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UK needs stronger regional innovation clusters outside South East

Venture capital fund managers speak to Computer Weekly about the importance of innovation clusters to the UK tech ecosystem, and the need to develop further investment opportunities outside the South East

The future success of the UK’s technology sector depends on its ability to form stronger regional ecosystems, with investment still too heavily concentrated in London and the South East, say venture capitalist fund managers.

In June 2022, figures published by Dealroom showed that UK tech startups and scaleups secured over £12bn in venture capital (VC) funding in the first six months of the year, with a record-breaking £9bn raised in the first quarter alone.

However, of the total £12.4bn raised, £8.6bn went to London-based startups. By comparison, the next two largest tech investment hubs in the UK were Bristol and Oxford, which raised £220m and £248m, respectively.

According to Andrew Williamson, chair of the British Private Equity & Venture Capital Association (BVCA) Venture Capital Committee, and managing partner of Cambridge Innovation Capital (CIC), the UK tech industry “has grown up pretty quickly” since the late 1990s, from a point where VC investment for tech was almost non-existent to one where only US and Chinese companies are attracting more capital.  

Williamson said a significant amount of this investment is now tied up in the “Golden Triangle”, a colloquialism that originally referred to a group of elite, highly funded universities in Oxford, Cambridge and London, but is now more commonly used as shorthand to describe the UK tech sector’s centre of mass.

Williamson added that such clusters, although difficult to build, provide entrepreneurs and fledging founders with “very significant network effects” once they have reached a certain level of development.

“You need a critical mass of fundamental innovation that business are built on, talent and entrepreneurs to build those businesses, capital to grow those businesses and support infrastructure that they rely on, and those things grow organically and feed on each other – that’s something that, certainly in the Golden Triangle, has been built very successfully over the last 20 years,” he told Computer Weekly.

Williamson added that while there may be debate over how to tweak certain details, successive UK governments have created a supportive policy and fiscal environment for tech businesses.

Read more about UK tech innovation hubs

He also said that the ideas, intellectual property (IP) creations and patents coming out of other UK cities – including Manchester, Leeds, Sheffield, Newcastle, Edinburgh and Bristol – are “every bit as strong” as those coming out of the Golden Triangle.

“All the evidence shows us that London doesn’t have a monopoly on talent, it doesn’t have a monopoly on good ideas or good innovation,” he said.

“The question is, how does one build innovation clusters with sufficient scale to harness the potential of those regions? There is a bit of a chicken-and-egg situation, because if you’re an investment firm, you obviously want to set up your operations close to an area of significant economic activity; and equally, if you’re an entrepreneur, you want to go and locate your business close to sources of capital.

“We do need to break the chicken-and-egg, and I think that is a good example of where government intervention, government support can be very helpful.”

Pointing to the April 2022 launch of Northern Gritstone, an investment company focused on the commercialisation of university spin-outs in the north of England, Williamson said it had made “anchor investments” – alongside government, select pension funds and some corporates with a local presence – of around £250mn to put the stake in the ground for a new regional innovation cluster.

“I think what that will do is act as a catalyst to build an innovation cluster,” he said. “As more companies get funded there, other investors will join Gritstone in co-investment, and then more companies will come in and the thing will snowball.”

Improving diversity

Bo Ilsoe, managing partner of NGP Capital, agreed that a certain critical mass is needed “to get the flywheel of an ecosystem running”, but that innovation clusters are easier to build around capital cities because, historically, that is where most of the universities and capital have been concentrated.

In the case of London, because it was already a global financial centre, many tech businesses were, and are, attracted to it because it has a wide range of capital available, and “a depth of capital markets” that simply does not exist in other European cities, said Ilsoe.

However, he added that most of the companies his organisation invests in – which it tends to only do post-Series A – have already received funding through either angel investors or people with access to capital through their personal networks.

In November 2020, an analysis of UK VC investment by Extend Ventures showed that, between 2009 and 2019, three-quarters of all VC investment went to all-white founding teams. By contrast, 23% went to startups with multi-racial founders, and only 0.24% went to all-black founding teams.

Similarly, in May 2021, tech recruitment firm Spinks found that just 15% of tech startups had more than half of the top roles held by women, while 5% had female-only leadership.

Ilsoe said: “If you’re not out of privilege, how do you come across potential investors? You have to pound the pavement and press the flesh.” He pointed out that clusters can support founders from marginalised or less privileged backgrounds because there is a much higher density of people willing to support their fledgling tech businesses.

For Williamson, the key to achieving greater diversity across the board – including race, gender and social class – comes back to the UK’s education system.

“If everybody on the leadership team of the company went to a certain type of school, a certain type of university, come from a certain type of socio-economic background, then their perspective on what kind of products and services that companies should be delivering will be pretty narrow,” he said.

“You need that diversity of thought and experience – but there you’re getting into fundamental questions of the education system. I think it goes all the way back to giving high-potential students access to the very best education.”

Opening pension funds

While Ilsoe also believes that successive UK governments have been at the forefront of creating strong incentives to invest in tech businesses, especially compared with other European governments, he said the next step would be opening pension funds to further boost tech investments across the UK.

“If you look at fund managers who know what they’re doing, most of them make profits. So the risk of loss is, I think, very, very low,” he said. “These companies can crash and burn, that’s true, but many of them don’t, and many of them actually become very successful.”

This view was shared by Williamson, who said that defined contribution pensions, which have billions of dollars of assets under management, are prevented from investing in VC or private equity by a series of rules put in place by the Department for Work and Pensions.

“The effect of that is, compared to our peers in Europe, and massively compared to our peers in North America, there is much less pension fund capital being invested,” he said. “That’s a significant amount of particularly growth capital that could be available to British businesses to help them scale.”

However, Williamson added that it was up to the tech industry to conduct a “hearts-and-minds campaign” to convince people that using pension funds is a good idea, which it should do by showcasing the best examples of growing businesses and the returns that can be achieved.

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