19
Science and Technology Committee
Corrected oral evidence: Financing and scaling UK science and technology: innovation, investment, industry
Tuesday 3 June 2025
11.45 am
Members present: Lord Mair (The Chair); Lord Berkeley; Lord Drayson; Lord Lucas; Baroness Neuberger; Baroness Neville-Jones; Baroness Northover; Lord Ranger of Northwood; Viscount Stansgate; Lord Stern of Brentford; Baroness Willis of Summertown; Baroness Young of Old Scone.
Evidence Session No. 10 Heard in Public Questions 110 – 116
Witnesses
I: Ian Merricks, Managing Partner, White Horse Capital Limited; Irene Graham OBE, CEO, ScaleUp Institute.
USE OF THE TRANSCRIPT
Examination of witnesses
Ian Merricks and Irene Graham.
Q110 The Chair: Welcome to the second session of this morning’s committee meeting. We have with us Ian Merricks of VenturePath, who is also managing partner at White Horse Capital, and Irene Graham, who is the CEO of the ScaleUp Institute. We are very pleased that you have both joined us; thank you very much. As you know, we are examining the problems of UK science and technology companies getting financed and scaling up. You have both worked in this field for quite a long time. In your opening statements, we would like to ask each of you how you view the landscape and what the major concerns are. Perhaps we could start with you, Irene.
Irene Graham: Thank you very much for inviting me here today. As you are aware, the ScaleUp Institute was formed and led by the private sector. It is a research and education institute. It was born out of the Scale-Up Report the coalition Government commissioned in 2014, when the OECD had placed us third in the world at start-ups and 13th in the world at scaling up. Perhaps, building on the points that Saul made, we are a very good start-up and incubation nation but perhaps not leading to the scale-up phase.
Picking up points from the earlier session, when we observe countries ahead of us in that scale-up journey, there are three key things that come across that are very important for now. First, long-term, at-scale interventions. Despite political cycles, you have long-term institutions that are present throughout and permanent, whether it is KfW, the Small Business Administration or Bpifrance. We have the equivalent here in the British Business Bank, in our development banks in devolved nations, and in Innovate UK, but are we making them permanent, and are we making them for the long term? That is a key point.
Secondly, the national infrastructure that is organised is deployed in a federated regional way, so you have very strong regional networks working closely with the local environment. That is another point that we need to look at as we evolve our activities here. Thirdly, we observed at-scale capital. You have heard that a lot just now, but whether that is sovereign wealth funds or institutional money, it is deployed at scale into the growth economy.
We also know that there are three key drivers of local scale-up growth in the UK. We looked at a whole range of dynamics as to what would drive local scale-up growth. It is not actually the number of start-ups; it is not necessarily even transport links. Three things stood out as real drivers. First, access to skilled talent locally; secondly, the building of clusters and hubs and really homing in on those; and thirdly, access to local growth capital. So, while we need capital to be at scale, it also has to be accessible in that local market and reach into the local market.
Where are we today? I will pick up on some points that we heard earlier. We should recognise that when we started, we in policy, in the private and public sector, would often talk about SMEs—small and medium-sized enterprises—as one homogeneous group. We cannot do that; we have to segment. In the 10 years that we have been observing and working on this agenda, we now have a proper definition of the scale-up economy and that segmentation. We need to see that continuing and going forward.
We have seen an overall increase of 27% of the scale-ups in the UK. Today, we have around 34,000 scale-ups, and they contribute over 55% of the SME economy. There are 16,000 in the pipeline, around 19,000 in the industrial sector strategies that we have been touching on, and there has been a growth in our science and technology overall. That is good, that is progress, and we are progressing in our international dynamics.
However, there are core challenges that remain for our scale-ups, and they cover a number of the things you have just heard about today. First, dialling up allows access to markets, whether that is procurement from government, collaboration with government, or corporate collaboration and procurement, but also going internationally. A trait of a scale-up will be that it is innovative but also global in its ambitions. The majority of our scale-ups are international in their activities. How do we make sure that is as accessible and as streamlined as possible?
Then there is, of course, the access to talent that we have touched on, the access to finance and particularly growth capital, and to the infrastructure; meaning particularly that there is space to grow. The planning reforms that the Government have brought in are very welcome. We also know—we are seeing the first of it now coming out from last year—that maintenance of a tax environment is beneficial to our scaling economy. So, a lot has progressed in various areas, but I am sure we will touch on some things that we need to see undertaken better as we move into the session in those areas that I have highlighted.
Ian Merricks: Thank you, everyone, for having me here today. You heard a lot in panel one from Saul and Sir Jon about the later stages of venture and these very large cheque sizes—very large fund sizes. My focus is on the earlier stages of venture, which none the less drive the pipeline all the way through. We are seeing a real challenge in the UK, and something we have been flying the flag for to the new Government for the last year—nearly—is that we are seeing record lows of companies making the progression from start-up to beginning to scale up. The threshold that we are using is their ability to move from seed funding—typically angel funding, private investors, or small seed funds—into venture capital. We will use that as the divide, otherwise we will end up with lots of different definitions of scale-ups today.
