When UK prime minister Rishi Sunak took up his post in October, his government’s aspiration for the tech ecosystem was clear: developing the UK into the world’s next Silicon Valley.
This week, the government seemed to double down on that promise by setting up a new ministry for science, innovation and technology.
At the same time, UK startups and their investors have expressed concern over recent policies that appear to run counter to these aims, among them the move to pull funding from government-backed industry body Tech Nation, the lack of visas for attracting startup talent and the removal of tax relief for research and development.
As post-Brexit Britain falls behind the rest of Europe in recovering from a series of economic crises, the government is under increasing pressure to safeguard the development of the country’s most innovative sectors. Not everyone thinks it is doing enough.
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Still, the UK would have a long way to fall. The country accounts for the largest chunk of European VC investment activity, attracting €31 billion (around $33.4 billion) in 2022, according to PitchBook data—over double the €14.2 billion invested in its nearest rival, Germany.
Efforts to build up the UK as a startup nation have been around for years, including during Sunak’s time as finance minister. Investors and startups alike praised initiatives including the 2020 launch of a £250 million (about $301.4 million) Future Fund to support startups through the pandemic, recent changes to the Seed Enterprise Investment Scheme and efforts to bolster the fintech startups through recommendations by the Kalifa Review.
On the other hand, the January decision to cut funding to Tech Nation—an accelerator set up by former Prime Minister David Cameron in 2010 to provide funding and visas for tech companies—has attracted criticism. Instead, the £12 million Digital Growth Grant that funded Tech Nation has been redirected to Barclays’ Eagle Labs incubator.
“It’s really discouraging to see a private bank awarded the funding instead of a third-party independent tech expert body like Tech Nation,” said Jessica Mendoza, CEO and founder of software startup Monadd. “With some of the decisions that the government has made recently, I feel less supported than I have before.”
The government said in a statement that the move represents the best value for taxpayers. But investors and startup founders, including Mendoza, are concerned about Barclays’ ability to remain objective when faced with fintech startups in direct competition with the bank and about the obscurity of the selection process for the bid. Did the government take into account the views of the startups the grant serves?
A potentially bigger question and a source of anxiety for many founders is what may happen to the visas Tech Nation gave out, despite government assurances that they remain valid.
Rayan Dawud, a tech investor and recipient of the Tech Nation visa, is one of those left with uncertainty.
“The signals that [the UK] is sending sometimes feels like they’re not taking these issues seriously,” he said. “There’s so much uncertainty, and if you can’t attract and retain talent, then the ecosystem is really at a disadvantage.”
Access to talent is often cited as a No. 1 priority for startups and investors alike. Since Brexit, immigration is more difficult, even with specific visas such as Tech Nation’s or the Scale-up Worker visa. The costs of bringing in tech talent, particularly from Europe, are significantly higher now.
The decision has compounded founder concerns arising from cuts announced in November to the R&D tax credit plan.
To reward innovation, companies can offset a portion of their R&D expenditure with tax relief in an effort. But in a bid to clamp down on R&D-related tax fraud, Chancellor Jeremy Hunt announced that R&D tax relief for small businesses will decrease from 130% to 86% in April, while their credit rate will fall from 14.5% to 10%.
“There’s no two ways about it, the R&D tax credit cuts have been massively impactful for our sector,” said BeZero co-founder Sebastien Cross. “If nothing changes, there will be significant costs. For us as a business, we have invested heavily in R&D and for the government to not acknowledge the benefits of that and the tax cut that R&D should be rewarded with, it’s hard to see the logic behind it.
“With the current environment, having a hole in your balance sheet where a tax reduction should have been is particularly challenging for growth-stage businesses.”
Tech lobbying group Coadec estimates that UK startups could lose £100,000 under R&D tax changes. Furthermore, a survey of 267 startups by Coadec found that 84% of respondents were concerned that they would have to look at offshoring more of their development. This reduction will particularly affect the deep-tech and climate-tech startups working on new technologies.
For a government presenting itself as startup-friendly, the move appears counterintuitive, especially when compared to actions by other countries.
Earlier this month, Germany launched a new fund to invest up to €1 billion in deep-tech and climate-tech, while French sovereign wealth fund Bpifrance has committed an additional €500 million to support deep-tech startups. Across the pond, the US’ Inflation Reduction Act has been a game-changer for climate-tech startups, providing tax incentives, loans and grants to promote energy transition technologies.
Given the current economic crisis in which the UK finds itself after having just narrowly avoided a recession at the end of 2022, the government can be forgiven for not pulling £1 billion in public funds to spend on startups. The UK already has a stronger base of private funding than many other European countries.
Having a dedicated tech and innovation department sends a signal that startups are a priority for the UK, but it’s unlikely to solve a lot of the problems founders are facing, at least in the short term. What it might do is create a department that makes startups a priority and has power within the system to increase support. For the sake of the prime minister’s Silicon Valley aspirations, let’s hope it delivers.
Featured image by Mara Potter/PitchBook News
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