UK risks becoming an ‘incubator economy’ if we don’t take action to support our tech companies to scale up

If we do not reverse the trend of innovative British technology companies moving to other markets or selling to foreign companies, the UK will see a decline in global competitiveness, weaker economic growth and a brain drain of talented people abroad.

The UK has many of the essential ingredients for scaleup success, but we have consistently struggled to enable our brightest technology startups to transform into thriving domestic businesses. In recent months, UK fintech unicorns Revolut and Monzo have announced they may list in the US rather than the UK stock market.

Fostering innovative homegrown scaleups will be vital to meeting the Government’s ambitions for growth. AI and creative technology are two areas in which the UK has existing strengths and significant opportunities. But urgent and targeted action is needed to realise this potential and stop us from falling behind.

Barriers to successful scaling up in the UK include limited access to capital compared to other countries, challenges in recruiting in-demand tech talent and a business and investment culture that can be too risk averse.

The Committee concludes that the Government should not be complacent about the health of the UK's scaleup scene.

It welcomes the Government’s recent AI Opportunities Action Plan but stresses that achieving its ambition of making the UK "the best place to … scale an AI business" will require concerted effort and a significant mindset shift across the public sector.

A complicated ‘spaghetti’ of well-intentioned government schemes, including financial reforms, tax credits, investment incentives, and innovation focused initiatives, are introducing further barriers and bureaucracy. ‘Piecemeal’ initiatives fail to offer scaleups a coherent pathway of financial support as they grow. The Committee calls on the Government to do better by doing less. It should resist the urge to launch new schemes, and instead focus on consolidating and streamlining existing programmes for maximum impact.

The report sets out key recommendations for change including:

• Ensure join-up – The Government’s industrial strategy should provide a coherent, cross-sector vision for how technology scaleups will be supported to drive economic growth.
  
  
• Accelerate financial reforms – Unlocking domestic growth capital is key to boosting institutional investment in UK innovation. This needs to happen quickly to keep up with technological change.
  
  
• Champion entrepreneurial success – We must do more to celebrate successful wealth creators and foster a culture where founders are incentivised to stay in the UK to grow their businesses, or fail and try again.
  
  
• Streamline public support for innovation – The current regime is too complex and should be consolidated to provide innovative companies with a clear pathway along their growth journey.
  
  
• Commit to AI Delivery – The AI Opportunities Action Plan is welcome, but a plan on its own is not enough. Delivering the plan will require a laser sharp focus on removing obstacles to growth for homegrown AI companies and robust political commitment.
  
  
• Sustain investment in the creative industries -  The sector’s growth potential, driven by creative technology businesses in particular, won’t be realised without longer-term commitments and an increased commercial focus.

Commenting Baroness Stowell, Chair of the House of Lords Communications and Digital Committee, said:

“The UK has the potential to be a powerhouse of growth for AI and creative tech companies. However, we are at real risk of becoming an incubator economy instead, where UK start-ups develop innovative products and services before selling out or moving abroad, so other countries derive the economic benefit. Too often it’s a case of UK begins, other countries cash-in. That has to change.

“The UK has some great advantages when it comes to AI and creative tech; a strong university sector undertaking groundbreaking research and generating commercial spinouts, and a proud tradition of world-leading creative industries. These sectors have the potential to deliver the fast-paced economic growth the Government wants to achieve. But we have a real problem turning startups into scaleups. Every UK unicorn that gallops overseas to list, or sells out to foreign investors, is a blow to UK PLC and our aspirations for growth.

“The Government’s new AI Opportunities Action Plan is a good start, but a plan in itself is not enough. The key is its delivery. The Government will need to drive through change to address fundamental barriers such as limited infrastructure and comparatively low levels of adoption if it is to have an impact. It must also ensure creative tech is given the attention it deserves as an area with huge potential for economic growth.

“Action must be taken to unravel the complex spaghetti of support schemes available for scaleups. Various tax credits, British Business Bank funds and investment incentives combine to be so hard to navigate that companies have to employ consultants to advise them. We urgently need to simplify the help available and ensure it is set up to support our most innovative scaleups to grow, while also offering value for money to the taxpayer.

“The Government must be ambitious in its approach for our brightest AI and creative tech scaleups, ensuring that the UK's most innovative companies receive the recognition and support they need and deserve.”