The StartUp Investment Landscape in the North East of England

A Four-Part “Point-of-View” outlining the Problem(s), Challenge(s) and the Opportunity to Transform the Region to become a Leader of Innovation to ‘Drive the Path to Decarbonisation in the UK’ AND to ‘Deliver Generational Wealth for ALL’.

I write this in the context of a recent repatriate to the North East after a 40+ year career in London, Hong Kong and San Francisco, during which time I have held a series of ‘CxO’ roles in both the ‘for profit’ and ‘not-for-profit’ Sectors. As an impact-oriented, cross-functional Capacity Builder, my career-long focus has been to leverage all forms of capital to empower and inspire political, business and community leaders – along with their respective teams – to effect multi-dimensional growth through the provision of an holistic, multi-lens perspective to problem solving.

In the coming weeks I shall provide three follow-on posts:

Part Two - “Addressing the Structural Challenges facing Startups in the Region”;

Part Three - “The Opportunity to Transform the Region through a focus on Decarbonisation”; and

Part Four - “A Manifesto to Drive Innovation AND Economic Resilience in the North East”.

But first, we need to address the ‘Elephant in the Room'!

PLEASE READ THIS!

Part One – The Problem(s)

During my time away from the North East, I have witnessed some staggering changes – most specifically in Asia; and I have been responsible for some of these witnessed changes too.

In the short time I have been back in the UK I have met with many brilliant souls who are busting their gut to drive and fuel innovation in the Region (many of whom are tagged in comments below – “Thank You” for the work you do!). I have noticed some changes too – however, these changes are primarily on the surface. A deeper, sub-cutaneous look shows little difference to the underpinning economic structure of life in the North East of England since I left in 1981; in fact, one might say it has worsened. And the data doesn’t lie.

The links below provide adequate insights into the ongoing underlying issues of:

i. Income Inequality (and Wealth Disparity) - https://commonslibrary.parliament.uk/research-briefings/cbp-7484/ ;

ii. Poverty - https://researchbriefings.files.parliament.uk/documents/SN07096/SN07096.pdf [NOTE – it is morally shocking that 40% of the populace in Sunderland are living in poverty – two in every five persons!!]; and

iii. Productivity of the Region - https://www.ons.gov.uk/visualisations/dvc1370/

The facts laid bare!

But why and how, one might ask, does this impact the Startup world here in the North East?

The graphic shown above is from a recent Enterprise Investment Scheme Association (EISA) [#EISA] presentation outlining both “Job Creation” and “Turnover” generated by startups funded through Startup Enterprise Investment Scheme [#SEIS] / Enterprise Investment Scheme [#EIS] channels from 2014 – 2023. The data clearly shows an underperformance in the North East compared to other regions….and central to this underperformance is the ‘Elephant in the Room’, i.e. the decades-long, institutionalised lack of access to capital.

The North East of England has historically experienced economic challenges (and not only restricted to a lower access to capital compared to other regions), which has significant implications for startups trying to scale beyond Stage 1 in ‘Financing a Business’ (i.e. the initial development and survival stage). This stage is oftentimes referred to as “Bootstrapping” and / or “the Friends & Family Round”.? At the risk of sounding trite, folks in the North East are not shy of hard work [see the Productivity report above] nor are they short of friends and family; but those “bootstraps” are generally a lot shorter than those in other regions and our friends and family are rarely as wealthy as those found further south. Both truisms have a profound impact on the startup landscape and hence this disparity in access to capital affects both the number of startups that emerge and the rate at which they grow into successful businesses.

Here are some ways this institutionalised lack of access to capital manifests and further compounds the problem over time:

1. Limited Seed and Early-Stage Funding

Access to seed funding is crucial for startups to move beyond ideation and into product development, marketing and hiring. In regions like the North East, where there is a relative shortage of local angel investors, venture capitalists and business networks compared to London and the South-East, startups may struggle to raise the necessary capital to progress beyond Stage 1. This creates a capital gap in the early phases of the business lifecycle, stifling growth at the very point where investment is most critical.

2. Concentration of Investment Networks

The concentration of financial networks in London exacerbates regional disparities. Startups in the Region may face challenges accessing not just financial capital but also the social capital—mentors, connections, and industry expertise—often provided by investors. The geographic and cultural distance from these hubs can result in fewer opportunities for local startups to pitch their ideas or meet potential backers.

