Summary
The UK has many of the essential ingredients for scaleup success, including our strong reputation for innovation and our vibrant startup scene. Yet we have consistently struggled in enabling our brightest technology startups to transform into significant domestic businesses and potential British world-class companies. Enabling homegrown startups to develop into global competitors will be vital to meeting the Government’s ambitions for growth.
The consequences of failure are significant. The UK risks being an ‘incubator economy’ for other nations, as innovative British technology firms pursue greater growth potential in other markets or seek acquisition by foreign companies. A continuation of this trend could lead to decreased global competitiveness, weaker economic prospects and a ‘brain drain’ of talented individuals, at a time when technology is rapidly advancing. Our inquiry examined the barriers to domestic growth faced by technology scaleups, focusing in particular on those innovating in AI and creative technology—areas where the UK has existing strengths and significant potential. Many of our recommendations are relevant to all scaleups, whatever sector they are part of, though their urgency and importance are magnified in these two high-potential areas for the UK.
Successive governments have attempted to address scaleup challenges through a series of financial reforms, tax credits, investment incentives, and innovation-focused initiatives. While these interventions have generally been welcomed, the result is an overly complex spaghetti of schemes that may be hindering rather than helping innovation in some areas. Programmes delivered through UK Research and Innovation, the British Business Bank and government departments are piecemeal, and fail to offer a coherent pathway of financial support. Evidence on whether they represent value for money for the taxpayer is unclear. This cannot continue.
AI is not a sector but a technology—one that is likely to drive innovation across each of the high-growth sectors identified in the industrial strategy Green Paper. The Government’s response to the recently published AI Opportunities Action Plan highlighted AI’s transformative potential. Its ambitious proposals are to be welcomed.
Announcing the plan, the Prime Minister recognised the part that new, innovative companies will play in achieving the plan’s objectives. Our evidence suggested, however, that making the UK “the best place to … scale an AI business” is no easy task.
The scale of change required cannot be underestimated. The Government must remove barriers by ensuring that innovative AI businesses have access to the necessary infrastructure and resources. But delivery of the plan will also demand a mindset shift across the public sector, accompanied by bold policy reforms and robust political commitment in the face of competing priorities. The UK’s approach to AI regulation must remain proportionate and focused on real-world applications across sectors. It is homegrown AI companies, not big tech incumbents, that will drive the innovation needed to realise the UK’s AI potential. Open markets and open competition are essential to ensure they have a fighting chance.
Novel applications of technology in the creative industries have underpinned innovation in film production, video games and immersive experiences, as well as providing spillover benefits in other sectors. This is an area of considerable economic potential for the UK. But opportunities for ambitious creative technology scaleups have not been fostered due to investors’ unfamiliarity with the sector, scaleups not always understanding investors’ motivations, and a confusing public and private funding landscape. These must be addressed if the Government is serious about its commitment to driving growth in the wider sector.
Action is needed to keep the UK competitive in the high growth potential areas of AI and creative technology. We recommend the following:
- Streamline public support for innovation: The landscape of Government-funded programmes and grants to support innovation is a hard-to-navigate suite of schemes that needs urgent evaluation. The temptation to introduce further programmes must be resisted. Initiatives should be streamlined to provide innovative companies a clear, comprehensible pathway of support along their growth journey. The tax credits available to companies investing in research and development (R&D) play a vital role in the innovation economy. Stability in the amount of relief available and a simplified application process are needed to ensure maximum benefit for innovative scaleups.
- Accelerate financial reforms: Efforts to unlock domestic growth capital and boost institutional investment in UK innovation are welcome, but must be accelerated to keep up with the rate of technological development.
- Champion entrepreneurial success: Our culture struggles to celebrate successful wealth creators. Coupled with an attitude of risk aversion and short-term vision, this is limiting the growth trajectory of UK companies. More should be done to celebrate the achievements of successful British entrepreneurs to renew national pride and ambition in innovation.
- Ensure join-up: The industrial strategy must provide a coherent, cross-sector vision for how technology scaleups will be supported to drive economic growth.
- Commit to AI delivery: The AI Opportunities Action Plan is only the first step to capitalising on the UK’s AI growth potential. A plan in itself is not enough. The Government must be laser-focused on removing obstacles to growth for homegrown AI companies. This will require not only immediate action, but a fundamental shift in attitude to drive widespread adoption of the technology across the public and private sectors. There is an urgent need for the Government’s long-term compute strategy, which should be published as soon as possible, and certainly by the proposed “spring 2025” deadline. It should set out how the Government will deliver the broad range of computing resources required by AI scaleups, including high-end computing facilities.
- Sustain investment in the creative industries: Funding for innovation in the creative industries has been disjointed and temporary. The sector’s growth potential, driven by creative technology businesses in particular, is unlikely to be realised without longer-term commitments and increased commercial focus. Ambitious technology scaleups in the creative industries should be afforded the same opportunities as those operating in any other key growth sector. The Government should review its R&D tax credits definition to include more of the creative sector. The issue of data mining and copyright also needs urgent resolution.