How can the UK Government encourage more trade and inward investment into the UK’s small but hugely important number of high growth small businesses? For me, it’s about providing support but also removing barriers, letting the private sector develop without constraints.
In my view, one of the loudest messages coming from the 2018 High Growth Small Business Report is that the businesses and the entrepreneurs behind them, are saying to the Government, “step aside and, rest assured, we’ll make it happen.” A good example of this is TechCity (soon to become TechNation). The Government set up the framework to encourage Big Tech’s involvement, creating a melting pot of assistance to support innovative entrepreneurs. You only have to look at the change in the Shoreditch area. You can’t pass a coffee shop without overhearing a new business idea being pitched. Now, the challenge is how to spread this vibe to other areas of the UK.
No longer a nation of shopkeepers
We are fortunate in the UK to have not only a world-leading financial services industry but also a core sector in deep science. Artificial Intelligence, for example, is an area in which the UK excels. Think of the acquisitions that have been made in this field:
- Google’s acquisition of Deep Mind
- Microsoft’s acquisition of SwiftKey
- Amazon’s acquisition of Evi Technologies
- Apple’s acquisition of VocalIQ
- Twitter’s acquisition of Magic Pony
- Softbank’s recent investment into Improbable
Importantly, these Big Tech acquirers have left the original teams in place, creating clusters of talent that draw the best and brightest from across the world, keen to work for these exciting, innovative companies. You can add to these clusters of excellence our world-class universities, from which Nobel Prize-winning science is developed.
Open for business
This shows that the components for an entrepreneur-led economy here in the UK is already in place. Government should therefore continue to encourage the brightest and the best to come to our shores, as it is this talent that will create the next generation of ground-breaking business.
Immigration is a delicate issue, but our politicians should provide a clear message to talent around the world that the UK is open and is still a great place to come to live and work. Removing the protracted uncertainty that exists today because of Brexit should be a priority.
Incentives for investors
Tax policy, of course, has a big part to play in helping create the vibrant entrepreneurial ecosystem we see today: Entrepreneurs’ Relief, the Enterprise Investment Scheme (EIS), the Seed EIS and Venture Capital Trust tax reliefs are now well-established and clearly beneficial in terms of helping establish and develop these companies which in turn are driving productivity gains. But the worry for high growth small businesses is that funding gaps still remain, specifically within later-stage investing, or ‘Series B’ funding.
A paucity of available capital for the growth stage of ‘scale-up’ businesses, many of whom will be loss-making as they strive for global growth, hampers such companies. With only about 10 to 12 funds in Europe capable of writing cheques for £10-20 million, this vulnerable area needs imaginative support to maximize the opportunity – whether this comes from government or elsewhere.
Changes to legislation could make a huge impact
Government could take a greater leadership role through its pension funds and set legislation to encourage these institutions to invest in the asset class. Long term patient capital should be ideally suited for venture capital. In the US, Pension Funds account for 20% of capital in the venture capital community; in Europe, it’s 8% (Source: Atomico: The State of European Tech). But bear in mind there is over four times the amount invested into venture capital funds in the US than Europe (Source: Invest Europe and NVCA). A drive to promote access of pension funds to the funders of high growth small businesses would help drive productivity in the UK.
Global expansion awaits for the brave
The UK success stories expand into international markets – they simply have to in order to build really big companies. Therefore, a broader understanding of foreign investment, particularly within the Tech industry, has to be part of the bigger picture. Take Skyscanner’s sale to CTrip in 2016. This is not, as was generally perceived, a ‘selling off’ of our crown jewels. This kind of sale retains, rather than drains, talent and draws in further investment. More, not fewer, sales of the hundreds of millions to a billion scale will build the ecosystem, further firing the attitude and aspirations of the next generation of UK entrepreneurs to create the next £5-10 billion level companies. The Zooplas, Funding Circles, Just Eats and Markits show what’s possible for our founders-in-waiting, should they lift their horizons.
So, government policy, for the venture capital ecosystem at least, is about creating fertile space and keeping at bay barriers and red tape. Entrepreneurs are creating the high growth small businesses that ultimately contribute massively to the health of our economy and society. In terms of positive government policy, less is often more.
Alex Macpherson is chairman of Octopus Ventures.