Our focus is on the companies as they step into their first institutional funding round, where we have measured a £2 million to £10 million funding cheque. That is the moment in time; prior to that is maybe the seed focus. It might interest you to know that in 2024, 391 companies accessed VC funding at Series A: only 391. That figure represents one in 14 seed-funded start-ups. Not seed stage start-ups but seed-funded start-ups: only one in 14 is making the onward progression to venture capital. Now, unarguably, it should not be all of them. If you start a very small business with a £25,000 or £50,000 angel investment, you do not then need £5 million of growth capital to expand it internationally necessarily, but we do not think it should be 7% either.
The knock-on effect through the funding continuum is that Series B in 2024 looked like 130 companies. You heard earlier today that that funnel looks something like 5.5 million SMEs, 34,000 recognised scale-ups, 50% of those are open to growth capital—that was a ScaleUp Institute statistic—so there could be 17,000 that are thinking about it, 1 million new companies incorporated a year, and yet 391 companies are accessing venture capital. That is a hugely low figure.
Has it always been this way? Actually, it has not. The Q1 of this year was the lowest quarter for 28 quarters, or seven years. It is a linear path down. It is not a bump; it is not an odd quarter. That is the hat that I am wearing, if you like. I have spent a lot of time in the start-up world to get to this space. I firmly believe that some great learnings that the UK has, that have been used to support and encourage the effective start-up ecosystem, can be transferred to the scale-up landscape, certainly as companies are beginning to scale.
I will add some other nuances that are in there, and then I will pause. We are seeing a flat cheque size. The first time these companies are accessing their VC funding round, they are getting typically £4 million to £5 million. That has been consistent for the last 10 years; £4 million to £5 million does not buy you as much today as it did a decade ago. On the declining volume, Dealroom data shows that there were 105 fewer companies annually that were raising this Series A funding round in the last three years. It has a real knock-on effect on companies directly. The value is that we are seeing £500 million less investment year-on-year, and as I have said, the lowest capital invested in 28 quarters.
We presented a case called the UK ScaleUp Investment Mission to the brand-new Government, saying, “We’re not pointing fingers. This is just to say that this exists, and maybe this is a moment in time to change it”. We have spent the last 10 months, with the support of £10 billion-worth of VCs and 100 or so ecosystem leaders, trying to make six recommendations land to Government, which, sadly, have not been realised yet.
Q111 Baroness Northover: This is probing Irene further. You summarised very effectively where you started and how things have gone. You have been producing reports, as you say, since 2014. Can you tell us more about what the major recommendations have been? In particular, we would like to know how things have changed over that time. What lessons, as it were, have you drawn from that, and where should we be heading?
Irene Graham: We have a set of recommendations. There are 10 recommendations, but we can bucket those into five key areas. First, how do we use data more effectively and open up data to make sure we are pinpointing our scaling businesses early in our identification and then taking them through the journey, referring on and joining up? That looks at how we open up HMRC data that is not necessarily shared across government yet, let alone the private sector. How can we leverage that data more effectively? Obviously, at the moment there is a data Bill going through Parliament to look at how data is shared. Some of that is now shared with the export department and Department for Business and Trade, but we need to see that really opening up and open data being the mantra.
One of the drivers of our fintech economy is the open data that I was involved with in the banking industry; how we create that in health, energy, and transport is a critical factor. Also—this can be done without all the Bills passing through, and we have done an exercise on this called the Data Enabled Change Accelerator with past Governments, which could be leveraged today—how do you use HMRC as a vehicle for growth, actually writing to our emerging growth and innovation businesses and pinpointing them towards a range of the services that are available in government? We are not actually joining that up yet, and there is opportunity in that in terms of those areas. So the opening of data and data sharing is absolutely fundamental. That puts these businesses on the map, as was discussed, and helps to put them into the regional economy.
We then need to see the continued focus on segmentation. We need to see at the local level their growth plans having scale-up plans within them, which are very clear about how the scale-up economy is going to be supported at that local level. We have seen the benefit of account management. We talked a lot here in the earlier session about how you join up the knowledge of these companies into both public and private sector activities. So relationship management, the concierge-type service that you see in Bpi, the account management we see in Ireland, in the Small Business Administration in the US, in Denmark, and indeed in Scotland, which is working well, we need to see consistently deployed at national and local level across the UK.
Importantly—we have presented evidence to the CST, and Saul has commented on that—procurement is a very big lever in terms of the investment approach. How do we actually organise that effectively? We now have a lot of levers in place from the Government, whether it is the Procurement Act 2023, the innovation hub or the Regulatory Innovation Office, but we need to see how those can be organised better in terms of the objectives and the way in which we have procurement champions across the country, and how we can carve out R&D, innovation, and procurement as the US does, and is indeed investing in the UK today.
The growth capital agenda has been an issue for the UK for decades. I have been involved in many of the reviews, including setting up the Business Growth Fund at the time. We have around a £15 billion yearly gap. We must see the acceleration, as we heard earlier, of the existing initiatives. We should make permanent the British Business Bank, Innovate UK and our devolved banks. But we also need to give the British Business Bank the opportunity to be a lead investor—not a following-on investor, but a lead investor—into companies. It should also have the ability to invest in small quoted companies, that is through AIM, which it does not have today, which is different to where its international counterparts are. We are going to get into talent and skills in more detail subsequently, so I will stop there, but I have just given you a flavour of some key elements that we need to address.
The Chair: We are also coming on to the British Business Bank later.
Viscount Stansgate: Which of your recommendations have, in your view, seen progress, and where does more progress need to be made in other areas? Rolled up with that is: what, in your view, do you think the Government need to put more effort into to help companies to scale?
