The IMF is tipping the UK to fall into recession, inflation is still high, and there is a palpable sense of gloom over the UK’s economic prospects. Nevertheless, one bright spot stands out: Britain’s growth as a hub for start-ups and entrepreneurship. The amount invested in British start-ups has grown exponentially over the last decade, from £1.6 billion in 2011 to almost £28 billion in 2021. London is the top destination for venture capital in Europe, with its start-ups which double the funds raised by their colleagues in second place managed by Paris, and fall only behind Silicon Valley and New York worldwide. There’s just one problem with this success story: Britain’s best start-ups are being poached.
The turmoil in the wider economy means the UK’s once fertile venture market is drying up. Last year was the first on record where the amount of money invested in start-ups decreased. In turn, companies look abroad for money, and find that it often comes with strings attached in the form of requirements to relocate.
The American venture market presents a particular draw. Silicon Valley is the undisputed start-up capital of the world, New York is a bigger financial center than London, the American consumer market is bigger and richer, and American investors are more happy to give start-ups more money for riskier 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 still give money to British companies for scientific enterprises such as drug development and space research; they just ask that they move their operations to an EU country to continue their business.
We now risk seeing a generation of founders abroad. In response, you might think that the government would do anything to get us back on track. It does everything but. Of particular concern to some of our nation’s most innovative entrepreneurs are planned cuts to the generosity of R&D tax credits. These encourage investment in the development of new goods and services, and are integral to promoting modern innovation. Scheduled to take effect this April, research by Coadec suggests the reform will cost the average startup £100,000. Combine this with the rise in corporate tax, general government hostility towards tech companies, and the poor outlook for domestic investment, and it’s not surprising that companies are leaving.
Start-up founders are not like the rest of us. They are dedicated to the companies they are trying to build, and are more than happy to flip between countries to do it. While only 14% of the British population is foreign-born, 49% of the UK’s fastest-growing companies have at least one foreign-born founder. Anecdotally, many of them are here because the UK is the best place to grow their businesses. When that ceases to be the case, they will move – taking with them the promise of jobs and further inward investment
We have already seen this process with Estonia. A small nation on the edge of the Baltic, it has founded the highest number of billion dollar start-ups per capita. But while Estonia clearly has impressive levels of entrepreneurship, its population is too small and too far away from other tech centers to provide the ecosystem needed to sustain its start-ups. As a result, many of them are moving to scale. If you look at the ten Estonian start-ups valued at over 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 companies is global. Capital goes to the best companies, and their founders go to the best opportunities. Britain is in danger of losing its edge – and, like Estonia, its start-ups.
Aria Babu is Head of Policy at Entrepreneur Network
