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AI and creative technology scaleups: less talk, more action Contents

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Chapter 2: The technology scaleup problem

From startup to scaleup

15.It is widely acknowledged that the UK provides a world-leading environment for startup companies. London has been described as “New Palo Alto, the alternative place to start a company compared to Silicon Valley”.33 Indeed, the city currently ranks second, tied with New York City, in Startup Genome’s Startup Ecosystem Ranking.34 The UK as a whole ranks fifth in the World Intellectual Property Organisation’s Global Innovation Index.35 According to the Council for Science and Technology (CST), it has “emerged as one of the top three places in the world to invest in innovation” and its venture capital ecosystem is stronger than that of European comparators.36

16.Witnesses consistently acknowledged the UK’s thriving startup scene, and its well-established early-stage funding system.37 The Government identified strengths in the UK’s scaleup landscape too, stating that since 2000 it has “enabled the creation of 154 unicorns, which is more than France, Germany, and Sweden combined.”38 Erin Platts, Chief Executive Officer, HSBC Innovation Banking, told us that the UK has “all the ingredients of success to help companies to scale”.39 Along with others, she highlighted strengths including our leading universities, depth of commercial and technical talent, stable legal and regulatory systems, and time zone.40

17.Matt Clifford’s review of the UK’s AI opportunities presented the UK’s “vibrant … scaleup scene” as another existing strength.41 However, shortcomings in enabling startup firms to scale in the UK were raised consistently in our evidence42 and are well documented elsewhere.43

18.Barney Hussey-Yeo, founder and CEO of Cleo AI, argued that “the challenge that we have as a country is that we cannot scale these companies, list these companies or capture their tech value”. He described the UK as “a terrible place to scale and list a business”.44 Nick Poole, CEO of video games industry body Ukie, reported that the UK is seen as “one of the worst places in the G7” for scaling games businesses.45

19.As the CBI emphasised, however, “unless we nurture [scaleups] and create the environment for them to expand, we cannot hope to approach the level of growth and prosperity we need.”46 The British Venture Capital and Private Equity Association (BVCA) listed further impacts that result from UK businesses instead pursuing growth in other countries:

“The UK science, technology and financial innovation sectors lose out on opportunities when companies move overseas, taking intellectual property, quality jobs, and innovation with them.”47

20.Oxford Science Enterprises argued that, without urgent action,

“the future cascade of value from the unicorns we are building—and the creation of the next generation of entrepreneurs from those companies—will continue to benefit other countries, primarily the US.”48

21.While the UK’s vibrant startup environment is lauded, the country has a technology scaleup problem. We risk becoming an ‘incubator economy’ for other nations, which has serious implications for our economic growth and global competitiveness.

22.The Government should not be complacent about the health of the UK’s scaleup scene. Creating the conditions that will enable our brightest homegrown businesses to grow in the UK, rather than scaling overseas, should form a key objective in the Government’s ambitions for growth.

Common barriers to scaling

Access to capital

23.A recent letter to the Chancellor from the CST noted that “the UK innovation economy has started to emerge from its startup phase”. It detailed, however, that:

“A lack of scale up capital has starved both UK companies and venture capital, and while we are close to Silicon Valley in rounds up to $15 million (early stage) we are still significantly behind in rounds of $15–100 million (breakout) and over $100 million (scale up)”.49

24.While some commentators have challenged the notion of a ‘funding gap’ in UK scaleup capital,50 many witnesses highlighted access to investment as a key barrier to growth.51 James Dancer and Professor Lord Tarassenko argued that no other factor was “more important to the success of high-growth companies in the UK.”52 James Wise, Partner at Balderton Capital, reported “incredible progress” in improving the availability of capital for technology firms, but emphasised “the scale of the challenge” that remains.53

25.When making comparisons, witnesses acknowledged differences in the size and maturity of the UK and US scaleup finance ecosystems.54 Nonetheless, we heard that:

“Relative to the size of our economies … venture capital firms in the US have more than twice as much capital to invest into scaling up technology businesses.”55

