Party leaders, cabinet members, and MPs across the House have spoken loudly and clearly on the importance of innovation, technology and entrepreneurship to the UK’s growth strategy.
In a speech last month, Chancellor Jeremy Hunt reminded us that the UK ranks fourth on the Global Innovation Index and made clear his ambition to make the UK into the next Silicon Valley, by drawing on our world-class universities, financial institutions and putting in place policies that support our 85,000-strong startup ecosystem.
These commitments are commendable and certainly represent a political class looking in the right direction. However, a turbulent and uncertain economic climate has also shed light on where the gaps are and how the UK can and needs to strengthen its position as a science and tech superpower.
As one of more than a thousand startups that have spun out of UK universities, we’ve seen first-hand over the last six years where the support for UK innovation is working – and where it could perhaps be improved.
Seed-stage funding is booming, but what’s next?
We have recently heard various voices in the tech ecosystem calling for better access to capital, more venture funds, and more accelerator programmes to help foster growth within early-stage startups. But the early stage – where accelerators have the most impact – is not where the help is most needed.
Seed-stage investment as a distinct activity has exploded in the past decade since the UK’s startup ecosystem burst into life around 2012. Some individual specialist early-stage funds set up since then are now backing more than 100 companies every year, and many VCs that previously engaged only in less risky later-stage investing have launched new seed funds to seize on the opportunity created by swelling startup numbers and “get in early” on the best deals.
The growth of the early-stage investment market has been driven in large part by the success of the SEIS and EIS tax relief schemes, introduced in 2012 to encourage private individuals to contribute to the funding of innovative new companies. Some 3,755 companies raised a collective £1.6bn across the two schemes in 2020-21, evidence of their essential role in funnelling investment into early-stage firms.
Previously thought to be under threat, various statements by the government in late 2022 reiterated its commitment to the scheme, both safeguarding their futures and expanding and simplifying them to allow more individual investors and more companies to benefit. This is critical.
While it is encouraging to see the progress we’ve made at the early stage – without reliable seed funding companies will struggle to make it through the most difficult first months and years, and the innovation pipeline could dry up – we seem to lack the same level of support for later-stage tech companies.
In other words, there are insufficient funds available in the UK to help innovative homegrown companies scale from seed to Series D and beyond. Only 46% of seed-funded companies will raise another round in the UK, which means that this is the endpoint for the majority of early-stage startups as they cannot survive without raising another round.
As a result, many move overseas in pursuit of investors with a bigger risk appetite and more generous valuations. For the innovation economy to really thrive, there needs to be greater support to help companies break through this Series A wall.
Commercialisation – not just for the private sector
Another area that, if improved, could deliver significant mutually-beneficial returns is the relationship between corporates and early-stage companies. Lengthy and complex procurement processes have made it near impossible for startups to win large contracts, and therefore huge potential is being lost every day in terms of talent, knowledge, and cost savings.
While corporates bring the firepower, network, and credibility, startups have the technical skills and knowledge to streamline the way organisations run, drive cost efficiencies, and even improve employee job satisfaction. The public and private sectors need to capitalise on homegrown tech by procuring from their own. Otherwise, we risk losing our competitive edge overseas.
The UK has all the tools needed to be a science and tech superpower, but to unlock the next stage of innovation and economic growth there needs to be support for companies across the growth pipeline from both the public and private sectors.
Support for later-stage companies is critical. Without it, we face the very real risk of losing high-potential UK-born companies, along with our status on the global tech stage.