Making Innovation Work in the UK — some solutions
My evaluation of the support for innovation now is not that different from what I found 20 years ago, when I looked at this for the government. A lot needs to be done, and I will not cover all of it here. My ideas are shaped by what I’ve seen work elsewhere, especially living and working in Estonia, and from what I see every day with startups. Here are some suggestions. Not all of them are my own.
1. Better Definitions
If we had clearer definitions of a startup, and of success, we could do away with a lot of the arbitrary restrictions on funding and tax incentives. Better definitions could mean that any company that qualifies is immediately eligible for all of the support available. There are ways to do this, and there are people who understand this, but they are not civil servants or academics. Ask the best investors and ask the startups. We know who and what we are.
We also need to define the startups worthy of the most support. Again, a relatively simple set of criteria could allow a smaller number of companies into a hall of fame where they get very serious, very big support quickly. We need to become confident about picking our winners and then getting fully behind them.
2. More Connected Tax
Having defined a startup, or whatever business is deemed important to innovation, it should have its own special tax treatment. This would ensure that tax incentives are not then taxed. This would look to take tax revenues in the future, not while a company is scaling, and it would make it easier to hire people in a way that is attractive for employees but not punitive for the company. Potentially we need a tax band for startups that has reduced corporation tax, exemptions from PAYE, and which avoids taxing money raised from SEIS and EIS investment.
3. Supporting law-breaking
Estonia is a world leader in technology and innovation. It does not just produce commercial successes. The innovation and technology runs deep into the public sector. Recently the government launched Accelerate Estonia, which invites foreign startups to come to Estonia to trial radical ideas for which laws would need to be changed. They ask people to ‘come and break the law’, but more seriously they want to change legislation to bend to innovation. That sort of vision comes from the top down. Estonia is lucky to have evolved a generation of senior politicians and civil servants who are seriously technically minded, entrepreneurial, and innovative. They have ensured that initiatives like this have the political clout to work.
This addresses many problems, from unaligned tax policy to regulation that stops innovation. Could the UK create something similar, across government or just in specific areas? For this to work, we need politicians and civil servants who get tech and innovation, who’ve done it themselves, and we need the initiative to come from the top down to give it weight.
4. Buying Out Angel Investors
I first heard this idea from Nick Sturge, so I will credit it to him. Angel investors are crucial to get startups off the ground. They take the earliest and highest risks and often offer support to the startups. But their money invariably gets tied up in startups for years. The government should set up a fund that buys out angels at later investment rounds so they can re-invest their money in the next very early-stage companies. This could come with tax incentives to support re-investing. The fund would be following established investors at later investment stages, so would not have to carry out lengthy due diligence. It would just be a resource to make sure money keeps moving efficiently.
5. More Investor Co-funding
The London Co-investment Fund, co-founded by John Spindler, recognised that the government is not good at picking winners, so it co-invested into startups alongside experienced angels. This makes it a lot easier for founders at early stages by reducing the number of investors they need to find. For this to work, the fund needs both to be flexible, move fast, and be proactive. John was great at putting together startups with angels to create opportunities, rather than just waiting for the startups to come to the co-fund.
The current iteration of the Angel Co-fund looks like it may have become too complicated. The rather random rules, including that any investors it matches must be new to the company, must invest above a certain amount, be part of a group, don’t reflect the reality that of angel investment. Startups have enough trouble finding any angel investment, let alone then trying to morph it into fitting an arbitrary set of rules.
If we think big, co-funding should be free to follow any investor into a deal, at any point. There need to be basic rules in place to stop it being abused, but that’s the case with every program. Co-funding alongside angels and VCs is a powerful multiplier for investment. It should be fast, confident, comfortable with risk, and bullish to become a force that really drives technology innovation.
6. Improve University Spin-outs
Spinning IP out of universities is something of a holy grail. But too many UK universities still try to hold onto large chunks of equity in startups that they spin out. This very often leaves the company unable to raise quality investment, so it fails or relies on grants and less sophisticated funding. It also leaves the founders lacking real incentives.
If universities let go of their spin-outs more quickly, they would produce more successful commercialisation of their research. If they supported those founders to become rich, they are more likely to come back as investors or benefactors. Government should look at how to set boundaries, best practice, incentives, or rules around this so that the UK’s universities really become engines behind commercialised IP, innovation, and exports.
7. Streamline Grants
The innovation support industry needs to be streamlined back down to something that startups can navigate. We need to create a culture in which we accept that many startups receiving grants may fail, but some may succeed, rather than trying to mitigate the risk with slow and cumbersome application processes and reporting.