26.The British Business Bank (BBB)56 explained that funding shortfalls leave many UK companies “reliant on overseas investors for growth funding”. Its figures showed that those in receipt of overseas investment “were more likely to have exited abroad, representing significant unrealised economic potential for the UK.”57 Many of the stakeholders we heard from echoed these points.58 The BVCA suggested that some companies had relocated to Europe in order to secure funding from the European Investment Fund (EIF).59 Mr Poole warned that this situation risks the UK “becoming either an IP farm for other investing nations with a greater risk appetite or a work-for-hire hub on the outer fringes of Europe”.60

27.Several witnesses associated this gap in later-stage funding with the lack of domestic institutional investment in the UK.61 The BBB’s summary is illustrative:

“10 per cent of Britain’s venture capital pool comes from pension funds, compared to 72 per cent in the US. In Canada, pension funds invest 15 times what UK pension funds invest in private equity and VC”.62

28.Mr Wise explained that many UK VCs therefore receive their investment from international pension funds and endowments. As a result, the returns from their successful investments are mostly “going back to Canadian firemen and German librarians”, rather than UK pension holders.63

Culture and risk appetite

29.Echoing the findings of previous reports,64 our evidence suggested that a risk averse approach to investment and the lack of an ingrained, national entrepreneurial culture in the UK is another contributory factor, with witnesses contrasting UK attitudes with those of the US.65 According to Richard Kiernan, Global Head of AI Platforms at NatWest, “investors in Silicon Valley are known for their high-risk tolerance, often funding moonshot ideas with the potential for exponential growth.” In contrast, UK investment is “more conservative” and focused on “early returns”.66

30.David Glick, Founder and Chief Executive Officer, Edge Investments, noted that this impacts business owners, as well as investors:

“British entrepreneurs tend to get to a certain level and then get a nosebleed. They feel they are too high up on the ladder.”67

According to Oxford Science Enterprises:

“UK founders are too often perceived as aiming for smaller-scale operations (particularly by US investors). This mindset can limit the growth trajectory of UK companies, particularly in emerging sectors such as AI, where significant capital and long-term vision are essential to compete globally.”68

31.Eleanor Lightbody, CEO of AI firm Luminance, spoke of the need to “do better in the UK” to celebrate the achievements of successful companies and entrepreneurs, in order to inspire others and build a “virtuous cycle of success”.69 The CST concluded that the Government has “a key role to play in ensuring a cultural shift within the investment and policy community” and working to “renew a shared pride in the UK’s culture of innovation”.70

Market size and conditions for listing

32.Research from the University of Cambridge highlighted that UK firms do not have access to “the dynamic economies of scale available to competitors based in the largest economies”.71 Many founders see the UK’s medium-sized market as less attractive than that of the US.72 We heard that companies that do base themselves in the UK “have to be almost global from the start”,73 since they are “serving a smaller market locally”.74 Those who target the European market may face challenges due to the way it is fragmented by, for example, language and differing regulatory regimes.75

33.Mr Kiernan set out that, in addition, “the UK’s IPO market is smaller, and exit opportunities are often more limited”. This leads startups to “either sell early or relocate to the US for better opportunities”.76 Other witnesses raised similar points, calling for action from the Government to make the London Stock Exchange a more attractive place for technology companies to float.77

34.Louis Taylor CBE, CEO of the BBB, suggested that unlocking private capital would have a positive effect on the UK’s public market, adding, “if we have healthy private markets … we stand a chance of rebuilding the capital markets over time”.78

Regulation and procurement opportunities

35.Analysis by the Social Market Foundation set out that onerous procurement rules often prevent small and medium sized companies from competing for lucrative state contracts.79 Mr Wise agreed that “the procurement process is difficult for startups to navigate; it has been for a long time.” He praised the approach taken by the Advanced Research and Invention Agency (ARIA) in “very proactively reaching out and looking for opportunities” in innovation, suggesting this could be replicated elsewhere.80 Several witnesses argued that while government procurement could be a driver of innovation, reform is needed to current processes.81

36.On regulation, Victor Riparbelli, CEO of AI scaleup Synthesia, indicated that UK policy on mergers and acquisitions may be a barrier to scaling up, by “forcing people to sell earlier”. He told us: “That is something that a lot of people in the tech community are talking about”.82 Mr Wise criticised the Competition and Markets Authority (CMA) for being “harsh” in its scrutiny of “internal roll-ups”—in which British companies buy another British company—explaining that sometimes this is the only viable path for British companies to “get to a competitive level with their international peers”.83

