Entrepreneurs

A Digital Masterstroke—Will Emergency Measures Lead To Long-Term Government Investment In U.K. Tech Startups?

Does an element of the U.K. government’s response to the Covid-19 crisis represent an accidental “masterstroke” in terms of a longer-term strategy to build a healthy and sustainable innovation economy?  

Stephen Kelly, chairman of Tech Nation thinks that might just be the case. Speaking at an online Lockdown Conference earlier this month, he argued that a scheme providing convertible loans to eligible tech companies could pave the way for the government to play a more active role in supporting startups. 

The scheme in question is the Future Fund. Under the terms of the program, startups can apply for government-funded loans of between £125,000 and £5 million, convertible into equity in the event of non-repayment. The Future Fund is intended as a temporary measure, but in the longer term, it may be that Britain’s government retains an equity stake in a significant number of early-stage businesses. 

We could be talking about hundreds rather than dozens of companies. Treasury (Finance Ministry) figures indicate that by July 26, 816 businesses had applied for funding under the scheme, with just over 500 approved and £512.9 million committed. 

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Broad Assistance

Now, you could argue that such funding – although welcome – amounts to little more than the Government providing a temporary sticking plaster to a corner of the UK economy that is in need of help. Similar assistance in the form of loans, grants, and payments to furloughed workers has been available to businesses in just about every sector.

But viewed from the perspective of Tech Nation – a body set up by government to provide support for early-stage technology businesses –  Stephen Kelly sees an opportunity.  

“Intended as an emergency shoring up, this measure could actually be a longer-term masterstroke, and to make the most of this, the Government should commit to businesses for the long term to support growth,” he said. 

In Kelly’s view, there is a case for government investment in key strategic industries – particularly as other nations are already actively doing so. He cites China as an example. 

“Without heavy state backing, many Chinese technology businesses would have failed years ago. Boston Consulting Group’s 2019 report on tech investment found that China is the biggest driver of deep technology investment growth globally, with funding increasing at an annual rate of more than 80% from 2015 to 2018. Much of this investment is state-backed,” he said.  

But should we be following the example of China in this regard? Well, perhaps there is a case for defensive investment. For instance, Chinese investors are increasingly looking outside the country’s borders for investment opportunities elsewhere – notably India.  Stepping back to see the bigger picture, cross border investment in technology is a fact of life. Indeed, much of the VC cash flooding into Britain’s innovation economy comes from the U.S. and Asia. That’s not necessarily a problem, but it can be.   

“One of the structural problems in the UK is that, once at a certain size, businesses look to exit, often ceding their IP to foreign competitors. This is in stark contrast to the successful US mindset of long-term growth and global market leadership. It’s vital that UK businesses are allowed to grow and mature in their own time,” Kelly said.  

So, how does all this relate to the Future Fund? Well, in Kelly’s view it provides a means for the government to partner companies that are developing some of tomorrow’s key technologies.  The Future Fund he said offers “a crucial way of protecting our ideas by investing in them ourselves, thereby de-risking other foreign investment they might be receiving.” 

That’s a lot to hang on the shoulders of what is essentially an emergency measure. And it has to be said that the Future Fund has its critics. For one thing, only companies that have raised a certain amount of equity already are eligible, excluding many at the seed stage. Also, the loans have to be matched by equity investment. Perhaps more crucially, there is little room for negotiation on the terms of the debt-to-equity conversion.  

But it is proving popular and perhaps it may mark a point when government not only protects startups from the ravages of the pandemic but also plays a partnering role, nurturing development. Kelly acknowledges this would be anathema to many on the conservative side of the political spectrum but argues the case for putting ideology to one side. “Rather than seeking to get the government out of the private sector as quickly as possible, we need to look at it the other way. It could be in our national interest that they remain a long term partner and shareholder.”

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Forbes – Entrepreneurs

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