Britain’s Innovation Economy Could Quadruple In Value But It’s Not A Given

Britain’s innovation ecosystem could quadruple in value between now and 2032 but only if the “right conditions” are in place.

So says the latest and final report from Tech Nation. Established in 2011 with a brief to nurture and develop the -at that point nascent – U.K. startup sector, the organization is currently in the process of winding down following the withdrawal of public funding. As staff begin pulling down the shutters, the report – How to Build a Scaleup – offers a forward-looking take on the potential for further growth in a sector that is seen by policymakers as vital to the wider economy.

And given the economic doldrums we find ourselves living through, the report has chosen to look on the bright side, projecting that a sector worth around $1 trillion today could be valued at $4 trillion in a decade’s time. However, this is not a given.

In fact, as the report acknowledges, if you simply extrapolate the growth of the sector over the past ten years – allowing for peaks and troughs – what you come up with is a sector valued at $2.6 trillion by 2032. So rather than simply maintaining momentum, hitting a $4 trillion figure will require a considerable degree of acceleration. To achieve that a number of factors will have to fall into alignment.

So what exactly does that mean? I spoke to Gerard Grech, CEO of Tech Nation to find out.

As he is keen to point out, the U.K. currently hosts the world’s third most valuable startup and scaleup sector after the U.S. and China, although India is not far behind and European competitors are also in the process of catching up. Success to date, he says, can be attributed to a number of factors, including entrepreneur-friendly government policies, an effective support infrastructure and efforts to de-risk investment in early-stage companies.

Now, you could argue that while Britain did realize quite early on in the game that encouraging tech entrepreneurship was at least one of the keys to future wealth, being quick out of the starting gate doesn’t necessarily guarantee sustained or accelerated growth over the next ten years. So can the U.K.’s startup community continue to thrive and attract investment?

Evolution

Grech points to the importance of a government commitment to nurturing cutting-edge technologies. “The ecosystem is evolving,” says Grech. “The government is putting money into A.I. and quantum computing. The role of policymakers is to pump prime markets.”

But as Tech Nation sees it, direct support from the government can only take the U.K. ecosystem so far. Other things need to be put in place if growth in the tech sector is to accelerate.

Additional Capital

“It will require an injection of additional capital,” he says. “This could be done through the creation of a sovereign wealth fund or by encouraging pension funds to allocate more capital to higher risk investments.”

Grech says there have been discussions within government about the possibility of creating a sovereign wealth fund of some sort. He cites Singapore and Norway as examples of states that have successfully gone down this road. Equally, he believes there is movement on the part of pension funds to invest more. However, as he points out, the bulk of investment from this quarter currently comes from overseas funds.

Regardless of the source of capital, Tech Nation says patient capital must be made available at all stages of company growth.

Talent is another issue. If the U.K. innovation economy is to grow rapidly it will need to attract talent at a time when hubs in other countries are also competing for much the same people. The days of frictionless recruitment from the European Union are over. That could be seen as a huge disadvantage, but Grech points to a potential opportunity. “The ecosystem has to be open to talent that is really diverse,” he says. “We can attract people from Africa, India and America. Over time, that could be a competitive advantage.”

That does depend on Britain being an attractive place to live and work. You could argue that elsewhere in Europe, tech hubs can draw on talent from across the member states while also looking beyond E.U. borders to bring people in on visas. It is a competitive world.

Grech says the UK remains attractive, not least because of the tech support infrastructure that has been built up.

Equally important, though, the report says new pathways should be created to bring diverse home-grown talent into the innovation sector.

Value Realization

Finally, the third pillar for accelerated growth is – according to the report – a renewed focus on “value realization.” Grech says startups should be thinking about exit plans from day one. This should involve ensuring the business is exit-ready.

An exit could be by means of an acquisition. But will the U.K. also be an attractive place to list? As we’ve seen recently, London may not be the first choice for tech companies seeking an IPO. There was, for example, much wailing and gnashing of teeth when owners Softbank opted to list U.K. tech poster child, ARM in the U.S. rather than Britain.

A government-sponsored review by Lord Hill has made a series of recommendations aimed at making London a better place for technology entrepreneurs to list their businesses. Grech says new skills are needed if investors are to embrace early stage companies. “Banks need to invest in knowing how to analyze tech companies,” he says.

These are uncertain times. After a record 2021, investment in the technology sector slowed in 2022. And in terms of investment in key sectors, the U.K. now faces some real challenges. For instance, it is unlikely to be able to match the strategic investments made by both the Biden administration and the E.U. in green transport technology.

Grech does expect the government to do more in supporting crucial sectors. Earlier this month, Finance Minister Jeremy Hunt announced a £3.5 billion investment in tech, with quantum and A.I. being particular beneficiaries. “I’m encouraged by those announcements. I would be disappointed if there aren’t more,” says Grech.