37.The CBI drew attention to the impact of regulation on scaleups bringing products to market, stating:

“The regulatory process can often be complex, costly and fragmented across regulatory environments, while decision-making can be slow, unresponsive and lack transparency. This misalignment impacts smaller businesses more as they typically do not have the experience, capacity and finances to navigate the regulatory process and absorb delays relative to incumbents.”84

38.Speaking in a separate accountability session, Sarah Cardell, CEO of the CMA, highlighted the role that the new competition regime introduced by the Digital Markets, Competition and Consumers Act 202485 will play in supporting smaller scaleups to compete with big tech incumbents in digital markets.86 We heard from American venture capital firm Andreessen Horowitz that the ability of large, established companies to “levy extractive rents on small businesses” for their services is a barrier to scaling.87 Our report on LLMs called on the Government to “make market competition an explicit policy objective”.88

39.Ms Cardell acknowledged that there is a “perception” of UK merger control having a “chilling effect” on innovation, but argued that only a small proportion of potential deals are subjected to in-depth investigations.89 Elsewhere, the CMA has said it is working to ensure that enforcement does not have a deterrent effect on pro-competitive collaborations between competitors, which can boost economic activity.90 The CMA also recently announced a review of its approach to mergers, which will examine the scope for different types of remedies.91

40.Our report on large language models highlighted the risk of regulatory capture if public bodies become overly reliant on private sector influence to inform policymaking through lobbying or a lack of technical expertise.92 Ms Lightbody said that the Government and regulators could make more of an effort to make sure scaleups “have a share of voice in the room” when regulations are being developed, so that “they are not being made in a vacuum or in isolation”. These conversations are usually held only with big tech companies, she added.93 The CMA told us it was alert to the risk of regulatory capture, and said it was taking several steps to proactively engage with a wide range of stakeholders.94

41.We welcome the Competition and Markets Authority’s decision to review its approach to mergers and acquisitions and to engage with a wider range of stakeholders. Effective implementation of the Digital Markets, Competition and Consumers Act 2024 regime will play a vital role in ensuring innovative technology scaleups can compete with, and provide challenge to, incumbents.

Access to talent

42.Paul Murphy, Partner at Lightspeed Venture Partners, told us simply:

“If there is one reason that companies struggle to scale, it is talent. If there is one reason that a company is going to leave the UK, it is talent.”95

Alex Kendall OBE, Co-founder and CEO of Wayve, agreed: “The biggest thing we could do in the UK to make this a thriving environment is to invest in getting the right talent here”.96 A 2023 report from the Social Market Foundation stated that “staff recruitment and skills” was the most widely-cited obstacle to scale among high-growth companies.97

43.Michael Holmes, CEO of spinout incubator Scale Space, identified issues with “importing talent” from overseas as a particular challenge.98 Some witnesses suggested that Brexit had had a negative impact on the supply of skilled migrants entering the UK.99 Several others reported that the administrative processes associated with recruiting international students or specialist workers are slow, laborious and costly.100 Oxford Science Enterprises called for a “fast(er)-track option for working visas”, since the UK is “in global competition for a small, highly sought-after talent pool”.101

44.Witnesses drew attention to the success of the UK’s universities in attracting and developing technical talent.102 We heard, however, that improvements could be made to education and training, to ensure a strong domestic skills pipeline.103 Some larger scaleups also highlighted skills gaps at senior leadership level, saying those with experience of managing later-stage companies often had to be recruited from overseas. Mr Riparbelli explained that such individuals “are rarer” in this country, “just because there are not that many businesses and thus that many people who have seen that scale in the UK.”104

45.Baroness Gustafsson CBE, Minister for Investment, Department for Business and Trade and HM Treasury, commented that “when we talk about skills for scaleups, our minds always go to the technical skills”. She stressed that alongside efforts to “mobilise the education system to provide those”, there is a need to develop and retain talent across the “many other things that come with scaling a business”, including finance, legal and marketing.105