Irene Graham: There has been progress through a range of the initiatives, and we have a blue and green analysis of that. In one sense, a lot has happened on the capital side, so that is moving into the green space, but how do we get all those initiatives connected into the growth economy? Procurement, frankly, is blue: it has not progressed. In fact, I am delighted that after the evidence we gave to the Council for Science and Technology when Lord Vallance was the co-chair, it took that on. It has often been seen as a problem too difficult to solve. The Council for Science and Technology is now focused on that, the Chancellor has a growth mission board focused on that, and you have heard how Lord Vallance and Georgia Gould, in their roles, are focusing on it. We need to see that really turning into long-term change and the ability to write the right level of investment through R&D and procurement moving forward.
On talent and skills, one of the things we see in the UK is that we have a great ability not to learn from each other. I have talked about account management. That is present in Scotland and in Northern Ireland. It is patchy across England. It is not happening at every local level in England. Liverpool, Coventry and Warwickshire are doing that well, but not other areas. We have a national Government who have not necessarily yet organised towards that approach. So how we learn and implement those things is important.
Baroness Neville-Jones: We just mentioned a moment ago the issue of talent and skills, and we would like perhaps to go into that in a bit more detail. Could you say something about your recommendations around skills and training? It seems that it comes under two headings. First, there is the visa idea, of which there has been very little take-up. It seems to me that the more important thing we should be trying to do is actually train our own: find our own, train our own, and have a cadre of people for whom investing in the UK is a thing that comes naturally. Would you like to expand on the subject?
Irene Graham: Let us take the domestic side first and foremost. That goes across a number of areas. If you take the schools environment, certainly our scale-up leaders want to see more alignment of where the opportunities are in the future economy and where their needs are. That means having a closer relationship. An example of what the Careers and Enterprise Company is addressing is, how do we get more alignment within our scale-up economy with the school’s environment? Are we training the cyber digital skills in a consistent way? How are we leveraging the private sector into that? How are we using the maths curriculum to train for the modern era, including venture capital?
In many other countries across the world, they have venture capital schemes that are working with schools and universities. Indeed, we have just started our Science and Technology Venture Capital Fellowship, which is being run by Imperial and the Royal Academy of Engineering. That is important, but how do we take that perhaps into the earlier stage as well as to the later stage capital opportunities in pensions?
Baroness Neville-Jones: Is that at sixth-form level?
Irene Graham: This is something that you need to look at when you look at Skills England, as an example: how do you get this into the system through it? It could be through the private sector coming in and carving out some available time, or the maths curriculum could be re-looked at, to look at it from a modern era point of view, as we look at rebalancing our overall economy and how we can bring entrepreneurship into the school environment. We talked earlier about the US system, which encourages confidence but also recognises that failure is okay. Some of those entrepreneurship elements need to be brought in.
If you look at the university environment, our scale-ups would like to see much more engagement with their students, with the R&D collaboration. We need to look at the balance between research, the REF measurements versus the KEF: the knowledge exchange elements of the university dynamic. If I am a professor at a university in the US, if I move into business, I get accreditation in my academic career. I do not get that here in the UK.
We need to look at that incentivisation and look at more alignment within that. Our scale-ups are willing to pay if their universities and business schools are offering some of these services. We have examples where that is working well in terms of that alignment between universities and business schools, which, again, could be dialled up in other areas of the country. It is not consistent across the country. Those are some examples of what I would place in the domestic area and how you get that alignment, which we can follow up on. I realise we are running out of time.
On the visa side, we have said that you need a scale-up visa. That was recommended in 2014 and has been a follow-on recommendation in the Kalifa Review that we took part in. It has now launched. One of the big issues is awareness of it. People are not aware, so we need to increase awareness. We also need to make sure it is designed for what it was meant to do, which is speed up the process, and it is not necessarily speeding up the process yet, so there are elements of that that need to be undertaken. We also need to change the language around some ways in which we currently are talking about the importance of the need for international students and international players to come into our economy. We need to recognise that as a UK environment. Language is important in terms of signalling.
Q112 Lord Ranger of Northwood: For full disclosure, Ian, you and I have known each other for the best part of 15 years, when I was involved in setting up the digital office for London, that era in the late 2000s, 2010, where we had this huge scale-up, start-up ecosystem emerging in London. Exciting times. You have seen that change over that period—you have been heavily involved. You have mentioned some challenges of risk appetite for funding coming through at that level between angel and venture—full disclosure I am also an angel investor—but also at the £100 million-plus level, a decline in funding appearing to come in there.
We are trying to unlock how we can get more of this; is it risk appetite or is it incentivisation? From an investor perspective, what are the challenges and what has changed over that period? I remember rather a booming time a decade or so ago. What has changed, and what can we do to help unlock that a bit further?
Ian Merricks: It is a great question, and the number I glibly referenced earlier was circa 1 million new incorporations per annum. That was less than half that number 10 to 12 years ago. As a country, we have really created a lot of support for the start-up phase. There are a few questions in there, but I will tackle one. Of the things that were created during that period, such as the Seed Enterprise Investment Scheme, or SEIS, through the Treasury’s creation of that product 13 years ago, it gave angel investors a 50% tax break for backing an early-stage, idea-stage company, typically in the first two years of trade. That has unlocked £2 billion of funding into start-ups as they are incorporated. The EIS scheme, its big brother, which gives angel investors a 30% tax break, in the course of its life has unlocked £39 billion of funding into 59,000 companies. That was renewed only in September 2024. That has had a knock-on effect on some recent downturn, certainly at seed stage.
