The IMF advises the UK to fall into recession, inflation is still high, and there is a palpable sense of gloom over the UK’s economic outlook. Despite this, one bright spot stands out: the UK’s growth as a hub for start-ups and entrepreneurship. The amount invested in UK start-ups has grown exponentially over the past decade, rising from £1.6bn in 2011 to almost £28bn in 2021. London is the top destination for capital -risk in Europe, its start-ups raising funds twice. managed by their peers in second place in Paris, and ranking behind only Silicon Valley and New York in the world. There is only one problem with this success story: the best British start-ups are poached.
The turmoil in the wider economy means that the once fertile UK venture capital market is drying up. Last year was the first on record where the amount of money invested in start-ups decreased. In turn, companies seek money overseas and find that this often comes with strings attached in the form of relocation requirements.
The US venture capital market presents a special raffle. Silicon Valley is the undisputed start-up capital of the world, New York is a bigger financial center than London, the US consumer market is bigger and richer, and US investors are happier giving away more money. to start-ups for more risky ventures. We have always been in danger of losing our best start-ups to American investors who want to be close to the companies they help build. Europe is also getting involved. European funding bodies continue to give money to British companies for science projects like drug development and space exploration; they are simply asking that they move their operations to an EU country to continue their activities.
We now risk seeing a generation of founders tempted abroad. In response, you might think the government would do whatever it can to get us back on track. He does everything except. Of particular concern to some of our country’s most innovative entrepreneurs are the planned reductions in the generosity of R&D tax credits. These encourage investment in the development of new goods and services and have played a vital role in promoting cutting-edge innovation. Scheduled to take effect in April, research from Coadec suggests the reform will cost the start-up an average of £100,000. Combine that with rising corporate taxes, general government hostility toward tech companies, and poor prospects for domestic investment, and it’s no surprise that companies are leaving.
Start-up founders are not like all of us. They are dedicated to the businesses they are trying to build and more than happy to jump from country to country to make it work. While only 14% of the UK population was born overseas, 49% of Britain’s fastest growing companies have at least one overseas-born founder. Anecdotally, many of them are here because the UK is the best place to grow their business. When this ceases to be the case, they will move – taking with them the promise of jobs and new foreign investment.
We have already seen this process unfold with Estonia. A small nation on the edge of the Baltic, it has the highest number of billion-dollar start-ups founded per capita. But while Estonia has clearly enviable levels of entrepreneurship, its population is too small and too far from other technological centers to provide the ecosystem necessary for the sustainability of its start-ups. As a result, many of them are scaling up. Of the ten Estonian start-ups valued at more than a billion dollars, only two of them, Bolt and Veriff, are still based in the country. Skype is now based in Luxembourg, Gelato has moved to Norway and Playtech to the Isle of Man. Zego and Wise (formerly Transferwise) are now based in London and ID.me, Pipedrive and Glia are in the US.
We should be proud of our start-up ecosystem, but we should also remember that the competition for our businesses is global. Capital goes to the best companies, and their founders go to the best opportunities. Britain risks losing its advantage – and, like Estonia, its start-ups.
Aria Babu is Policy Manager at The Entrepreneurs Network