Can a new government fund to boost investment in innovative start-ups actually help Britain’s beleaguered economy, asks Simon Wilson?
What’s the new fund all about?
The UK Innovation Investment Fund (UKIIF) will be “bigger than other European venture capital funds”, claims the science and innovation minister, Lord Drayson. The aim is to make it easier for start-ups in key sectors, such as life sciences, low-carbon technologies and digital and advanced manufacturing, to get access to equity funding. The new fund will help British scientists and entrepreneurs convert their ideas into flourishing businesses. Once a management team is in place (the government is currently considering tenders) UKIIF will operate as a ‘fund of funds’, channelling money into other venture capital funds and thus, it hopes, fostering “a climate of innovation and enterprise in the UK and Europe”.
Why launch the fund now?
Lord Drayson – himself a successful biotech entrepreneur turned politician – says he wants to clear the “capital blockage” that makes it hard for high-tech entrepreneurs to get their hands on capital. After a global credit crisis and recession, that problem is more acute than ever – especially for small and medium-sized enterprises looking for financing of up to around £2m. The British biotechnology sector, for example, has had a terrible year. Many firms have struggled, while once-bright prospects such as Alizyme and York Pharma have gone into administration. Meanwhile, as the UK languishes at the bottom of the G20 after a record six successive quarters of recession, the CBI’s Richard Lambert has called for a “rebalancing” of the British economy away from financial services, consumption and credit and towards investment, innovation and exports. In short, Britain needs to revive manufacturing.
Don’t we already do manufacturing?
Not like we used to. These days, the sector only accounts for 15% of Britain’s GDP (adding £150bn to the economy each year). However, it makes a hefty contribution to overseas trade, accounting for half of all UK exports. Moreover, as the sector has slimmed down in successive recessions over the past several decades, its output has become increasingly high-tech. Productivity has shot up 50% since 1997, outdoing the rest of the economy. Jobs in the sector are increasingly high-skilled and well-paid and are spread throughout the country, rather than clustered in one corner of it. So, having been in hock to the banks for a decade, the government is waking up to the fact that manufacturing is crucially important to the economy and plays a key part in regional regeneration. Yet Britain just doesn’t invest in manufacturing as other countries, such as the US and Germany, do.
Is this a new problem?
No. The UK has quite a track record in failing to back its world-leading scientists and innovators with capital investment. And there have been no shortage of government initiatives to tackle the problem. For example, Britain’s best-known private-equity giant, 3i, has its roots in a corporation set up by the Bank of England in 1945 to provide finance to smaller firms. At that time, the government’s aim was to plug the so-called “Macmillan gap” (named after an eponymous report in 1931) in the provision of capital to new businesses. That gap still exists. However, last week’s report from the National Endowment for Science, Technology and the Arts (Nesta) confirms that we are still great innovators.
We’re good at inventing?
Very. Indeed, innovation is vital to British business – Nesta reckons it is responsible for two-thirds of private-sector productivity growth between 2000 and 2007. But what is “innovation?”. If you simply take spending on research and development as a proxy, then Britain doesn’t score that well. But Nesta includes several other factors in its nascent Innovation Index, including spending on software, design, the development, organisational skills and brand equity. Nesta reckons that brings a total investment in innovation of £133bn in 2007, or 14% of private sector Gross Value Added. On this measure, Britain comes second only to Finland in a group of eight rich countries. And in a separate EU study, Britain was ranked fifth out of the 27 member states as an “innovation leader”.
So what’s the problem?
We only rank seventh out of nine economies when it comes to ease of access to funds. In short, we generate plenty of good ideas, but often don’t back them. Sure, Britain appears to have a thriving venture capital sector (the concept has even spawned the television series Dragons’ Den), but it is tiny compared to, say, the United States or Germany. So, outside capital-light sectors, such as financial services, many of our best ideas (eg, the computer and the iPod) end up in overseas hands.
Will the new fund solve the problem?
It’s unlikely. The government has put in just £150m, but it hopes to attract private-sector income and build the fund to £1bn over ten years. That could be a big ask. The new UKIIF looks similar to the English regional venture funds launched in 2002. So far, those have accessed only £74m of public money, says Richard Tyler in The Daily Telegraph. And there’s already a £75m Capital for Enterprise Fund that lets small and medium enterprises exchange debt for equity stakes, and the enterprise finance guarantee scheme providing loans of up to £1m. So this fund looks more like a headline grabber than a cure-all.
• Correction: The original version of this article contained two serious errors. We stated that Renovo is in administration. This is a mistake. Renovo is a well-funded, publicly listed company, with £71.1m in cash and cash equivalents as at 30 June 2009. We also stated that Intercytex is in administration. This is also incorrect. We apologise for any misunderstandings caused and are happy to clear up the errors.