British Startups Just Can’t Seem to Scale

(Bloomberg Opinion) — This is part of a series on what 14 years of Tory rule have delivered for Britain’s economy, society and standing in the world. The challenges awaiting the next government are numerous. 

Britain takes a third of all the money flowing from venture capital investors into Europe and has done so almost consistently for the last 14 years. Its ecosystem has thrived independent of Conservative Party policies, thanks in part to its wealth of English speakers and world-class universities. Even Brexit failed to stop talented engineers from taking jobs at British tech firms, many of whom count around a third of their staff as immigrants.

To its credit, the government has set up programs like the Advanced Research and Invention Agency (ARIA), modeled after the US’s Defense Advanced Research Projects Agency (DARPA), to help back frontier-tech firms with an £800 million ($1 billion) budget. 

Such large pots of money are sorely needed. Britain’s legacy of tech innovation goes back to Cambridge University’s Alan Turing, the father of modern computer science, and continued with DeepMind, the AI company that kicked off the battle to build artificial general intelligence now being waged among big tech firms like Alphabet Inc.’s Google, OpenAI and Meta Platforms Inc.

But tech startups here have grappled with a chronic inability to scale, and the problem hasn’t improved under the Tories. British startups virtually matched the California Bay Area in getting early-stage funding last year, but they raised just 22% of what their Silicon Valley peers did when seeking $100 million or more. British startups tend to head for the exit as a result: Rising stars like DeepMind sold to Google, Arm Holdings Plc to SoftBank Group Corp. and Imagination Technologies to Canyon Bridge.

London’s City might be awash in money — British investment funds manage £13 trillion ($16.6 trillion) in assets — but it is also risk-averse, which doesn’t bode well for the deep-tech startups specializing in things like AI and quantum computing, whose large capital expenditures require many years of patience.

David Willetts, a former Conservative minister for universities and science, tells me that while in that role he tried to ensure that British university spinouts and startups got “sufficiently deep roots” in the UK from local investors, so that when more money came from overseas, entrepreneurs wouldn’t be pressured to move to America’s Bay Area or East Coast. But that continues to be a struggle. At a recent dinner in London showcasing several cutting-edge university spinouts, Willetts recalls that half a dozen American investors flew in to scout the opportunities, while not a single British investor took a cab in from the Square Mile.

Still, a few clever policies could help fuel the ecosystem here. The Tory government is forcing Britain’s 86 local government pension funds — which in aggregate would rank among the top 10 biggest funds in the world — to pool their money into eight organizations that will invest on their behalf, including into more high-risk, local tech investments. 

Meanwhile, most British startups already exploit the Conservative government’s Enterprise Investment Scheme, which helps early-stage firms raise financing of up to £150,000 ($190,665) by offering tax relief to investors. If the next government extends that program to startups with more than £30 million in assets (which currently aren’t eligible), that would be one way to address the scale-up challenge. 

It’s also worth remembering that Silicon Valley has a multi-decade head start on the UK. As frustrating as it may be for the entrepreneurs, creating a new land of tech giants will take time. 

More from A Report Card on 14 Years of Tory Rule:

–With assistance from Elaine He.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Parmy Olson is a Bloomberg Opinion columnist covering technology. A former reporter for the Wall Street Journal and Forbes, she is author of “Supremacy: AI, ChatGPT and the Race That Will Change the World.”

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