3. Risk Aversion and Limited Funding Options

In regions with lower wealth distribution, investors may be more risk-averse, preferring to invest in established businesses or sectors perceived as low-risk. This can push startups into taking on debt, which can stifle growth and create financial constraints during crucial early stages. A lack of diverse funding options means startups may be forced to rely on traditional bank loans or small government grants, which often don’t provide enough capital to drive significant expansion.

4. Impact on Startup Ecosystem

A less developed startup ecosystem in the North East means fewer incubators, accelerators and tech hubs that often provide startups with both funding and other forms of support like mentorship and office space. This can leave local founders isolated from the kind of community and resources that promote growth and innovation, thereby reducing the chances of successfully moving beyond Stage 1.

5. Lower Rates of Growth and Success

The combination of reduced access to both capital and networks can lead to lower survival rates for startups in the North East. Without adequate funding and resources, startups often face slower growth trajectories, struggle to hire talent, and may fail to keep pace with competitors in better-funded regions. This results in a lower rate of successful startups, which perpetuates the cycle of economic disparity – see the EISA graphic. Fewer success stories in turn reduce investor confidence in the region, making it harder for future startups to attract investment.

6. Regional Disparities in Innovation

With less access to capital, startups in the Region might be less able to invest in innovation and R&D, which are key drivers for scaling up and moving beyond Stage 1. The focus could shift to survival rather than strategic growth or the development of competitive new technologies. Over time, this can create a concentration of less innovative, lower-growth businesses in the region, further entrenching economic disparities.

7. Brain Drain and Talent Flight

Another consequence of limited capital is the potential for talent flight. Entrepreneurs and skilled workers may relocate to regions [even other countries!] where access to capital, business support and opportunities for growth are more readily available. This exacerbates the regional economic divide, as the Region loses its most innovative talent to areas where the startup ecosystem is more vibrant.

Potential Long-Term Effects:

• Regional Economic Stagnation: The lack of successful, scalable startups will continue to contribute to longer-term economic stagnation in the North East, reinforcing regional inequalities and reducing local job creation;
• Missed Opportunities for Social Mobility: Startups often offer opportunities for social mobility by creating jobs and wealth. Limited access to capital will continue to reduce such opportunities, further entrenching economic disparities in the region;
• Fewer High-Growth Sectors: Certain high-growth sectors, such as tech or green energy, which require significant upfront investment, will remain underdeveloped, leaving the region economically reliant on lower-growth industries.

By way of a ‘Teaser’, here are some ideas or Strategies for Improvement to ponder [there will be a deeper dive in subsequent posts in this series]:

1. Local Government Support: Increased government funding initiatives, tailored to address the specific needs of the North East, could help bridge the capital gap;
2. Further Devolution of Economic Power: Decentralizing economic power and creating regional investment funds could stimulate growth by enabling local control over funding decisions;
3. Development of Regional Hubs: Creating innovation hubs or tech parks in the North East could attract investment and talent, fostering an environment conducive to growth, e.g. the Region should be declared a Special Economic Zone [SEZ];
4. Attracting MORE [Earlier-Stage] Angel Investors and Venture Capital: Policy incentives that encourage Angel Investors and Venture Capital Firms to invest outside London, such as tax breaks or co-investment programs, will help level the playing field; and
5. Create a North East Development Bank (or Fund): Establish a regional development bank that offers accessible, no-/low-interest capital to startups. ?

Summary

Startups in the North East will need a combination of further regional policy reform, government support and private-sector engagement to overcome the challenges posed by the decades-long, institutionalised limited access to capital AND to establish a thriving entrepreneurial ecosystem. Without such, the Region will continue to be underserved and in return will continue to under-deliver.

Please share your thoughts / comments below.

#SocialJustice #Poverty #EconomicDemocracy #ImpactInvesting #RegenerativeGrowthForALL #LeaveNoOneBehind #Innovation #SocialInnovation

Impact Investing Institute British Business Bank North of England British Business Bank The North East Combined Authority NORTH EAST TIMES MAGAZINE LIMITED