These measures that were created within that 10 to 15-year period that Lord Ranger speaks of have been international case studies of how to support start-ups well with government intervention that does not have to look like government capital. There are other examples where it is not capital—we have talked today about tax breaks under the EIS and SEIS schemes—but there is other early-stage support. I chaired a network of 70 accelerators, and 11 were funded by Government to solve particular problems, such as creating sectoral clusters in particular regions.
The early-stage investment activity that government participated in during that period at seed stage included initiatives from the British Business Bank, such as the Angel CoFund, which gave a kitemark badge of quality to some companies that were being funded and enabled more private investment to crowd in. In that same timescale, Lord Ranger, the Start Up Loans scheme was created in 2012. That delivered 118,000 loans to help people move to their first £25,000 of funding, then £50,000 of funding—very early doors, in essence, to hand in their notice and get going on their start-up. That [scheme] has invested over £1 billion of funding.
These are great initiatives that have not cost government a lot and that were really focused on the start-up phase. I would not say that we have necessarily lost our lustre as a scale-up economy, we just never really had it. All that activity was focused on the start-up phase. Irene has done great work with the ScaleUp Institute, which started tracking what the next stage looked like and how these companies got bigger over the last 10 years, but the support has not caught up. Because that support is not there, and capital is part of that, that is where these challenges are currently most painful.
Irene Graham: I would like to just pick up some points there. We have cliff edges at the moment. First, we need to be consistent with our tax economy and keep consistency with these things, including business relief, but also, we have cliff edges. Most of our businesses that scale will scale between 10 and 15 years, in terms of some deep tech. Some particular tax environments at the moment cut off too early. What does that do? That incentivises your investors to not follow through but actually move into earlier stage.
We are in deep discussions at the minute with the Government, working with colleagues such as the EIS, first, on what those cliff edges are and how we remove those, such as taking away the age limit. That is a barrier to some scale-ups—those that are getting bigger—actually accessing the capital or leveraging those, or our investors are creating much more of an incubator investment and not the follow-on capital that we need. We can pick that up further with you because that is pretty important.
We have used a lot of acronyms today. We have talked about LIFTS, and we have talked about the British Growth Partnership, but these are all under the British Business Bank. This goes back to the question of whether the British Business Bank is given full permanency. There has been some movement towards that already, but is it at the scale? Then there are our devolved banks, which is Scottish National Investment Bank and the Development Bank of Wales, which are also very vital to their local economies. Are they permanent? Permanency crowds in private sector money. They know there is certainty, and these are things that we have to get right for the long term.
The same with Innovate UK, which is very good at de-risking that very early stage. We need to make sure that it is both focusing on the scaling phase and given the ability to follow on and join up. We need to see referrals between Innovate UK and British Business Bank in terms of the funding. We need to see businesses that are getting that funding moved into procurement. There is a whole range of ways it can be organised. It is not about more money but about how we are sharing information and organising referrals, and that goes across the private and public sector. We can follow up on that.
Lord Berkeley: Irene, I found your evidence about what was going on in schools, in the sixth form, very interesting, but generally there seems to be a feeling that across the country it is all a bit chaotic. Who, if anybody, is in charge? What about the various companies that you both support for this development? I suppose my question really is, what more can the Government do to ensure that these really important issues are dealt with in sixth form, should we say, or a bit younger, on a consistent basis across the country?
Irene Graham: I hope that some of the intent to review the curriculum takes into account the scale-up economy. How do the Government create the right scale-up forum to inform into that and not have knee-jerk reactions? For example, level 7 apprenticeships are used by a lot of scale-ups. They are now being discontinued to rightly focus on the youth element, but our scale-ups are also supporting the youth element. How do we look at levers that do not cut off one thing that might be working, but also build into the next?
It is important that the Department for Business and Trade—we have had these conversations—is working really closely with the Department for Education in relation to what is required in that skills system. I made this point earlier: it is also about how our universities and business schools being measured. If the measurement is mainly in research and not on the knowledge exchange into the growth economy I am working with, that can skew where you see the balance of activity. There have been some interesting reports under the spin-out review that look at that as well.
Q113 Baroness Young of Old Scone: You heard the previous session, where we did quite a lot on the Mansion House scheme and a little on LIFTS and various measures that have been put in, and you have talked about tax and public co-investment as well. Are you holding your breath for the Mansion House scheme or are you more or less sceptical about how Mansion House II will have an impact?
Irene Graham: Mansion House is necessary—all levers are necessary. This is an important step alongside the pensions review, which also has the backstop now that will be put in place to measure that. We have a range of our pensions and institutions moving forward with the Mansion House Accord: Phoenix, M&G you heard earlier, NatWest Cushon. There is a whole range moving forward but it takes time to align that with the growth economy. The FCA regulatory status of the Business Growth Partnership is a very important step that has now taken place as well.
It is a very positive move. We have been decades at this. These are the biggest single changes that we have had, and we need to let them go through. But we must reverse what has been 4% now of our institutional funds and pension funds going into equity of any sort. That used to be at the 50% level. What we need to see with the Mansion House Accord is that those can also invest in small quoted companies and listed companies, as well as directly through co-investment vehicles.
