The UK has long been fertile ground for startups, offering a home to new ideas and cutting-edge solutions. The tech sector adds an enormous £150bn to the economy each year, employs more than 1.7m people, and while London leads the charge, cities like Birmingham, Bristol and Manchester have each become vibrant tech hubs in their own right.
But startups don't remain startups forever. The successful ones scale-up; heading for a public listing, acquisition, or profit-led success. But, right now, not enough start-ups are staying on UK soil for that portion of their journey. From Darktrace to DeepMind, too many leading tech firms are snapped up by overseas acquirers or public markets (very often in the US). We’re currently incubator Britain, not scale-up Britain. If we want to change that, the new Government needs to do more to incentivise talent to start-up and stick around.
If we don’t make the UK’s fiscal environment a more attractive backdrop for high-growth businesses, we’ll watch by the sidelines as they continue to relocate, list on foreign stock exchanges, or get picked-up in international M&A deals.
To stem this flow, we need to ensure founders are incentivised to exit their business on UK soil. That means expanding current tax incentives. For example, the Government should explore an Entrepreneurs Relief-style policy that offers a favourable tax approach for the first £10 million in exit process, rather than the current lifetime cap of £1m offered by (the renamed) Business Asset Disposal Relief. Likewise, creating a new, more appealing tax incentive for businesses that have generated over £50 million in exit value would further demonstrate the UK’s commitment to fostering big ticket talent. [a]
To complement these measures, policymakers should look towards improving the system of Research and Development (R&D) tax credits. Startups with significant R&D activity should have strong incentives to invest more heavily in innovation, but recent clawbacks from previous claims and increased scrutiny from HMRC may discourage them from applying for legitimate rebates. We need to restore confidence in the R&D process; ensuring it’s straightforward and accessible for founders to navigate. If startups are spooked that R&D credits could be recouped years later, they won’t engage with the system.
Strong scale-up markets attract the world’s most successful entrepreneurs and tech professionals. We need to do more to attract this level of talent from overseas, as well as foster homegrown tech heroes.
One way to do this would be designing a ‘Scaling Talent Visa,’ specifically aimed at individuals who have already built successful companies abroad. Through an annual, targeted initiative, we could invite 100 top-tier C-suite professionals with experience scaling unicorns to Britain each year. It would provide a strong signal that we value the tech market, that the UK is open for business and that we’re eager to host the world’s best entrepreneurial minds. A visa of this kind would be both practical and symbolic.
The Seed Enterprise Investment Scheme and Enterprise Investment Scheme have had a huge role to play in driving the early stage technology ecosystem to date. But investment in these schemes has been declining. This is a worrying trend that needs to be reversed. Expanding and extending SEIS and EIS is essential if we want to feed the pipeline of innovative startups that have the potential to grow into large, influential companies.
We also have to address the capital gap for mid-sized funds. There’s currently a dearth of LP capital for funds in the £50-£300m range in the UK. One way to square this circle is by creating a new British Business Bank fund that could bridge this gap; investing in funds that have graduated from the Enterprise Capital Fund programme but aren’t yet ready for British Patient Capital. If we fail to build a ladder of funding that can match the capital needs of scaling start-ups, we risk stalling companies at a critical juncture or encouraging them to seek investment overseas.
And we can further reshape the LP role in fostering talent by exploring more innovative solutions, such as mandating that every UK public pension fund includes at least one high-growth entrepreneur on its board. Public pension funds in the UK represent a huge potential source of capital for high-growth businesses. Through an entrepreneurial board seat initiative, we could diversify boardroom thinking and push more capital into high-growth, high-potential markets.
The UK is brimming with potential. But we’re missing a national narrative that tells people they can go further, without going farther. A series of policies and marketing campaigns, led by the Government, to foster high-growth entrepreneurship in the UK, celebrate and reward successful entrepreneurs, and most sustainably fuel the VC market, can help the next generation of founders view the country as a long-term home, not a launchpad.
Ultimately, great business leaders make informed business decisions – we have to ensure our policies and infrastructure make choosing the UK as a home for scaling an obvious choice.
