Early-stage investors have built up deep expertise—Labour can harness it, says William Cullerne Bown
The Department for Science, Innovation and Technology has two dimensions: a vertical one, in which it tries to speed the flow of ideas from the research base into the productive economy; and a horizontal one, in which it mobilises research and technology to support other government departments.
In his first major speech early this month, Dsit’s secretary of state, Peter Kyle, focused on the horizontal—especially support for Labour’s five policy missions in economic growth, clean energy, health, education and crime. This suggests the vertical, economic dimension of policy is the more difficult one, and it’s not hard to see why.
The UK faces a world in which both China and the US are pursuing intensive, subsidy-laden, trade-barrier-protected industrial policies. Prime minister Keir Starmer (above, left) has promised an industrial policy, but what does that really mean?
Fundamentally, improved growth and productivity can come either from strengthening existing companies or creating new ones that are better. Focusing on new companies allows the government to sidestep the problem of picking winners. So let’s compare Silicon Valley with the UK’s Golden Triangle of London, Oxford and Cambridge, which by some measures is now the world’s second-biggest venture capital cluster.
Triangle versus Valley
In the United States, the venture capital-driven economy not only generates extraordinary, hi-tech, export-oriented growth, it spreads it around. For 30 years, companies backed by venture capital have always created at least 60 per cent of their jobs outside the tech hubs of California, New York and Massachusetts.
This broad growth is just what Starmer is looking for. You can see that very clearly, for example, in chancellor Rachel Reeves’s (above, right) Mais Lecture, given at the London School of Economics and Political Science before the election, in which she emphasised regional inequality and sketched out an industrial policy based on government strategy and business investment.
The US economy’s success rests on three pillars. First, in a globalised economy, one or two companies often come to dominate each market niche; Silicon Valley mobilises large amounts of capital to include its companies in the winners. Second, most job creation happens in mature companies, and the US holds on to its successful startups as they scale up. Third, when a new company somewhere else in the world starts to master a niche, the US often either buys it or invests enough to acquire a controlling stake.
The Golden Triangle has none of these features. It mobilises too little capital, too slowly, so that even cutting-edge technology companies are routinely outmuscled by US competitors. In the rare cases where this doesn’t happen, our companies run into a shortage of domestic capital to scale up and are either acquired by US companies or turn to US investors. Either way, they often end up migrating across the Atlantic.
More capital, more quickly
The result is that the Golden Triangle delivers jobs and growth in the early part of the company lifecycle but rarely moves on to spreading this around the country. So when we look at the economic impact of the Golden Triangle in the UK, we see the jobs created by young companies, which are concentrated in the triangle. We don’t see the jobs created by the same companies as they mature, because these are often scattered around the United States.
To solve this, the UK needs to mobilise more capital, more quickly, into promising companies. Despite currently spending around £30 billion a year on support for science and technology in universities and companies via UK Research and Innovation, government departments, the tax system and the British Business Bank, there is no determined effort at the policy level to this end. Despite now having a mature and expert domestic venture capital industry, the UK continues to pour public funds into mechanisms that lack expertise and whose economic impact is indirect and weak.
One potential source of capital is pension funds, but this is freighted with political risk, legislative complexity and institutional inertia. Despite years of effort from the previous Conservative government, all that its final chancellor Jeremy Hunt could get from pension funds was a promise to invest more in venture capital’s problematic twin, private equity—the people who brought you the debacle that is Thames Water. It seems unlikely that Reeves, for all her energy, will be able to make more than marginal progress during this parliament.
Better would be for the government to simply invest into venture capital funds themselves. The billions involved could come from the existing £30bn of research and innovation spending, or on top of it. Reeves’s promise to reform the fiscal rules that constrain government investment make such an increase possible.
William Cullerne Bown is the founder of Research Professional and a former adviser to Labour’s science team