It will be about the implementation now. That is not just at the executive level that has bought into this, but we must see it at the governance level. How we ensure that education of the growth economy—something that was said earlier—is undertaken, not just at the executive level but at the governance level of trustees, and who the trustees on these boards will be important. The British Business Bank and Innovate UK have a role in those education and referral processes.
It is also very important for this committee that we have an industrial strategy coming up that will include the financial services sector. We need to see that industrial strategy for the financial services sector include the fact that our financial services sector will back our scale-up economy and the cross-industrial sectors. It needs not just a focus on how we grow our FS businesses, but actually how they deploy into our growth economy. That is an important element within the industrial strategy that we need to see emerge.
Ian Merricks: I am more sceptical from my perspective. It is great that the Mansion House reforms are coming through, but they are not likely to reach the area where they are most needed, which is coming as early as this handoff between seed to Series A and early Series A-stage investment. That is a view shared by Wyndham North, the managing director of the British Growth Partnership, and by the current Lord Mayor’s advisory team, who all believe that any injection of capital from pension funds will want to be deployed towards marquee [funds and] companies.
There is an additional worry there that if the funding is coming in from pension funds into venture, does that just sit in the existing very large venture capital firms to help them grow existing big assets under management, existing big company portfolios through to a faster international trade sale? I am a little more sceptical about whether the Mansion House reforms will create the improvements needed where the data shows the investment gap is most acute.
Irene Graham: To your point, Ian, there is also a worry that it will just go into infrastructure because that is the understood asset, and the growth economy is not. You then look at how the metrics are deployed and what is required to be directed to the earlier stage as well. We have international money that goes in very early—we will share our industrial strategy insights with you—and you can see that they are coming in early at some stage at Series A, and pretty much by Series B, our industrial sectors are mainly invested in by international players. We have to address the risk appetite, and that is done by how you put KPIs and metrics into some vehicles that are being established.
Lord Lucas: What sort of KPIs go in, particularly?
Irene Graham: I will follow up, but you might say of the X percent that has been placed into, let us say, the British Growth Partnership, you want a portfolio approach, so a percentage of that will be deployed into early-stage seed opportunities, and then others will be deployed in that larger scale-up capital phase.
Lord Lucas: Should we just say, “We’ve given you this tax advantage; all of that should go into the UK risk assets”?
Irene Graham: There is the UK risk asset part, about which there is a view that that should be occurring, and that measurement and oversight we heard about earlier is going to be important. There are also the vehicles that are established, and what metrics you give them in terms of how they allocate the portfolio.
Lord Lucas: You have done a lot of work on procurement. It seems that a lot of it is that the people doing the procurement have a set of objectives that are not where they should be in terms of the national interest; they serve some regulatory or local interest. How do we change that? What more do the Government need to do beyond what they are doing already?
Irene Graham: One of the things the Government have been very good at is giving growth duties into different departments. Also, the growth duty to the CMA is important. So how do we leverage the CMA as well, for looking at the procurement dynamic that is occurring both at government, local level, national level and in the private sector? It is about making sure that what I will term procurement champions are properly dedicated roles with clear KPIs, and they are working and organised across government in that regard.
There is a carving-out of some R&D innovation procurement, where there is a recognition that X percent will be used for that type of investment. For example, in the US, we know of companies in life sciences investing £50 million from their procurement R&D arms of the US Government into UK businesses. They are not investing in one bulk, but they are saying, “We will invest in tranches”. We need to think more like that and give the objectives and the cover to our officials to be able to do that.
Q114 Lord Stern of Brentford: Thank you both very much for coming and for the very thoughtful evidence. This is a question about the National Wealth Fund and the British Business Bank. We have covered that and touched on them, and you heard the earlier discussion, so this is really a request for a key message. What would you recommend to the leadership of those two institutions around what they should be doing over these next few years? What would you say to the basic shareholder of those institutions, which of course is us—formally, the Treasury?
We have discussed the importance of these kinds of banks in their ability to take the long view, and their ability to take the risk. Of course, they have to have confidence in their future in order to take the long view. We insanely sold off the Green Investment Bank, which casts a question over how long these institutions can last. How would you summarise your key messages to the leadership of those two institutions, around scale, risk, collaboration, and to the shareholder?
Ian Merricks: My one is probably easier because the National Wealth Fund does not feature in the area that I am talking about, so then that targets my feedback specifically to the British Business Bank. We heard earlier that it has made some improvements and that some reforms to the British Business Bank are now coming through, which all sounds positive. The British Business Bank, if it is not known, is the largest limited partner investor in the UK. That means it is the biggest investor into VC funds in the UK. There is a lot more it could do around that. Despite that great potential and credential, it is backing at a rate of circa three funds a year, so it is a very slow pace to back new funds coming through. Over the decade or so it has been operating it has built up a bank of these funds, and it is, by default, the largest LP investor in those funds. So maybe we should pick up the pace of getting that out.
There are some reforms that the DBT has signalled are on the way and that should see British Business Bank be able to extend its Enterprise Capital Fund scheme. The Enterprise Capital Fund scheme is the entity that backs early emerging new venture funds, particularly to address equity gaps. We are quite hopeful of that, but that is yet another initiative in the future; that is going to land no earlier than April 2026. That is my first comment.
