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Government’s ‘Scale-Up Britain’ ambition under the spotlight

Author: ICAEW Insights

Published: 27 Feb 2023

Is the government’s bold vision for a UK Silicon Valley at odds with how start-ups and scale-ups are being managed at policy level?

For the UK start-up and scale-up community, the latter half of January was marked by stark contrasts.

First came Business Secretary Grant Shapps’s speech to delegates at Davos, in which he heralded the dawn of ‘Scale-Up Britain’, an ostensibly ambitious vision for the UK to become a hothouse for the next crop of Big Tech giants.

In his 19 January address, Shapps acknowledged the UK’s strong record on innovation, but said what we needed to do better is convert start-ups to scale-ups, “building businesses that don’t just develop in the UK, but stay to grow and mature into world-beaters”.

Turning to how the UK could swell its ranks of ‘unicorns’ – start-ups that scale up to a valuation of $1bn or more – Shapps said: “I think we can learn a lot from Silicon Valley’s ambition and its record creating global tech brands. But we can also learn from the mistakes it has made.

“Its unicorns have sometimes prioritised shareholder value above all else. Its culture sometimes falls short of the standards we expect from modern employers. And while it has made a few people unimaginably rich, the wealth isn’t shared by everyone, with homelessness in nearby San Francisco a visible sign of this inequality. What I want to create is a Silicon Valley with a British edge.”

So far, so reasonable. But subsequent developments suggest Shapps hasn’t exactly planted his vision in the most fertile soil.

Severe impact

On 20 January, the Coalition for a Digital Economy (Coadec), an independent advocacy group for UK start-ups and scale-ups in the tech sector, unveiled the results of its recent R&D Tax Credits Survey. Never mind launching the next Amazon or Google – the findings indicated that the UK may be about to struggle to help its newest tech start-ups take root.

Coadec canvassed the views of almost 270 start-up founders on proposed changes to the R&D tax-credits system outlined in last November’s Budget, under which small-business R&D tax relief is set to drop from 130% to 86% in April. Meanwhile, the SME company credit rate will be cut from 14.5% to 10%.

Some 97% of respondents either agreed or strongly agreed with the statement “I expect the cuts to severely impact my start-up”, while almost 90% aligned with “If the cuts go ahead as planned, I believe the UK will be made significantly less attractive to start-ups and investors”.

However, a potentially greater blow to entrepreneurs fell on 31 January, after Tech Nation announced that it would close its doors on 31 March following the termination of government backing. The non-profit beacon of UK start-up and scale-up advice has provided fledgling companies with a wealth of training and guidance, and even a visa programme to help founders source overseas talent.

In an announcement that dramatically offset the tone and thrust of Shapps’s Davos speech, Tech Nation pointed out: “More than a third of all tech unicorns and decacorns created in the UK have graduated from a Tech Nation programme, collectively raising over £28bn so far in venture capital and capital markets.

“Our alumni include the biggest names in UK tech: Monzo, Revolut, Depop, Bloom & Wild, Zilch, Just Eat, Darktrace, Marshmallow, Ocado, Skyscanner, Peak AI and Deliveroo, to name just a few of the 5,000-plus businesses we’ve supported.”

In a tweet, Coadec Executive Director Dom Hallas called Tech Nation’s wind-up “the end of an era for the startup ecosystem in the UK. The idea of government as a provider of startup advice to founders backed by Tier-1 VCs is now finished.”

Human capital

Given the apparent clash between Shapps’s vision and declining levels of fiscal and practical support, what is the likelihood of Start-Up Britain becoming a reality?

Jason Mitchell, Partner and Head of Technology at MHA MacIntyre Hudson, tells Insights: “The UK has a sizeable share of innovators and disruptors, many of them leaders in cutting-edge technologies such as artificial intelligence (AI), blockchain and the metaverse. The UK’s issues lie more in our ability, or lack thereof, to scale businesses effectively. We’re not the best at moving from entrepreneurial start-ups to larger businesses.”

In Mitchell’s assessment, the human capital required for more consistent scaling in the UK is currently limited and must be fine-tuned with focused training, an area in which the nation should have a strong start, with its world-class schools and universities systems.

“It helps to build on ‘known’ areas for UK tech innovation – such as Thames Valley, university spinoffs and East London’s ‘Silicon Roundabout’ district – to attract talent. Businesses can then train promising workers who can cross-fertilise, even as they move between different organisations,” Mitchell says.

Targeted incentives

Mitchell also believes there’s a gap between the seed funding that entrepreneurs can find early on and the investment available when the business is at a much larger scale. “In addition, R&D tax credits and Patent Box regimes are very valuable for helping businesses ramp up development and we need to see this continue – rather than being reined in, as appears to be the case.”

While US hedge funds are much more willing to take a gamble on developing tech companies and have more appetite to make capital contributions in innovative ways, the UK tends to have more conservative investors, Mitchell believes. “Although due diligence is not to be set aside, as it’s important for identifying risks, UK investors’ conservatism does mean we miss out on some potential opportunities.”

Ekaterina Almasque, General Partner at early-stage VC investment firm OpenOcean, believes if the UK government wishes to turn Britain into a new Silicon Valley, the industry needs grassroots support. “Deep-tech firms in fields like quantum technology, for example, have timelines measured in decades – and rely on targeted incentives and funding from government to ensure they continue to make progress.

“Many countries are making those efforts to back their tech economies. If it is to avoid falling behind its peers, the UK must do the same,” Almasque says.

“Simply branding plans with ‘Silicon’ is not sufficient. We must ensure that we put in place the correct processes to bring talented founders with innovative software concepts all the way from ideas on a whiteboard to the stock listings in Paternoster Square,” Almasque adds.

Ultimately though, the success and scalability of UK businesses is key to long-term growth and job creation, says ICAEW Head of Business Simon Gray: “While the UK is a renowned hotbed of ideas and innovation, building early-stage businesses into large, well-established brands has always been a challenge here. To do that requires not just the correct incentives and access to funding – much also depends upon establishing clusters of expertise and a culture that fosters entrepreneurship.”

The skills needed to start a business are very different to those required to develop a small enterprise into a large one, Gray warns. “That makes the creation of an ecosystem that will pool together the expertise and inspiration for scaling up critically important.”

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