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Examination of witness
Professor Dame Fiona Murray.
Q270 The Chair: Welcome to the second part of this afternoon’s session of the Science and Technology Select Committee. We are very pleased to welcome as our witness Professor Dame Fiona Murray, associate dean of innovation at the MIT school of management. She is joining us remotely.
Dame Fiona, as part of your opening statement, could you set out for us what the major challenges are for companies when they try to scale in the UK rather than going overseas? Which areas should the Government focus on to address this issue?
There is a second part to my opening question. As you will know, the UK’s industrial strategy has set an ambition to have the first trillion-dollar technology company by 2035. This has been a big challenge for all of Europe for a long time. What needs to change for that to happen?
Professor Dame Fiona Murray: Thank you again for having me. I very much appreciate it. First, it is really important just to set out that, at least when I talk about thriving scale-up companies, I am talking about those companies that often emerge out of our vibrant innovation ecosystems but are doing so at sufficient scale that they are also connected to a very strong industrial base. They are producing product solutions and so on at sufficient scale both to create jobs and to have an important impact.
I would also say that, while doing this is incredibly important for economic growth and national competitiveness, it is increasingly important for national security and as a vector of international competition. It has become even more important today than it ever has been.
There are two overarching things that are going to be important, particularly in the UK. One is focus. We are probably not going to be able to be good at everything. It is likely that we will most effectively support scale-ups in some particular areas of focus where we have comparative advantage. That is a challenge for government and for countries, but it is an essential lesson.
When it comes to the conditions, I would focus on the two ends of the life of these scale-ups. The first is about setting the initial conditions and the other is about making sure that, later on, there are large markets for the solutions. The challenges of scale-up start in how these companies are created and how well they are structured and capitalised early in their life, so we set the initial conditions. The second half of this is about how we make sure there are effective markets that are large enough for the solutions.
Maybe I can talk about setting up the initial conditions. We might think about this a little bit like children. If we give them the right education, nourishment and so on as young people, they thrive as growing adults. It is exactly the same for companies. We have to make sure that we set the initial conditions for companies to start in the United Kingdom. I would put that into three buckets: the people, the infrastructure of support and the money.
When it comes to the people, it is extremely important that we give people the right education at every stage to make sure that they understand the way in which to build companies, they appreciate the cultural relevance and that this is an incredibly powerful and important career path, and they have high levels of ambition. One thing that is quite distinctive about early-stage companies in the US is that they tend to have very significant ambitions. Articulating that and supporting individuals in setting very high ambitions at the start is essential.
The same is true for people who have been successful where we want them to come back and do start-ups again. That will get us into capital gains tax and so on, making sure that I can be ambitious the second time around, if I have been successful the first time around.
The second thing in the early stages of success has to do with access to test and evaluation infrastructure. We know that these companies need to deploy their capital extremely efficiently. One of the most inefficient uses of capital is, for example, to rebuild lab equipment that I might have used in a university. I am in effect having to reinvent the wheel, build completely new lab space and buy new pieces of equipment. In the very early stages, we can allow very significant capital efficiency by making sure that university core facilities, so test beds and evaluation facilities, are very straightforwardly accessible so these companies can demonstrate their ideas and move along technology readiness very rapidly.
The third piece is money. It is the case that we have some tremendous programmes for companies very early in their life cycle, whether that is through proof of concept funding, fellowships, seed funding, seed grants and so on. One of the challenges is that, in magnitude, the quantum of money that is given is often extremely small. If I am undercapitalised early on, I cannot necessarily build the team I need to build, with the right people, at enough pace to outpace the competition or run the experiments, the test and evaluation, that I need to do. It would be a bit like saying, if I am developing a new drug, that I can only test it on five mice when I should probably test it on 500. I want to make sure that early amounts of funding are adequate, even if that means making hard choices about not giving everybody a little bit of money, but giving a smaller handful of companies a little more money.