The other is that we talked about how the British Business Bank and Innovate UK are very proud of this MoU that they have between them for collaboration. It is still very much siloed. That is now just two public finance institutes talking to each other, which is good, but I would not say that that is the work done. It has to have much greater involvement and collaboration with the entire venture landscape.
One of the tasks of our ScaleUp Investment Mission work was to understand who within government and the public finance initiatives is supporting companies on their scale-up journey, with investor readiness and guidance around what the investment milestones might be. The Treasury thought it was the British Business Bank; the DBT thought it was the British Business Bank or Innovate UK; the British Business Bank said, “We don’t have a mandate for that; we don’t have any specific company support programmes”. DSIT said, “Do keep us in the loop; we’re working with Innovate UK to consider this”, and Innovate UK said, “Much greater effort is definitely needed to drive this system integration, we’ll need partners to help deliver”. That I describe as my pinball one-pager.
It was that difficult—I had to go through 10 painful meetings to get to that. If that pinballing around of public finance initiatives’ support for scaling companies on their funding journey—quite a basic set of milestones and metrics—is this disjointed within government, an MoU between two public finance institutes, forgive me, does not solve the problem. It needs to see much greater venture collaboration, and that is not money. That is saying, “How can we better signpost? How can we better create pathways? How can we better guide the companies on their journey as they come through?”
Irene Graham: As I said earlier, the British Business Bank must continue what it is doing. The Regional Angels Programme and the CF funds are expanding out to the south-east. It needs to be given the scale of capital to be able to do what it does today, but it also has to be given flexibility and agility. I have mentioned the fact that it is the key cornerstone in replacing EIB and European money in the venture environment. It is not, however, allowed to be a lead investor. There are many private sector investors that will invest in a company, providing there is a co-investment with them. At the minute, we do not give the British Business Bank the ability to be a lead investor. We equally have not yet given it the ability to proactively invest in some AIM companies and small quoted companies, and that is an opportunity for it as well. I said earlier that we need to make it fully permanent, as well as the Scottish National Investment Bank and Welsh development bank, so that you can see the permanency there, which gives them the ability to crowd in private sector.
On the point of joining up that Ian makes, I was involved in the original establishment of the British Business Bank, with something called a referrals mechanism under the Small Business, Enterprise and Employment Act. The British Business Bank and the Government have an opportunity to re-look at that referrals mechanism, which was debt-to-debt, looking at that now from an equity point of view. How do we make sure we are much more joined up and referring on, not just in the public sector environment but the private sector? What we see is that it may be backing private sector entities that are investing in the growth economy, but when those private sector companies that are being supported at arm’s length, if you like, need that next follow-on round of funding, they are not then able to be referred back and joined up into some other programmes that are now available. That is an opportunity that we can give you more information on.
The regional network of the British Business Bank needs to be allowed to be expanded and dialled up using the infrastructure that we have already. Both Innovate UK and the British Business Bank have a key role in the education of our pension funds and others about the growth economy and the returns that can be made. There are opportunities there as well. We will follow up on that—I know we are conscious of time.
Ian Merricks: If I were just to add some colour to Irene’s statement there, it is easy in these kinds of sessions to think, “Well, I’ve heard that that’s being done so I’m assuming that is okay”. The regional operations for British Business Bank that we just said could be grown is 12 people. There is one scale-up director per 12 regions. Their job is to raise awareness of the finance ecosystem locally, but they recognise they have no direct interventions, no levers to pull. Their wording on this was, “We would merely signpost existing funding streams”. When we are talking about the regional support, it is different from the regional funds.
Irene Graham: That is the way we need to look at all this. Innovate UK has a range of scale-up activity now that it did not have 10 years ago. It has a scale-up programme, scale-up directors and a regional infrastructure through Catapult, through a regional workforce. When I talk about looking at the account management, or dialling up the regional networks, we need to holistically look at all those resources and make sure we have dedicated account managers for some of our most innovative scaling firms at a local level, which link up to high-growth teams and concierge services at the centre of government, so that you can join this up. That is looking at the whole entire resourcing and how we align that effectively.
Working with the regional network, we have given the evidence that we have talked about before to develop things such as the south-west fund that is now available, or the Scottish fund that the British Business Bank now has, or what it has done in Wales. So there is a way of using that network to then actually develop the ECF and other funds, and we can give you the evidence of that. It is about all the resourcing and how we deploy that effectively, recognising what is there today and building on it. There is a journey that has been going on for that. The Government almost at a national level need to give the confidence to officials that that is a journey they want them to continue and make sure that that referral and account management work effectively.
Ian Merricks: It is useful to be aware that the British Business Bank has a part to play in this that is not necessarily the driving resource bank that we might expect it to be. Innovate UK, amazingly—I was quite astonished to learn this—has 400 of these nationwide innovation growth specialists, plus 30 to 40 scale-up directors, yet we are still seeing this terrible progression from start-up phase, where Innovate UK’s funding is largely targeted, to the scale-up phase. It is definitely a great question as to whether Innovate UK and the British Business Bank are to be trusted to deliver that account management and progression, or whether they need to involve greater private sector collaboration across the venture ecosystem. That definitely needs to be considered.
