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Western Europe / UK

Opinion: ‘Britishness’ is killing the UK’s start-ups

The UK has a long history of innovation; however, its start-ups are struggling to scale up. The British aversion to risk and success is partly to blame, along with a poor funding infrastructure.

The UK has a rich history when it comes to invention. From the seed drill and the steam engine to the cloned sheep and the World Wide Web, British innovation has been behind many items that have changed the world.

The Global Innovation Index proves that the UK is a hotbed of innovation, with the country ranking fourth globally in 2020. Despite the country consistently performing well in such indices, the UK often faces criticism that it does not fully capitalise on its strong record for innovation.

Grappling with graphene

A good example of this failure is the so-called ‘miracle material’, graphene. It was originally invented by researchers at the University of Manchester in 2002. Despite a laundry list of benefits for its application in a number of industries from construction to automaking, the UK has failed to implement or capitalise on the opportunities graphene presents.

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We are lousy at developments and adoption [in the UK]. Everything appears to go offshore. Mike Maddock, Performance Engineered Solutions

The overlooking of this material seems to be an exclusively British problem, despite the material itself being of British origin. According to the World Intellectual Property Database, Patentscope, as of March 2021, there had been 71,826 patents in total that include the production and/or application of graphene. China accounted for 50,987, the US 6,255 and the UK has just 275.

Mike Maddock, managing director and co-owner of Yorkshire-based Performance Engineered Solutions, says that when it comes to R&D: “We are good at the ‘R’ and the ‘&’ but not the ‘D’. We are lousy at developments and adoption. Everything appears to go offshore. Since 1918, the UK has never been able to put a strong adoption policy together.”

Falling down on scaling up

Stephen Phipson, CEO of Make UK, a body that represents British manufacturers, gives his view on the UK’s problem with scaling up. “The government has actually put a lot of effort into innovation,” he says. “It has included R&D and innovation in its budget again, and that is really good. This is a strength of the UK – we create a lot of clever, innovative start-ups.”

Phipson lists engineering and technology start-ups as a particular strength and cites fintech as a good sub-sector example. He explains that the problem arises when the time comes to grow that innovation into a scalable business. “The challenge is how we scale up,” he says. “If you look at the league tables of scale-ups, particularly unicorns, we don’t tend to produce very many of them in the UK. We are not at all good at doing that.”

Phipson suggests that a reason for this is a lack of competent management. “I talk to these companies – and I have talked to hundreds of them – and we talk to the Scale-Up Institute of Cambridge regularly,” he says. “The issue they bring up is management talent. We don’t naturally train our managers on how to scale up their businesses. We are not as advanced in management training as other countries are.”

As a result of this lack of training, smart inventors with a great product or offering are often found lacking in financial and business savvy.

Phipson is clear that this is a British issue. “In other countries there is a lot of support around this, and I just don’t see that kind of support in the UK so much. [Chancellor of the Exchequer] Rishi Sunak did seem to recognise this in his [2021] Budget to a degree, with things like skills training and retraining. He does seem to recognise that this is one of the reasons why we are not able to get these start-ups powering ahead.”

If the funding gap is filled, will the UK’s start-ups thrive?

Promisingly, Sunak’s Budget made frequent mentions of innovation and start-ups. The UK is launching a new ‘Future Fund Breakthrough’ that is designed to help fill the scale-up funding gap. This initiative means that there is currently £20m in grant funding available to applicants.

If you look at the league tables of scale-ups, particularly unicorns, we don’t tend to produce very many of them in the UK. Stephen Phipson, Make UK

Phipson states that funding has been a big obstacle to the UK capitalising on its talent for innovation. “We certainly don’t have much ‘patient capital’ in this country,” he says. “Long-term capital is very hard to find. Venture capital is only about 8% of the UK’s capital market. In most other countries it is about 26–27%.”

If the UK manages to address its scale-up problem in a meaningful way, there could be a lot to gain economically. According to government data, just 1% of growth in the value of scale-up firms could increase the value of the UK economy by more than £36bn.

Maddock highlights a flawed system when it comes to funding for scale. “Anything that is invested in – especially from the government, industry or academia – needs to understand where it sits within the TRL to ensure we leverage and maximise the IP and commercial opportunity,” he says.

The TRL is the technology readiness level, a metric designed to evaluate what stage of development any piece of innovation is at.

Maddock continues: “TRL level one is ‘it is in your head, barely a concept’ and then level nine is ‘fully viable and in production’ – everything else sits in between. TRL level four is where you have got a proven prototype and you have gone through all the risks and you have invested. At this point, you may get some investment or a grant that will take you through to the next stage, which is essentially the scale-up stage.”

Maddock highlights that it is usually between levels five and six that businesses trying to scale up will hit a wall. This is where investment is likely to drop off. Phipson argues that risk-adverse Brits and a general bad attitude dampen bold investment.

“From day one, [venture capitalists] are talking about their exit in five years’ time,” he says. “They are asking ‘who are you going to sell the business to?’ and ‘how can we provide capital for you to get to that exit?’ – that is what the focus is in the UK.”

No risk please, we’re British

For a long time, the UK has been focused on its service industries. It could be this tendency of wanting to package a product and sell it that is stymying scale-ups. A general averseness to risk, particularly in finance, is also hurting the cause and makes Brits look somewhat wet when compared with more tenacious investors.

Phipson says: “That first exit that comes along is the one [investors and businesses] grab to get a return on their short-term [investment]. They get swallowed up by someone else. Very often that someone else is American, Chinese or German. It is always that somebody else, taking advantage of the risk that has been taken by somebody else, and they will pay a premium for that.”

This tendency to be risk averse, and the preference to provide a service rather than be served, suggests that ‘Britishness’ – combined with a national fear of coming across as crass or over-ambitious – also seems to be a problem.

Maddock says: “There is an adverse approach to generating equity through the government and the government being shareholders in companies. [The British] don’t like that… It is almost like profit is a dirty word.  There is no issue in the government making a direct return on its investment, so it can reinvest in other projects.

“If something is successful it is absolutely right that there should a return on that investment when a company starts to generate profit. But [the government] doesn’t invest and then it can’t protect those businesses, so they go offshore. The majority of our successful Tech businesses move offshore or are bought out because we haven’t got a key brand or brand position in the market.”

Despite British personality perhaps playing a role in this, Phipson highlights the lack of meaningful risk-taking investment. “Why can’t we keep innovative scale-ups in the UK?” he asks. “We can’t keep them in the UK because we don’t have lots of patient capital. It  is a very small percentage of our market. That is the problem.”

Confidence and success often don’t sit comfortably within the British psyche. “No one likes a show-off” is a frequently used phrase within the British isles. It is tempting to link this modesty, drilled into all from an early age, to the manner in which UK start-ups reach a certain level of success and then start to feel uncomfortable. However, as Phipson and Maddock describe, with the right environment and funding, the UK could very easily move to the next level when it comes to scaling up, and play host to the big hitters in business that its record of innovation most certainly warrants.

Home page image of Dolly the Sheep, the world’s first cloned mammal, by Jeff J Mitchell/Getty Images

Ruth Strachan

Ruth Strachan

Senior reporter

Ruth Strachan is a senior reporter at Investment Monitor, focusing on manufacturing, mining and commodities.