The last Conservative government turned Britain into a startup nation.
Over 14 years, the UK became home to more billion-dollar tech startups (‘unicorns’) than France and Germany combined; we fostered the world’s third largest AI ecosystem; and in our last year of government, business investment into R&D increased by 30%, to £49 billion.
When it came to backing our startups, Conservatives got Britain to the future first.
I saw some of these inspirational success stories between last November and this July, when I led Phase 1 of the Conservatives’ Policy Renewal Programme (PRP) relating to science and technology, as Shadow Secretary of State. Like all other shadow teams, Phase 1’s objective for us from the party leader was ‘Problem Diagnosis’ – understanding the challenges the sectors still face – but not devising any new policies.
Over nine months, I travelled more than 1000 miles across the UK meeting entrepreneurs, scientists, engineers, investors and many others contributing to Britain’s success in tech and science including trade associations, Royal Societies, university vice chancellors, academics, think tankers and commentators.
I visited leading research-intensive universities such as UCL, Cambridge and Manchester, met tech founders in Shoreditch, listened to tech investors in the City of London and helped academics in Edinburgh overturn Labour’s cancellation of the UK’s new national supercomputer. It was a fascinating, informative and effective exercise, carried out alongside a busy parliamentary and political schedule, including putting the Government on the backfoot over their poor handling of the Data Bill over more than six months.
By the time Phase 1 ended in late July, our Shadow DSIT PRP had received 83 written submissions, we had hosted 16 separate round-tables to garner views, conducted a widespread literature review and spent over 150 hours writing our report which I submitted to our party leader shortly after summer recess began.
Under the Conservatives’ current PRP timetable, it may be several years before a package of Conservative policies is agreed in relation to science and technology.
However, the pace of innovation in the science and tech sectors is rapid, and their strategic importance to our economy only grows every month. Conservatives must show urgency as well as thoughtful deliberation if we’re to be taken seriously as the government in waiting. That’s why I am proposing three key radical policies now – a positive signal that we have a vision and solutions, not just a list of problems to be fixed in several years’ time.
For me, the vision is clear: the next Conservative government must turn Britain into a Scaleup Nation.
We must build on the last Conservative government’s success in turning Britain into a startup nation by enabling UK-based tech and science companies to remain and grow into scaleups, rather than going overseas for funding, talent and opportunities.
The solutions are also clear. The fundamental challenge we must address is that startups struggle to become scaleups in Britain. Their founders either leave the country in search of growth funding (usually in the US) or they decide they can’t raise any more money here and therefore sell the startup (often to an American buyer).
A key driver of Britain’s failure to nurture enough science and tech scaleups is the venture capital funding gap. There simply isn’t enough money available in the UK ecosystem to fund the growth of our best startups so they become scaleups and global leaders.
Manchester-born Stan Boland is one of Britain’s top tech founders and investors, having built and sold four firms in the UK together worth more than $1.2bn, and raised over $330 million in venture capital funding to grow them. Boland has been very insightful during my policy review, and he estimates that if the UK had the same amount of venture capital funding as the US proportionate to population, we would have an extra $12bn/£9bn in the system. This £9bn funding gap must be closed and then eliminated by the next Conservative government.
At the same time, scientists leading university spin outs and entrepreneurs scaling their startups told me that growing their businesses to a significant size from Britain is becoming harder in a world where it is the best-funded startups that typically win. I hosted one round-table with entrepreneurs and investors where they all agreed it was ‘almost impossible to get a cheque for £50m’ in the UK. In contrast, they felt in the US they could realistically receive up to £150m from a single Silicon Valley fund.
It’s no surprise then that under Labour the number of UK startups reaching unicorn status is slowing to the point of stagnation. In 2024, only three new unicorns were minted, down from an already-low figure of five in 2023. These were much lower than 2021 and 2022, which saw 11 unicorns named each year.
The next Conservative government must act radically and decisively to halt this trend by implementing three radical policies to end the venture capital funding gap and turn Britain into a Scaleup Nation.
Labour’s Industrial Strategy shows no organisation is focused on eliminating the scaleup gap. Existing bodies are too thinly spread in the current structure to tackle this issue.
Labour’s National Wealth Fund is a £7bn white elephant. It’s not a sovereign wealth fund. It’s actually a bank, duplicating the functions of other bodies. And it’s a repurposed bank at that: Labour spent nearly £90,000 re-branding the former UK Infrastructure Bank into the NWF, but with no focus on venture capital or scaleups.
The NWF should be abolished, with its core function (banking) merged into an existing bank, namely the British Business Bank (BBB), so all these banking functions sit together coherently in one banking body.
This would leave funding and space for a new, leaner organisation – British Growth Capital (BGC) – to fully focus on increasing the amount of venture capital funding available across the entire UK startup and scaleup ecosystem, from pre-seed to Series E and beyond.
