Is the success of London's 'silicon roundabout' forcing new start-ups out of the capital?

Tech City, or Silicon Roundabout, is the UK's flagship technology cluster. It's also the only cluster in the UK that enjoys full governmental recognition and support. Just look at the Tech City Investment Organisation – a body that has been set up by the Government to help to grow Tech City – for evidence.

The small area that encompasses Tech City – Old Street and Shoreditch – has seen a boom in tech start-ups setting up shop since 2008, growing from around 15 to 1,363 (according to the government-sanctioned Tech City Map) in five years. This sort of growth is unprecedented in other industries during this economic downturn, but it's typical of the burgeoning technology start-up industry in east London and the fast-growing clusters that are popping up around the UK.

Naturally, the resultant boom for the local economy and subsequent media and governmental attention have meant that residential and commercial property prices have rocketed. If that continues, start-ups will be priced out of the area, which means Tech City could, ultimately, become a victim of its own success.

In 2008, a similar technological revolution was happening in Old Street. Creative, media and tech companies were renting cheap commercial space to set up their businesses. The Old Street area was renowned for the artsy types who occupied it and its proximity to the City meant a business could have that central London status. Firms that started out there, such as TweetDeck, Songkick, Last.fm and Dopplr, began life as start-ups, with many later being bought by larger conglomerates.

The number of digital companies that reside in the area changes depending on where you get your information. The Tech City Map says that there are 1,363, whereas a report by the Centre for London think-tank estimates that there are 3,200 firms, employing 48,000 people. Either figure is a significant increase from the handful of companies that first ventured east, and the inevitable paradox of success is that the cheap workspace that attracted these companies to the area initially, is now at a premium.

"We set up in Commercial Street in 2007 because we all lived in the area and liked the nightlife," says Ian Hogarth, the chief executive and co-founder of Songkick. "We also found it to be a lot cheaper than other options." Hogarth agrees that the huge increase in tech firms has caused rents to soar, and he'd even consider moving if this current trend continued. "We have seen a recent rent increase [30 per cent in four years]. If we rented a much bigger office, I'm not sure whether we would remain in Shoreditch, or if we would move further east or north to cheaper, larger spaces. We would not, however, move out of London."

It's not just commercial property that has seen an increase; it's residential, too. The lettings manager of Foxtons Shoreditch, Suzi Robertson, says that the Shoreditch area has seen a sharp increase of around 20 per cent in residential lets since 2010.

Ian Hogarth's case is not isolated; this is a reality for many other entrepreneurs in the area who have recently started up, or are looking to do so. A tech boom in San Francisco's Tech City has meant that four out of 10 of the US's most expensive housing markets are in the San Francisco Bay area, forcing up rents by 11 per cent in one year and pricing out local businesses, residents and even people looking to relocate to work in the tech scene. London is not far behind. And with proposed legislation that will allow developers to turn Shoreditch office space into apartments without planning permission, it could happen sooner rather than later.

Many companies have seen this spiralling trend and looked to thwart it by moving to another cluster in the UK. Places such as Newcastle, Cambridge, Manchester, Brighton and Leeds already have bustling tech clusters that are experiencing good growth, but maintaining respectable rents. A quick comparison on Zoopla and Rightmove shows that a 200 sq ft office in Old Street will set you back £498 per calendar month, whereas a 355 sq ft property in Talbot Road, Manchester, will cost as little as £266pcm.

Dave Carter, the head of the Manchester Digital Development agency, recognises that this is attractive to entrepreneurs. "In terms of cost, it's much cheaper for both commercial and residential, which is a big bonus to companies that are looking to start up and for their employees who want to move. Start-up costs in London, just for things like rent, will eat away at whatever start-up fund that organisation is relying on. There are also lower labour costs and Manchester's digital village is all very close together so it's easier to get around." Manchester Digital estimates that the creative and digital local industry employs around 45,800 people, a figure that is constantly rising.

"In terms of financials and burn rate, Newcastle makes far more sense than London," says Paul Smith, the director of the accelerator programme ignite100. "You can rent a three-bedroom house in an affluent area for the price of a studio flat in the capital. Contractors and staff are more affordable. There's a shortage of skilled developers countrywide, so for a business that needs to keep its burn rate as low as possible, it makes sense to hire in a city such as Newcastle because it lengthens a start-up's financial runway. We're seeing start-ups base their development and design in Newcastle, and commute to London several times a month for business development and networking." There are around 40 to 50 tech companies in Newcastle's tech cluster.

The digital start-up Jeanography decided that London wasn't financially viable and set up, instead, in Leeds. Its main developer is based in London but the company is headquartered in Leeds. Alex Heaton, one of the co-founders of Jeanography, showed The Independent the astonishing difference in price between the two cities. "Jon's [the developer] desk is located at Google TechHub [in London] and costs £350 a month. Jeanography HQ is an 8m x 8m office in central Leeds, has car parking and internet connection included in the monthly cost of £350, and is home to four members of the team."

It's clear that the sharp increase in rents and the ever-rising costs of London are putting entrepreneurs off the capital, which is benefiting/creating other clusters in the UK. Tech City, and London generally, is still the main driving force for the country's economic output, but unchecked start-up costs will be detrimental to the capital's Tech City status if digital companies can no longer afford to set up there. The one bonus that can be drawn from this is that the expense of London is unintentionally redressing the balance of the digital economy by driving companies to set up elsewhere. This, however, shouldn't be because of Tech City's downfall.