier returns, especially at the earliest stages. Perhaps 70% of investments will fail completely, and another 29% might make a modest return - 1x to 3x the capital invested. But 1% of investments will be worth 1000x what was initially paid. Those 1% of successes easily pay for all the other failures.

On the contrary, many UK investors take an extremely risk-averse view to new business - I lost count of the times that a British investor would ask for me a 3 year cash-flow forecast, and expect the company to break even within that time. UK investors spend too much time trying to mitigate downside risk with all sorts of protective provisions. US venture capital investors are more likely to ask “if this is wildly successful, how big could it be?”. The downside of early-stage investing is that you lose 1x your money - it’s genuinely not worth worrying much about. The upside is that you make 1000x. This is where you should focus your attention.

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A thriving tech ecosystem is a virtuous cycle - there’s a flywheel effect that takes several revolutions to get up-to-speed. Early pioneers start companies, raise a little money and employ some people. The most successful of these might get acquired or even IPO. The founders get rich and become venture capital investors. The early employees start their own companies or become angel investors. Later employees learn how to scale up these businesses and use their expertise to become the executives of the next wave of successful growth-stage startups.

Skype was a great early example of this - Niklas Zenstrom, the co-founder, launched the VC Atomico. Early employees of Skype started Transferwise or became seed investors at funds like Passion Capital, which invested in both GoCardless and Monzo. Alumni of those two companies have created more than 30 startups between them. Matt Robinson, my cofounder at GoCardless, was one of the UK’s most prolific angel investors, before recently becoming a Partner at Accel, one of the top VCs in the world. Relative to 15 or 20 years ago, the UK tech ecosystem is flourishing - our flywheel is starting to accelerate. Silicon Valley has just had a 50 year head start.

There is no longer a shortage of capital for great founders in the UK (although most of the capital still comes from overseas investors). I just believe that people with the highest potential aren’t choosing to launch companies, and I want that to change.

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I don’t think the world is prepared for the tidal wave of technological change that’s about to hit over the next handful of years. Primarily because of the advances in AI, companies are being started this year that are going to transform entire industries over the next decade.

It doesn’t seem hyperbolic to say that we should expect to see very significant breakthroughs in quantum computers, nuclear fusion, self-driving vehicles, space exploration and drug discovery in the next 10 or 20 years. I think we are about to enter the biggest period of transformation humanity has ever seen.

Instead of taking safe, well-paying jobs at Goldman Sachs or McKinsey, our young people should take the lead as the world is being rebuilt around us.