Infrastructure

46.Mr Kendall also told us that the UK has “some really big gaps in infrastructure, compute and power”.106 Leo Ringer, Founding Partner at Form Ventures, similarly queried “whether we have enough horsepower of infrastructure in the UK data centres and access to low-latency compute” to support any scaleup with significant compute requirements. He argued that the UK is “shockingly bad at building physical infrastructure”, listing data centres and grid connectivity as “unfortunate examples” of this.107

47.These gaps may widen: the CBI cited statistics from the National Grid predicting a sixfold increase in energy demand from UK data centres over the next decade.108 In October 2024, the Government announced a £6.3 billion investment by private companies in UK data centre infrastructure, with a further £14 billion announced in January 2025.109 We heard, however, that this must be accompanied by steps to remove other fundamental barriers, including high energy costs, poor grid connectivity and limited telecoms rollout.110 The UK’s planning system has also previously been cited as a drag on business growth.111

Government initiatives

48.Successive UK Governments have taken steps to examine and address the barriers outlined above, and to cultivate an environment in which enterprises can grow successfully. Government reviews focused on scaleups include the 2014 Coutu report;112 the 2017 Patient Capital Review, which “considered how to support innovative firms to access the finance that they need to scale up”;113 and the 2021 Kalifa Review of the UK’s fintech sector, which made recommendations on how to support the growth and adoption of UK financial technology.114 While in opposition, the Labour Party commissioned the Start Up, Scale Up review, which explored how to “make Britain the best place to grow and start a business”. In a foreword to the report, then Shadow Chancellor Rachel Reeves MP emphasised the connection between a successful scaleup environment and Labour’s overarching ambition for economic growth.115

Unlocking private growth capital

49.In July 2023, the then Chancellor Rt. Hon. Jeremy Hunt MP announced a series of measures aimed at unlocking further domestic capital for investment in innovation. These included:

• An agreement known as the Mansion House Compact, under which some of the UK’s largest defined contribution (DC) pension providers committed to allocate at least 5 per cent of their default funds to unlisted equities by 2030;
• Efforts to encourage smaller DC pension schemes to consolidate into larger, better-performing schemes to improve returns and governance; and
• Progress on the Long-term Investment for Technology and Science (LIFTS) initiative to crowd institutional investment into innovative science and technology companies.116

50.Since taking office, the Labour Government has announced:

• that the UK Infrastructure Bank would become the National Wealth Fund (NWF) and operate with a broadened investment mandate,117 including targeting “equity investments in earlier-stage projects and technologies looking to scale up”, in partnership with the British Business Bank;118
• the establishment of the British Growth Partnership (BGP), which will create a new way for institutional investors (particularly pension funds) to invest in the most innovative companies;119 and
• a review into pensions investment,120 the interim report of which includes proposals to consolidate UK pensions into Canadian or Australian-style “megafunds” that the Government argues will be “better positioned to invest in productive assets”.121

51.Stakeholders were positive about these efforts to unlock institutional investment.122 However, several witnesses highlighted that it will be several years before pension reforms have a meaningful impact on the UK’s pool of capital.123 In Ms Platts’s view,

“waiting till 2030 to unlock significant DC pension schemes to invest into UK managers is too long away. We need to find ways to expedite capital going into managers.”

She added that financial reforms will need to be accompanied by more knowledgeable people managing funds to “help pension funds funnel the money in the right places”.124

52.Recent reports by the CBI125 and the House of Lords Science and Technology Committee126 likewise highlighted a lack of technology expertise among institutional investors as a barrier to science and tech scaleups accessing the necessary growth capital. Ministers highlighted the Science and Technology Venture Capital Fellowship, which aims to upskill mid-career VC investors on investing in UK deeptech and life science companies.127

53.The CST reached similar conclusions in its recent letter to the Chancellor, and called on the Government to “accelerate efforts to support pension fund reforms to create more immediate options for scale up capital.” Other recommendations included: “unlocking financing of critical infrastructure for emerging technologies”; creating better connections between private and public markets to make London a more attractive listing destination; supporting the development of the specialist investing, procurement, management and policy-making skills required to scale up science and technology companies; building awareness of investment opportunities; and improving public understanding of the importance of innovation.128

54.We endorse the recommendations of the Council for Science and Technology’s November 2024 letter to the Chancellor calling for an acceleration of efforts to unlock institutional capital; the development of the specialist skills required for investing and supporting innovative technology companies; and the financing and delivery of the critical infrastructure they need.