At the same time, the BBB’s limited pool of existing venture capital funding should be re-allocated to the BGC, and the BBB should stop its practice of investing in individual companies.
Instead, BGC should allocate 100% of its taxpayer-backed venture capital funding to professional, high-performing private sector venture capital fund managers. We have many of these in Britain.
The fund managers would then have to at least match any public money they receive, leveraging in more private sector cash. It would then be for the funds, run by private sector experts, to select the best companies to invest in, deploy the money, and secure the best returns including financial returns for the taxpayer. This would increase the pool of capital in the UK, encourage founders to stay in Britain to seek out the smartest money and the biggest funding cheques, and deliver better returns for the government.
Sweden has already successfully implemented this approach, launching Saminvest, a state-owned body dedicated to allocating £5bn to private sector venture capital funds who in turn make investments. Saminvest often acts as an anchor investor in a venture capital fund, drawing in additional private sector capital for the fund too, bolstering the amount of money it has for supporting high-growth businesses.
This approach would be a radical departure from the status quo in the UK, under which the BBB (through civil servants) currently competes with private sector venture capital funds to invest in the best growth companies.
Typically, the BBB will either totally fail to get into the best deals or get into deals for startups that aren’t globally best in class and don’t become scaleups. Where the BBB does manage to get a foot in the door, it will only be allowed to fund a relatively small portion of funding rounds, losing out to private VC funds because the fastest-growing companies and most ambitious founders would rather have a major brand name VC fund on their books than a state bank.
Top investor and Harry Stebbings observed on a recent episode of his podcast:
Most of the BBB’s portfolio is just dire…and they will not do well. Government money will be wasted.
Stan Boland agrees with my proposal, saying:
It’s time to get better returns for the taxpayer and boost the amount of venture capital funding available for the entire tech ecosystem, so allocating state funds to professionals instead of piecemeal government investments is the best strategy.
R&D tax credits can play an important role in supporting high-potential companies to innovate, but the current system is expensive and inefficient, with some questionable claims. For example, 28 sports teams, including Premier League football clubs, are reported to have claimed £13m under the scheme in the last five years.
The latest figures show that government spent £7.5bn in the 12 months to April 2023 on R&D tax credits. Figures for the year to April 2024 are expected this autumn, but will likely show an increase in the bill footed by the taxpayer.
Cutting the bill by 50% by reducing the scope of what can be claimed and by whom, would release around £4 billion per year in cash which would be better deployed by the BGC, as described above. With private sector match funding, this reform would generate at least £8bn per year which could be used to fund scaleups. Over 10 years, around £100bn could be raised, giving British scaleups massive firepower to grow whilst earning better returns for the taxpayer and making the R&D tax credit system leaner.
This reform would shift public spending from ‘passive’ investment by the BBB validated only by civil servants to ‘active’ investment in companies whose prospects have been independently validated by the market with private sector VC investors putting their money where their mouth is.
Stan Boland agrees:
R&D tax credits prop up a lot of companies that will never scale, so let’s channel that money into private sector venture capital that finds and scales world leading tech and science businesses instead.
Over £725bn is held in ISAs, of which over 40% (£294bn) is held in Cash ISAs. Many Cash ISAs pay interest at a rate that struggles to beat inflation, so their real value is eroded. Over 4.4m adults hold more than £10,000 in a Cash ISA but don’t invest. Every one of these savers is missing out on the growth generated by UK-based tech and science firms.
A new Tech ISA would provide a recognisable, easy vehicle for millions of people to save for their retirement, while creating a new and massive pool of capital to fuel the growth of UK-based tech and science companies.
The Tech ISA could be created by carving out from the existing £20,000 annual ISA allowance or adding an additional allowance for tech-only investments.
Tech (including science) is a uniquely high-growth sector, hence justifying its own type of ISA. ‘Tech’ would have to be defined, but the simplest way would be to mark a company’s stock eligible for the Tech ISA if it has been backed by an accredited private sector venture capital fund and/or indirectly by BGC. In reality, all meaningful tech firms with high growth potential in the UK will have venture capital backing anyway, enabling transparency and security.
Barney Hussey-Yeo, founder of British fintech unicorn Cleo AI, is a major advocate of the Tech ISA, and I was delighted to meet him several times during our policy review. Barney rightly says:
It’s insane we are incentivising around £300bn to be sat in cash, Instead, we should launch a Tech ISA so savers get better returns, and our tech firms benefit from access to more growth capital.
Britain is in a global competition to be home to the scaleups of the future, and to reap the rewards of being so, from new jobs and prosperity to sovereign capability in key sectors such as AI.
Only radical action from the next Conservative government can turn this vision into reality.
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