Irene Graham: It is also about how the combined authorities play their role. I said about the local growth plans having a scale-up aspect, so it is how we combine those public resources, as I say. The other bit is how we follow the customer. I have talked to Lord Vallance about this. We are very good at backing projects. We are not good at using our data to follow the customer. I come from a banking industry where how you use CRM systems, how you use account management and how you follow the customer—not just the one point of intervention but properly following them and handing over—are really important. There is a real opportunity to do that with the resourcing we now have and the tools that are available.
Q115 Baroness Willis of Summertown: First, I had better declare an interest. I am a University of Oxford professor. I have a spin-out; I am one of the one in 14 where it has gone to Series A. So I have had first-hand experience of many of the things that you are discussing. I am nowhere near the large company scale; Irene—wow. This is one of my questions, about how you have these 30,000 scale-ups in the UK, and very few of them are these billion-dollar industries. Just slightly changing the discussion here, what recommendations can you make to boost the important role of these other smaller companies? With many of them it is this whole-systems approach: without one of the smaller ones, you cannot do the bigger stuff. What can we do to boost those as well?
Irene Graham: We have always been focused on that whole range of companies, actually—it is not just about the unicorns and decacorns. They will come from these companies. That is why I have been so focused on one of the roles the ScaleUp Institute has played, in our course on driving economic development through scale-up ecosystems. This must be embedded at the regional, local level. It is important to give some stability to the structure, particularly in England. In Scotland, you have Scottish Enterprise and Highlands and Islands Enterprise, it is very clear, but in England we have moved from RDAs, to outlets, to growth hubs, to combined authorities.
Our local growth plans have to have a very clear scale-up ecosystem development that allows them to focus on the scale-ups in their economy, in the various sectors they are in, which are not just the industrial and strategy sectors, and lean into those effectively with the private sector. We are seeing really good things in, for example, the north-east. They have Scaleup North East; it is a private-public partnership, which, despite the changes, has been consistent in having that brand and focus. That is allowing it to move up the table in its scaling up of the businesses that you are talking about.
Much of what I have said about the recommendations applies locally as it does nationally. It is a great opportunity now, with the mayoral combined authorities, to really focus on their growth plans around scale-ups and learn from each other. Something called Grow London should be replicated in every area; what Scaleup North East is doing should be replicated; how Coventry and Warwickshire have deployed account management should be replicated. They can learn from each other, but we must have that scale-up brand and knowledge and that knowledge sharing. Universities are a very important part of that.
We know that is working well, and we know where there is more to be done—I am happy to share that—but that is going to be a very vital focus in this regard. I mentioned earlier that national frameworks delivered regionally are a big reason for why the US and others do this well in their federated systems.
Baroness Willis of Summertown: Ian, I would like to just follow up on, again, a really interesting point about the VC-backed companies. If you are fortunate enough to get VC backing, then you as a founder very quickly get diluted almost to nothing, in the UK anyway. Is there more that domestic VC funds could do to support the founders of the companies? You have given an indication of the drop-off in the number of companies. There is a language out there now where most people say, “Well, don’t do this because you’ll end up with 1%. You’d put half your career on hold”. Now, I am not speaking personally about that, but at the coalface, there are many people now just saying, “Whoa, I’m not going anywhere near that”, and it is putting people off. I am interested to know whether that is your experience as well. Also, what can be done to bring more domestic VC investment, do you think?
Ian Merricks: Your example is particularly apparent with university spin-outs, where the university already has a large piece of the equity on day one, and then subsequent dilution is just much worse because there is a smaller piece of pie for the founder to be shared. There is definitely some very negative mood music around venture capital at the moment, and a bit of it is probably the industry’s own making. It has sat on its hands for the last few years, and it has allowed international—particularly US—investors to buy the gap where it is not funding companies.
That was Series C, it was Series B, it was Series A, now it is seed, and now it is pre-seed in areas of deep tech, where the old funding escalator of SEIS, which was created in 2012—as we mentioned earlier—was £150,000 to hand in your notice and launch your website, to launch your first steps of your business. With the next step, that is now £250,000, so it has gone up, but you can be the judge of whether that is enough to get a business launched. The next step after that was a £750,000 EIS investment, usually a year to 18 months later, followed another year to 18 months later by £3 million of a VCT fund investing in you.
That as a whole continuum is broken. It does not work, particularly applied to deep tech, where you have businesses that maybe need $5 million of pre-seed funding to get to market because they are in quantum computing, AI, cryptography, cybersecurity: any of the advanced areas that we should absolutely be leaning into with our research base and our university skills to say that these are the kinds of businesses that are going to be global by default, that are going to be world-changing, where we have a real opportunity. But there we are, still trying to fund them with the old funding model that is not fit for purpose on this funding escalator.
First, university spin-outs struggle with this more than most in terms of over-dilution. That is being addressed. There is an initiative called CoSTAR Network , which is five universities collaborating on creating convertible loan mechanisms instead of pure equity. That is useful because it means that you can buy the university out at a later point. Regarding the general progression of a company and its dilution, it is not fair to say that that is specifically a UK challenge. Dilution is always suffered by founders and is the trade you make.
Baroness Willis of Summertown: I would like to answer that. It is more of a general point, and you are right; a lot of the things we are looking at that are coming through and becoming very valuable outputs are coming from universities, and the universities also are seeing that as a funding source for themselves. That also has to be very firmly factored into this. As you are saying, the real problem as I see it—and I think this is the point you are making—is that now, even at the seed stage, we have international investors coming in, and there is no stopping them coming in with much bigger offers on the table.