55.We also support its recommendation that the Government work to “renew a shared pride in the UK’s culture of innovation”. The Government has a leadership responsibility to promote and celebrate British entrepreneurial success in order to shift cultural attitudes towards risk and innovation.

The British Business Bank

56.In 2014, the British Business Bank (BBB) was established to improve access to finance for smaller businesses.129 In response to the findings of the Patient Capital Review, in 2018 the BBB established a commercial subsidiary, British Patient Capital (BPC).130 In October 2024, the Government announced reforms to the BBB. These included putting its £7.9 billion BPC-administered commercial programmes on a permanent footing, by enabling it to reinvest its investment returns.131

57.The BBB has played an active role in financing scaleups and has provided some form of financial support for a majority of the UK’s unicorns.132 Several contributors were positive about growth-focused initiatives administered by the BBB.133

58.On the other hand, critical views about the bank’s poor returns on previous investments have been reported in the media.134 Barney Hussey-Yeo, founder of AI fintech Cleo, told us that direct state intervention in venture capital “does not work”. He added:

“When the Government try to fund these companies directly, they pick the bad companies and, therefore, the returns are awful. The returns for the British Business Bank are negative to dismal.”135

59.In its submission to the AI Opportunities Action Plan, VC fund Air Street Capital argued that if a technology company “needs a government vehicle as a direct shareholder, it has likely failed to find product-market fit”, and “should be allowed to either fail or be acquired”.136 In a similar vein, a 2024 impact assessment commissioned by the BBB of its ongoing Future Fund: Breakthrough (FF:B) scheme noted:

“The extent to which financing provided by the scheme was additional to what would have otherwise been provided by commercial investors was sometimes not clear, with some firms suggesting they could have closed rounds at similar sizes without FF:B support.”137

60.Mr Taylor defended the Bank’s investment record, adding that the Bank generates “about £8.4 billion of gross value add—so £2.40 for every £1 we put out”.138 He argued that investment from the BBB served as a “kitemark of quality” for future private investors who rely on the BBB’s due diligence and expressed confidence that the bank is “performing in a way that is absolutely value for money”.139 Baroness Gustafsson said that the BPC was providing “good accountability for public money and making sure that that money is put into places that are driving sufficient economic return”.140

61.However, Mr Taylor highlighted room for improvement in the delivery of its services, noting that SMEs found it difficult to keep track of the BBB’s 21 different programmes. He said that the Bank was re-structuring its offering to “create simplicity, scalability and flexibility”.141

Other sources of funding

62.Innovate UK, a non-departmental public body founded in 2007 as part of UK Research and Innovation (UKRI), has developed a scaleup programme that provides support for rapidly growing businesses.142 It offers a number of other initiatives, including business innovation grants, Investor Partnerships, Business Growth services, BridgeAI, Innovation Networks, Innovation Exchange, Contracts for Innovation, nine sector-focused Catapults, and 11 regional Launchpads. 143

63.UKRI’s seven research councils also provide funding targeted at supporting innovation.144 For example, the Engineering and Physical Sciences Research Council (EPSRC) funds the XR Network+ at the University of York, which aims to develop innovations in the virtual production subsector.145 Government departments also provide innovation funding through other means, for example DSIT’s £12.2 million Digital Growth Grant, currently administered by Barclays Eagle Labs to support startups and scaleups.146

64.Mr Kendall told us that Innovate UK’s grant funding system is “severely broken”. He described the way funds are allocated as “largely random, not well formulated on the venture capital-style approach or on viability of business”.147 In Mr Ringer’s view, “there does not seem to be a huge connection” between the “pots of money” available from the organisation and “an overarching sense of strategy” for different sectors and technologies.148 Reporting in the Telegraph described an “alphabet soup” of schemes offering support to startups and scaleups.149

65.Many witnesses acknowledged that public grants and programmes had brought benefits for individual companies.150 However, the challenge of “navigating the complexities of the Government funding ecosystem”151 was a consistent theme in our evidence. The process of applying for grants from bodies such as Innovate UK was described in terms including “cumbersome”, “overwhelming”152 and even “infeasible”.153 Peadar Coyle, Founder of AI audio scaleup AudioStack, said that it is “difficult sometimes even to figure out which government body you are interacting with”.154 Mr Dancer and Prof Lord Tarassenko told us:

