From start-ups to scale-ups (2/2)

For years Britain was “working in a paradigm of market failure”: a belief that government should only intervene with public money if there was evidence that a market was failing. This philosophy of laissez-faire capitalism can be traced to the Conservative government of Margaret Thatcher in the 1980s.

Unusually, that is the view of a Conservative MP, George Freeman, who chaired the second half of a recent Westminster Business Forum policy conference on scaling up Britain’s start-up businesses. Freeman’s point was that this attitude – long entrenched in Whitehall – was a failure of policymaking rather than adherence to market ideology.

Instead, governments should invest to help markets succeed, he suggested, especially since the British government is one of the world’s biggest technology buyers:

I'm a strong supporter of what the [Labour] government is doing on industrial strategy, and this push to really pull every lever we've got.As Minister [Freeman was Minister for Science, Research and Innovation in two previous Conservative administrations], it was very clear to me that Innovate UK and the whole system were working in this paradigm of market failure, which goes back to the Tories in the 80s saying, ‘We only spend public money where we can prove market failure.’ My own view is the rest of the world is pulling every lever, so we should be pulling every lever too. I'm really pleased the government's changed that philosophy.

An unusual perspective from an Opposition MP, but one that is hard to gainsay if one looks at the AI sector, and its support from governments such as the US – in terms of massive federal contracts, often in the defence sector – and China, in terms of central backing for its AI and robotics ambitions.

So, what did Innovate UK, as the government’s innovation-backing agency, make of the Chair’s frank aside? How is it dealing with a new paradigm of backing winners rather than compensating failures? And how real a change is it? Is it just good messaging, perhaps, that will be undermined by a bureaucratic machine – a bureaucracy that, as the adage goes, knows the cost of everything but the value of nothing?

Scott O'Brien is Innovate UK’s Chief Investment Officer. He said:

For me, it's clear. There is a real appetite for us to make decisions and to back things, and the right things. But look, we shouldn't displace private capital. If somebody comes to me and says, ‘I want your investment because you're cheap,’ then I will say, ‘Well, go and get investment from the market if you can get it.’

But if they're coming to me and saying, ‘I need this because it helps unlock something that gets me to the next investment stage’, well, my job is to accelerate. There's benefit in accelerating people to that inflection point rather than waiting for the market to get there eventually. And I feel like I now have a mandate to do that.

That said, surely it isn’t Innovate UK’s job to pick winners – after all, they might be wrong. O'Brien argued:

To some extent we're not picking winners. But do you know what we are saying? ‘There's a cohort of businesses here where we think the team is right, where we think the technology is right, and they're the ones we're going to back.’ That’s not the same thing as picking winners, but absolutely there now seems to be more freedom to do that.

A recent criticism of the UK Government under former Prime Minister Sir Keir Starmer was that it often talked up the domestic AI sector, while forging close relationships with American providers, such as OpenAI. Shouldn’t the government be backing British, in the same way that the US is backing American? O’Brien said:

The procurement question is always challenging. It’s hard in government to procure from smaller businesses, though we've been trying to break that hurdle. I do think there is an appetite for innovation, which is coming through more strongly. Certainly, I see it from the NHS and elsewhere – I've got businesses in my portfolio selling to the NHS. So, things do seem to be ungumming – slightly – and similarly in transport.

But it tends to be as part of a collaborative partnership rather than direct SME to government engagement. Now whether that's a step on the way… I think we're still working towards it.

So, the British Government’s bold and supportive messaging is leading to a slight ‘ungumming’ of progress: good news, albeit qualified. But O’Brien was clear about the challenges ahead:

The genesis of all the work we're doing is a very well-worn story. The UK doesn't have a shortage of ideas, and we've got an extraordinary research base. We've got great universities, a vibrant startup culture, a spinout ecosystem, and by European standards, relatively deep pools of venture capital. But what we've been less successful at doing is turning enough of that strength in start-ups into globally significant businesses, which grow and stay here. And I tend to think of that not just in terms of scaling up businesses, but also in terms of industrialising technologies. I think that shift from lab to scale to real process industrialisation is massively important to making this work.

So, the real question here is, really, not how do to find more innovation, it’s how do we build a system which identifies the innovations and the businesses which have the greatest potential, support them through the points where the market can't, and then connects them to customers, capital, and, ultimately to private investment that provides the fuel for true scale? We can take them [some of the way], but it's private capital that really accelerates and exponentially increases the impact of that growth. And really, that's UKRI strategy: advance knowledge, improve lives, and drive growth.

Valuable perspectives, and welcome signs that there has been a genuine change of heart in Britain’s attitude to start-ups, scale-ups, and the markets they play in. No more laissez-faire economics, it seems, but invest to succeed. And by doing so, hopefully encouraging a once-conservative (with a small ‘c’) financial community to back the next field of unicorns.