That is particularly true with government funding. I really commend the Government for a lot of their work around proof of concept and other sorts of funding structures, but, relative to what is optimal, those are often quite small. In turn, that feeds back into this point about ambition. If I know that the funding on offer to me is small, I set my ambition low. It becomes a rather negative cycle of low ambition and low amounts of funding. That feeds into the smaller amounts of capital that these companies have early in their life.
If that is true, as they start to scale, they are not in as effective a position to go out and raise more significant amounts in subsequent funding rounds. That makes it more difficult. They take longer to get to these key milestones and generate the evidence that larger investors want to see. If you wait too long, you begin to lose your competitive advantage; your intellectual property becomes less valuable. There is a set of things around these initial conditions that I believe are extremely important.
At the other end, it is important for us to understand that scale-ups will scale and money will come in. Their ambitions will be set high when we know there are significant market opportunities for the solutions that they generate. Those are markets both in the procurement sense and in the capital market sense.
With respect to procurement, we are increasingly doing the things that we need to do as a country to send procurement signals. Again, we often do that in a way that is slow and is not sufficiently large to say, “We’re not just going to give you a small experimental contract. You have a very reasonable chance of getting a contract in something that the Government deem to be extremely important”. To the extent that government is a large customer, we need to demonstrate significant scale in those market opportunities.
There are also opportunities to send other sorts of demand signals. In particular, I am thinking of the market for capital with respect to listing. I believe that your previous session focused on those topics. If I am looking to become a public company in the UK, and to understand whether the capital markets are interested in me and whether there is enough coverage or liquidity in those markets, it is fair to say that either my scale ambitions are going to be lower because I do not necessarily see a plausible public exit or I am going to look to the other side of the Atlantic. We have to solve for both ends of this spectrum.
In all instances, even when we have some very important solutions, programmes and activities, we need to reduce frictions. The building of companies is about taking a lot of really well-designed steps—experiments, if you like—towards a very ambitious goal. If at every step of the way I am subject to a small additional friction, those add up and accumulate over time to make it much less easy for me. There are frictions at the beginning of the journey to scale up, but there are also very clearly frictions in how I access the capital markets, build facilities at scale, plan and so on. It is quite frustrating because it is quite a boring shopping list of frictions, but it is a really important set of small things that over time wear down the set of entrepreneurs and their investors. I will stop there for a moment.
The Chair: Thank you very much for a very informative introduction. That is very helpful. We have quite a lot of questions for you now.
Q271 Viscount Stansgate: Good morning. The US innovation system is something that the UK often looks to with envy. Although it is a different economy, what could the UK practically adopt from the US system? What would we need to do to make that a reality? I heard you say that there is a boring shopping list of frictions. Do I take it that that boring shopping list does not exist in the USA but applies in Britain? Can you give us some examples of how we could learn from what makes the US such an innovative system?
Professor Dame Fiona Murray: Of course, yes. I have been fortunate enough to spend most of my academic career at MIT, which is an extraordinary institution, largely studying the innovation ecosystems around the United States and globally. I have also had the privilege of coming back and working very closely with the UK, which is a source of tremendous pride. On my part, I am really honoured to do that.
One of the most important things to set out is that, although we think of the US, as you have rightly described, as a very large and vibrant economy, the phenomena that we are talking about, the start-up and scaling of businesses—particularly the ones that I am familiar with, which are in deep technology, coming out of research labs, universities and national labs—are highly concentrated activities.
Perhaps the most significant characteristic of the US innovation economy is that it is highly concentrated in probably less than 10 regions around the United States, the biggest being Silicon Valley, Boston, Pittsburgh, Los Angeles and Boulder, Colorado. These are not all huge. Silicon Valley is unusually large, but it is highly concentrated. Less than 10 economic areas across the hundreds in the US make up a very significant amount of the innovation activity.
