A flurry of headlines erupted after Prime Minister Rishi Sunak announced a new Unicorn Kingdom initiative to create more billion-dollar startups in the UK. Some people didn’t like the name; others questioned the decision, announced in the Autumn Budget, to slash R&D tax credits, expected to subtract about £2 billion from SME investment over the next five years.
The decision on R&D is questionable, and may yet be reversed. In other ways the government has made significant strides, for example by bringing in the Global Talent and Startup visas, which streamlined the process for companies to hire the best talent from around the world. Despite widespread concern that this would be disrupted by the closure of Tech Nation, it now appears these visas will continue under the Founders Forum umbrella for the foreseeable future. The announcement of a review into university spinouts is another bright spot. Many agree that lack of consistency in the terms offered by different universities creates unnecessary legwork for investors (see previous blog posts on this topic from us here and here) and could be improved by a consistent approach across the sector.
Each of these initiatives is aimed at solving an important problem, and together they may have a significant positive impact on the UK’s ability to generate more billion-dollar companies. However, tweaks to tax rates and immigration rules may not be enough at a time when some major investors are questioning the UK’s desirability as a startup destination.
At Capital Enterprise, our core expertise is accelerating tech startup ecosystems by connecting startups with funding and support. We have done this very successfully through CAP AI, through which scores of London startups have gained access to cutting-edge training in machine learning and artificial intelligence, as well as through TEAM SY, which played a significant role in seeing funding for South Yorkshire’s startup scene double from 2018-2022, among many other programmes. Despite the recent drop in funding (which happens to mirror exactly what is taking place in the US) there is enormous potential for startups here – but we need to get both the fine details and the bigger economic picture right.
The Telegraph recalled a BBC headline from 2008, predicting that Britons would soon be wealthier than Americans. This did not come true. As the newspaper goes on to note, real wages in the US increased by 20% from 2008 to 2021 while in the UK they have gone up only 7% – and that was before inflation really took off last year. Food price inflation in the year to March 2023 was 19.1% in the UK, the highest in almost half a century.
I would argue that broader economic factors like low wage growth, out-of-control housing costs, and ongoing inflation combine to weigh on the UK’s desirability as a destination for entrepreneurs. As a sector, startups have a role to play not just by creating growth through hiring and investment, but by advocating for policies that will help the entire country to prosper. Thanks to the government’s acknowledgement of the tech sector’s importance, startup leaders are uniquely positioned to make this case – and their perspective is sorely lacking in the current debate.
A major and underrated factor when comparing the performance of American tech giants to the home-grown competition is the disparity in wages and economic growth. No matter whether it’s advertising giants like Alphabet and Meta, B2C companies like Apple and Netflix, or B2B startups selling services to other businesses, many of these world-eaters from the US feed on the resilience of consumer spending at home.
It is often asked why the UK hasn’t yet produced a company on the scale of Google or Facebook. There is no one explanation, but it’s certainly a factor that startups will find it difficult to thrive when so many people from their home market see their spending power static or shrinking.
The good news is that a focus on growth seems to be taking hold across much of the political mainstream. It’s much less clear whether there is any agreement on how that might be achieved. In some areas, such as immigration, old taboos may be weakening (it was recently reported that immigration is now higher than it was before Brexit); in others, including land use and reform to the planning system, they are as strong as ever.
In a report last year, our friends at the Centre for Cities argue that Britain has a backlog of 4.3 million missing homes, calling for a massive increase in housebuilding to start making up for this shortfall. This type of policy might lack the glamour of courting tech unicorns, but in many other ways it would be exactly the shot in the arm that’s needed. Housing affordability would improve for millions of people who are currently rent-stressed. With less of their monthly pay going to a landlord or mortgage, ordinary consumers would have more disposable income to spend on other things.
The thinking behind this is known as the ‘housing theory of everything,’ coined by journalist and blogger Sam Bowman. As Bowman argues in this essay, the effects of a housing shortage go much further than making everyone feel poorer – they also include hurting a country’s productivity, holding back innovation, and deepening regional wage inequality.
It would be a mistake to treat tech policy as completely distinct from the broader economic picture. After all, startups can only be as successful as the customers they serve. And surely many startup CEOs and tech workers would be grateful for a house building boom – they have to pay rent, too.