“Experience in running high-growth companies shows that it can take a great deal of time to apply for and secure support from any one of these initiatives, for which the capital benefit might only be a tiny proportion of the amount available from a large venture capital investor.”155

66.Stakeholders repeatedly called for greater alignment between programmes and simplified application processes, particularly for earlier-stage funding.156 Simon Barratt, Chief Executive Officer of gaming studio Cooperative Innovations, told us: “At each point you seem to be validating what you are doing again and answering very basic questions about your business”. He called for “a runway in terms of the levelling up of funding available”, that would enable firms to progress through programmes once their credentials and performance had been verified.157

67.Others called for a more streamlined suite of support initiatives. Mr Dancer and Prof Lord Tarassenko stated:

“There may already be too many such schemes, and many or most are probably underfunded and unlikely to have impact. We should guard against fragmentation of effort and concentrate time and resources on a smaller number of high-impact initiatives.”158

Oxford Science Enterprises stated:

“When you get to a certain stage of development, the amount of effort to access the grant outweighs the amount received. It could be more useful to consolidate available funds into a smaller number of large grants that could ‘move the needle’ further.”159

68.The CST’s letter recommended that the Treasury, the Department for Business and Trade (DBT) and the Department for Science, Innovation and Technology (DSIT) should work together to “create greater scale by driving stronger integration in public pools of capital”. This should include “simplifying and joining up the landscape of government financial support”, it argued.160

69.UKRI advised that it has already introduced a streamlined application process for grants valued at less that £50,000, which it argued has been “particularly effective in the creative industries”.161 Mr Taylor and Baroness Gustafsson also drew attention to the memorandum of understanding which has been agreed between UKRI and the BBB, with the aim of improving “the baton handovers for companies” as they progress through the support schemes offered by the two organisations. Baroness Gustafsson acknowledged, however, that “we are yet to be tested on whether those procedures and what we have laid out will be sufficient”.162

70.Professor Christopher Smith, Executive Chair of the Arts and Humanities Research Council (AHRC), said that UKRI would “welcome from the committee the pull towards cohesion” across its programmes, as this was “a direction in which we are trying to progress”.163 Feryal Clark MP, Parliamentary Under-Secretary of State for AI and Digital Government, acknowledged that navigating various government schemes was “a complete minefield”, and said that DSIT was working with DBT to “streamline … and make it easier for businesses to access” existing initiatives.164 Sir Chris Bryant MP, Minister for Creative Industries, Arts and Tourism and for Data Protection and Telecoms, Department for Culture, Media and Sport and Department for Science, Innovation and Technology, recognised the tendency of new Ministers to “come up with a new scheme” and advocated instead for consolidation and continuity.165

71.There has been a proliferation of individual grants and programmes targeted towards scaleups, which are difficult for SMEs to navigate and apply for. This includes programmes run by UKRI, the British Business Bank and government departments. Witnesses made a strong case for consolidating existing initiatives to maximise their impact, rather than adding further to an already complex suite of programmes and funding pots.

72.The Government must ensure that its initiatives aimed at enabling technology companies to grow make a material improvement to the UK’s innovation ecosystem, as well as providing value for money for the taxpayer. Schemes that are duplicative, or fail to achieve desired outcomes, should be wound down. We caution strongly against the introduction of further schemes or interventions, which have the potential to slow companies’ growth by making the system of scaleup support even harder to navigate.

73.Government programmes should also provide scaleups with a clear, comprehensible pathway of support along their growth journey. Consideration should be given to how to minimise administrative hurdles, for example by streamlining application processes for subsequent funding for companies that have already passed rigorous checks as part of earlier successful public funding bids.

74.The Government should set out the steps it is taking to evaluate the impact and join-up of existing initiatives, including those administered by the British Business Bank, to ensure they offer a clear route for companies to progress through, address genuine gaps in the private markets and represent a sound use of government funds.