Ian Merricks: What that does is it very quickly moves them to a Delaware inc[orporated US company].
Irene Graham: That is why we have to get much more proactivity and connectivity and build out things such as replicas of Northern Gritstone. We need to get that really embedded locally, coming back to those local plans that we talked about.
Lord Ranger of Northwood: Just briefly, we have not mentioned the private equity interjection at that point as well. As an adviser to a number of businesses that are going down this route, I see this rapid attraction of private equity to this, but also a culture of founders then just looking to exit early. Do we have to change that so founders can feel that they can stay longer, and how do we defend against the more razor-sharp focus of private equity groups?
Ian Merricks: If I take the first half of the question—Irene, private equity might be more your comfort zone. It is not fair to say that UK entrepreneurs are looking to get out too early. Because of this broken funding escalator, they have [often] already been in it for many, many years. They get tired. After 10 years without a proper liquidity break and without secondaries, which are beginning to come through in the UK but have been rare, they have all their life’s work locked into one company, with shareholders governing a lot of what they do. You could see why they would welcome a liquidity break. That is an entirely different conversation, about whether there are instruments that could be created like secondaries, which could enable founders to go again, to pause for breath, to pay down their mortgage and to start thinking about growing the business to the next phase.
I would take that challenge if we did not have a backdrop where businesses that were set up with a five-year, seven-year horizon are now 12 years old. They still have no great access to an exit landscape, which has been depressed for macroeconomic reasons for the last four or five years, all of which has added to the duration of the company’s life cycle. The private equity piece is a different challenge, but companies exiting early is often due to the frustration of founders having limited liquidity otherwise.
Irene Graham: I briefly add that we have to look at some dynamics that are evolving with the London Stock Exchange and what it is doing to democratise the access to capital. What are the modern platforms that we can use? Floww is an interesting model that the London Stock Exchange is invested in, which is a platform to bring investors in across the earlier stage into local businesses. For example, GC Angels is a partner in that, as is Innovate UK, to bring the early-stage business. All universities ought to adopt this because it gets the earlier-stage businesses access to the follow-on capital.
Then you have what is happening with PISCES. Many of our businesses in the UK want to remain private, so that ability to bring that in to give you liquidity, and the reform happening in the main stock exchange, are all very important elements that are all linked together. A lot of our venture capital is currently also invested in by international players. What we now must see is that money coming from what is being released through the pension reforms, and getting that in, as we said earlier. There is a whole mix there, including re-looking at the tax incentives, not being short-term with them, and building for that longer term in relation to how some of our funding environment may behave at this moment in time. Dialling up the risk appetite is really important.
Q116 Baroness Neuberger: Very quickly, you know what we are trying to do: we want to create an environment where our science and technology base can be translated into productive companies that grow and build and stay in the UK. That is what we want to get to. We have to do a report and we have to give some solid—dare I say it—almost easy recommendations; we are going for at least doable recommendations. If you each had two to give, what would they be?
Irene Graham: You have to be consistent and build on what is working, make permanent what exists today, at scale—that is not necessarily the case in all instances—and give agility. I have talked about the importance of that in relation to the British Business Bank and the development banks, and how you organise government effectively to join up as well as maintaining the tax breaks. Then you have a real opportunity under the industrial strategy, the small business strategy and the trade strategy to make sure they are focused on scale-ups, to make sure that procurement is used as a lever into this environment, and that you create the account management around that.
Those are three strategies coming out that really need to home in on the scale-up economy side and think about the organisation of government and that procurement lever through that.
Ian Merricks: The good news here is that we are not asking for more capital. The suggestions I would make are to target the capital and the capital reforms that are currently in train, whether those are the Mansion House reforms, the Invest in Women Taskforce—a £250 million new pot—or the British Growth Partnership, and target those where the data shows there is a need. It is very easy to get carried away with, “We need to create more £400 million cheques to create carbon-neutral rocket ships”; I sat in a round table with Secretary of State for DBT and heard that, and saw it noted and people thinking, “Oh yes, we should do more of that”. That is a very small market, where the other end of the funnel has a massive break in it that is stopping our future scale-ups coming through. So, target capital where the data shows it is needed.
It is not just about the provision of capital but about ensuring that there is structured scale-up support, particularly with reference to investor readiness, resourced on a nationwide basis. The capital is there, the companies are struggling to access the capital, and that is particularly worse once you get into the regions. London has six times the amount of funding going into it than any other UK region.
Secondly—I am probably answering your question with a very liberal definition of ones and twos—is for government to maybe listen harder. You have asked for concrete policy recommendations. We presented the Government with six consensus-backed recommendations, supported by 100 ecosystem leaders and £10 billion-worth of VCs, presented it at 60+ meetings over the past 10 months. We have really been through the houses with all that. Yet, while that has all been talked about, three more quarterly declines have occurred.
That is definitely not a sensible pace for a Government who are focused on growth. We have to remember that we are in a competitive global landscape. This is not about the UK and our regions but about how we perform in the world, and we are definitely slipping behind. So targeted capital and support where they are needed and greater venture collaboration with the private sector would be my two.
The Chair: Thank you both for giving us your time. It has been a very interesting session and very informative, and we are very grateful to you.