The processes behind giving and monitoring grants for startups should look the same as those used by angels and early-stage investors. Ideally, they should be run by early-stage investors. This would avoid startups having to waste time on parallel processes and reporting, and would support more risk-taking in grants.
It should be a strict requirement of any system designed to support startups that it moves very fast, sticks to deadlines, and generally bends to the needs of the startups rather than making startups contort themselves to get the money. And if it isn’t working, it should be scrapped quickly so money can be deployed to something more effective.
8. Make Founders the Heroes
We should not just celebrate the founders who make fortunes. We need to celebrate those who try and fail. We should have the utmost respect for people who leave jobs to found startups, risk everything they have, work terrible hours for low salaries in order to pursue a dream. These people are the future of our economy. Most will fail, some will succeed, but we need to celebrate both in equal measure. The startup founders should be more important than the investors, the professors, or the bosses of agencies set up to support them. Having tried and failed to do a startup should be a badge of honour not of shame.
9. Focus on Diversity
I know it’s a cliché, but it really matters. For the UK to really achieve its potential in tech innovation, we need to make sure everyone who can make a difference has a chance to do so. Especially as we look to quantum, AI, and deeply technical innovations, we need to do everything to support people who are neuro-diverse, minorities, or just not middle-class white men. Currently we’re only maximising about half the potential founders in our armoury.
10. Regulation that Supports Innovation
Regulators and regulation should either support innovation or keep out of its way. This is another valuable lesson we can learn from Estonia. Regulators often end up colliding with very new business sectors embracing disruptive innovation which they find hard to understand. We can address this by creating more movement between regulators and the startup sector. Startup people should be advisors and mentors to the regulators. We should encourage regulators to second their people into startups so they can understand innovation better.
We need regulators to become part of the startup world, with specialist regulators deployed to deal with innovative technologies. Regulation should sit alongside tax incentives and grants so all three work together to the same outcomes. This would avoid tax incentives supporting investment into startups that are then destroyed by regulators (which happens!).
11. Change Procurement Culture
We need to make public (and corporate) procurement a driver in innovation not an obstacle. For this to work, it needs to be very easy for startups and outliers to win large contracts. One solution, and there are many more to look at, would be a requirement that a percentage of public procurement has to be spent on innovative solutions, new suppliers, and startups. Another is to disrupt the need already to be on a vendor list. Tax incentives could nudge the private sector in the same direction. This would change the emphasis for procurement professionals away from being rewarded for maintaining the status quo towards being expected to take some risks.
12. Breaking Employment Silos
There is a culture in the public sector of recruiting and retaining talent, and frowning upon people who leave to work in the private sector.
We should aim for the opposite. We should make it really easy to dip in and out of public sector tech and innovation work. The public sector should be where a startup CTO between jobs goes for 6 months whilst they find their next startup. Public sector tech people should leave to join a startup and be welcomed back a year later if it fails.
A free flow of talent between public sector tech offices, regulators, and the general civil service and the startup, innovation, and tech sector would create a better understanding of the innovation sector within the public sector, but it would also help the innovators understand the regulators and public sector better so they can navigate it more productively. This is subtle, but requires a complete change of culture in public sector HR.
13. Challenge the Misconception of what is Low Risk
As the recent criticism of the Turing Institute shows, there is a pattern of government addressing innovation questions by deploying very large amounts of money into projects that make great policy announcements, and by their sheer scale feel safe. We should look at how to create support activities that are easier to cancel or change if they’re not working, and that do not become echo chambers for their cheerleaders. Lots of smaller activities that compete, a wider range of people involved, more porous borders between academia, policy, and innovators would help.
Conclusion
Much of this is being discussed, thought about, or even tried, but none of it is core culture. A government really wanting to make a difference needs to make radical policy decisions, and force them through the layer of people who resist change.
We need far more porous borders between the public sector and tech and innovation sector so they can bridge the cultural gap. We should copy the things that work elsewhere. We should have far less tolerance for people who block innovation. We need to build risk into public sector procurement and government grants in a way that is appropriate and proportionate, but also radical. We need to keep money moving more quickly and help direct it to where it is most needed.
We need to embrace those who try, not just those who succeed. We need to make sure we are there for every founder, embracing true diversity. And most of all, government needs to decide to get behind the best startups in a very big way, with funding and incentives to encourage money to flow their way in large volumes.
This is the only way we really stand a chance of competing against China, Europe, and America.