Tax credits

75.A number of witnesses said the UK’s research and development (R&D) tax credit regime, which allows companies undertaking qualifying R&D to claim relief at a rate of 20 per cent,166 was beneficial. However, they voiced similar frustrations with complexity and bureaucracy.167 Mr Kendall said there were “stories of companies going bust because of the amount of time taken for approvals to get through the process”.168

76.We heard too that repeated changes to the amount of credit available had created uncertainty and cashflow difficulties.169 The Synthetic Media Research Network stated that HMRC had created a “hostile environment” for companies claiming the relief, while others described instances of HMRC demanding money be returned by SMEs.170

77.We also heard that the scheme is complex for firms to navigate, meaning many require specialist support, which comes at a cost. As Mr Riparbelli explained:

“There is a cottage industry around it that is fairly big … It does not feel like you should have to give up a certain percentage of whatever you get in relief to third-party consultants for doing what seems like paperwork.”171

Tax incentives for investors

78.Governments have also sought to incentivise investment into innovative firms through vehicles such as the Enterprise Investment Scheme (EIS),172 Seed Enterprise Investment Scheme (SEIS)173 and Venture Capital Trust (VCT).174 Some have argued that the schemes are used primarily for tax efficiency purposes, rather than as a means of supporting innovative startups.175 Yet we heard strong support for EIS and SEIS, which were seen as vital to the UK’s thriving early-stage startup landscape.176

79.Some stakeholders advocated for these to be extended to support later stage companies and those with longer R&D cycles.177 The Labour Party’s scaleup review recommended reviewing “the scope, scale and design of both EIS and SEIS”.178 However, Baroness Gustafsson told us that she had not looked at making changes to the schemes. She added:

“I acknowledge that they are a real asset to us … This is a great example of where we sometimes feel that we should have another initiative and unlock a different pool of capital, but actually there are some schemes here that work really well, are really valued and make a big difference. We just have to keep them going.”179

Other new government policies

80.Relevant to the barriers discussed above, the Government has also proposed reforms to the planning system180 and the establishment of Skills England.181 On planning, Baroness Gustafsson told us that frustration about the planning barriers to building more UK data centres was “being heard quite loudly and clearly”.182

81.As part of the AI Opportunities Action Plan, the Government announced the creation of AI growth zones, “areas with enhanced access to power and support for planning approvals”. It argued these would accelerate the building of data centres through public-private partnerships.183 In his speech launching the plan, the Prime Minister also promised to provide grid connections “at speed” to those looking to build in AI.184 However, some commentators expressed concerns about the feasibility of funding these data centres and meeting their energy demands, particularly in light of net zero ambitions.185

82.On skills and talent, the decision to raise employer contributions to National Insurance in the 2024 Autumn Budget186 has been cited as a policy that could negatively impact businesses.187 The RCA reported concerns from createch businesses that the changes to zero-hours contracts proposed by the Employment Rights Bill “may inadvertently affect their agile working practices.”188 Mr Glick told us that the costs of hiring and firing are much higher in the UK than elsewhere, putting UK businesses at a disadvantage.189

83.On the alignment of scaleup support more broadly, Oxford Science Enterprises spoke of the need to “align all relevant arms of government in support of the highest-potential companies in the areas where the UK has the potential to lead globally”.190 Mr Poole suggested efforts might be aligned under “an industrial strategy … that has that north star of a much greater ambition about our positioning in a global digital revolution.”191

84.We have the right ingredients to build world-leading tech companies, including in the high-growth potential areas of AI and creative technology. However, fundamental barriers to scaling in the UK’s technology sector, such as poor infrastructure, a culture of risk aversion, and comparatively limited domestic growth capital, are well documented and longstanding.

85.Some of these barriers do not have straightforward policy solutions, for example the relative size of the UK market, or cultural attitudes towards entrepreneurship. It is positive that solutions initiated by the previous Government to address challenges are being built upon by the current Government. However, these initiatives will not succeed without a consistent and determined focus on enabling British startups to scale.

86.The Government’s industrial strategy must provide a coherent, cross-government vision for the role of innovative technology scaleups in delivering the Government’s growth ambitions across its eight key sectors. It should serve as an opportunity to critically review the existing landscape of support for scaleups, and be underpinned by a resolute focus on removing barriers to growth. In its response to this report, the Government should outline how it will reconcile this with competing policy priorities, for example its commitments on net zero and employment rights.

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