Go West, just not too quickly ??

The unicorn dilemma

Outside of the US and China, the UK creates more unicorns than anywhere else in the world. Unfortunately, the key word here is 'creates'—as they're not staying put.

With over 100 unicorn businesses, a tech industry valued at more than ￡1 trillion, and Europe's largest venture capital ecosystem, the UK seems like the perfect environment for producing successful scale-ups. However, in 2023, scale-ups represented only 1% of UK small and medium-sized businesses, yet accounted for 22% of SME turnover, valued at a whopping ￡497 billion.

Over the last year, there has been an enormous amount of press coverage about why UK companies don't list in London, but honestly, this entirely misses the point. As the CEO of Revolut recently pointed out, why any tech company would voluntarily list in a market that values their business at a fraction of the US is a mystery, one that can be traced back to the cultural heart of the US, always having more of a growth mindset.

The other shared obsession for people in the tech industry, of which I often find myself guilty, is with the term 'unicorn'—another vanity metric that could hide all manner of ills under the bonnet, as demonstrated by Babylon Health's disappointing implosion last year.

Struggling to scale globally

In my eyes, there are two main reasons why UK companies rarely become global giants:

1. The first, and one that is most acute in the HealthTech sector, is the complete inability of the UK government to be a meaningful customer of any UK start-up. I will save this topic for another post, but suffice to say that for 20 years, I have long been a staunch advocate of the NHS as a tough but high-quality testbed for innovation. However, everything I have seen over the last 12 months, particularly under the new government, tells me that start-ups should run far away from it and any other UK government department. This isn't because of the usual hobbyhorse problems that get wheeled out, like procurement rules, sales lead times or even commercials; the most fundamental problem is communication and the inability of government customers to manage the expectations and precious opportunity costs of an early-stage business. If UK unicorns are rare, the UK unicorns that have been able to build a revenue base by tackling some of the most challenging issues in our public services are largely non-existent.
2. The second, and perhaps more systemic, is the lack of real scale-up funding after Series A. This lack of investment is tied scarily closely with a tax regime that has worked wonders in encouraging thousands of companies to be seeded, only then to be followed by a tax cliff edge that is the equivalent of a national herbicide for seed-stage founders. So why should we care? Shouldn't we just be happy and proud as a scouting ground or the early years of education for start-ups? Put simply, no, we shouldn't, and if we don't do something soon we will lose even more ground to more ambitious countries.

The cause of concern, and one that the UK governments of both colours have been desperate to address, is the speed with which any tech company of any real promise either moves their incredible (and high tax paying) talent to the US and the speed with which a US behemoth acquires them. Over the last two years, it's been agreed that the leading cause of our start-ups and university spinouts' failure to become large businesses is the lack of follow-on funding for companies once they hit Series B and beyond. Without this crucial later-stage investment, we risk losing our scale-ups and talent far too quickly to overseas markets.

A few years ago, we saw a bizarre situation where the UK government was actively courting the biggest US VC funds to proactively set up shop here and accelerate the issue, which led to a few funds sending a token name to set up an 'office' that we don't often hear a great deal from. More recently, one notable trend I've observed is the increasing number of US-based funds recognising the opportunity for value arbitrage by acquiring lower-cost businesses in the UK and scaling them in the US. This should be another reminder to the UK government that we are missing opportunities.

Mansion House reforms

If you work in a technology business or UK VC and haven't heard of the Mansion House reforms, you must get behind them. The reforms aim to encourage pension funds to allocate more capital to UK businesses and stem the precipitous decline in their support for home-grown companies. The scale of potential funding here would be game-changing, meaning that we no longer rely on the false economies created by VCTs. There is still some debate as to whether they do this directly or via VC and PE funds, but the key point is that they do it.?

You can learn more about Mansion House 2024 here ??

Who would have thought I'd feel so passionate about pension reform?

Looking ahead

While London continues to be the leading tech hub in Europe, and UK institutions exhibit the highest level of deep tech patent activity on the continent, other cities are quickly closing the gap. Dubai is positioning itself as a strong competitor to Silicon Valley, drawing talent and investment at a rate that is difficult to overlook. If I were a founder again, I would consider it a far easier environment to raise capital, but I'm not sure my family would agree...

So, what does the future hold for the UK?

We have the potential to establish ourselves as a leader in innovation and growth; the talent and ideas are here, but we need a shift in funding and fast. We can support UK start-ups by providing the capital they need to grow at home, not abroad, or we can embrace the 'New Palo Alto' (as coined by LocalGlobe ) and foster collaboration with our European neighbours who are within 4 hours of London, encouraging partnerships among businesses, investors, and VC firms.

Either way, we need the government to be bold and replicate the success we have seen in Australia and the UAE, where they have taken tangible steps to allocate more meaningful capital to local start-ups.

Until then, the reality is that any decent scale-up, including companies such as Automata , will likely continue to raise more value-adding capital from the US. Why? It's easier, there's more money, and, frankly, US investors are more willing to take risks on scaling tech businesses. Meanwhile, UK pension funds argue the toss over management fees.