Secondly, it is highly concentrated in a small handful of organisations. If we look at the universities across the United States that are generating intellectual property and other seed corn for many of the very high-growth start-ups, fewer than 25 universities in the US are generating a significant fraction. Over 50% of the patents from American universities, for example, are generated by only 25 of those universities. Even within those universities, fewer than 2,000 faculty members are the ones starting the companies across the entire nation. Even in an institute such as my own, it is a very small handful. It is probably 50 people. That tells us this is a highly concentrated activity.
One characteristic of the US has been a willingness, typically, to allow for that concentration and to allow very significant amounts of resources to flow to particular academic institutions and particular individuals in those institutions in order to allow for both concentration and specialisation. Boston is particularly good at life sciences and defence and security; LA has become extremely good at very advanced manufacturing in aerospace, Pittsburgh in autonomy, and Boulder in space technology, for example. There are quite natural comparative advantages that emerge.
That is something for us just to think about and understand. If we were to think about replicating that in the UK, it would probably mean there are five to seven regions in the UK where this phenomenon is likely to take off. That is a difficulty from a political point of view. I absolutely recognise that. We need a whole-of-society set of opportunities. In the United States, we are beginning to see programmes that allow for these companies to grow in these vibrant innovation ecosystems, but also for the industrial base and the job stack to flow out across the economy a little more widely.
When it comes to what we can learn from the US, there are a couple of things. One is a recognition that it is an extremely large market. We have to understand that our market is significantly smaller, but it is a market that is typically subject to fewer frictions, certainly in government procurement. I am most familiar with procurement in the defence context. The US Government have gone through at least a five-year journey to reduce the frictions to procurement and to make procurement much more accessible to scaling-up companies. I think of the likes of Palantir, Anduril and Shield AI. I could give you a long list of those companies that have benefited from the reduced frictions of procurement.
There are also reduced frictions when it comes to accessing capital. When you look at the capital stack that these companies have to work within at every step of the way, there are proof-of-concept grants, SBIR funding and all these other mechanisms that go towards providing very robust foundations for these companies. Take the speed to get a contract as an example. There are some very nice examples of being awarded SBIR contracts within a 25-day period and things like that. That is really quite instructive. If you look at the issues around the regulation of the financial sector, it is less about the specifics of the regulation and more about the pace at which people are able to set up new funds and so on.
I would also point to the same set of frictions inside universities. In some comparative work that I have been doing, mostly informally, with some of our UK universities, the time to do a licensing agreement for a piece of intellectual property is orders of magnitude more in the UK than it is in the US. Part of that is simply because there has been less willingness to standardise terms and conditions and more of a desire to negotiate on a deal-by-deal basis. This handful of leading American universities have been willing to try to reduce the bureaucracy and reduce frictions by having standardised contracts and so on. All across the board, we begin to see the reducing of these small frictions and the concentration of this activity.
Alongside frictions, recycling of funding, and focus, the other real characteristic is a very strong willingness on the part of government and the economy more widely, including large companies, to be really clear about the problems that they want to solve and the big issues of the day. They send very strong signals into the market. Mechanisms such as DARPA are lauded for a variety of reasons. What makes them particularly important is that they send very strong signals about the important problems for people to focus on.
For example, we saw an enormous shift in the interest of our students, who are often quite useful leading indicators, towards energy and climate in the last decade. That was amplified, built upon and signalled through the Inflation Reduction Act, where some very strong signals were sent. The signalling was as important as the very specific tax breaks that were provided. That allows labour markets and capital markets to align around some very specific areas.
Those are all lessons that we can learn from the United States. The key is to recognise that it is a very large economy, but it is characterised by high levels of concentration in a handful of areas and a real willingness to reduce frictions in access to both the capital markets and the government procurement markets.
Viscount Stansgate: Forgive me for asking this brief question. Is there anything that the United States is beginning to envy about us in the light of circumstances since January?
Professor Dame Fiona Murray: It would be fair to say that most American universities at the moment, particularly those such as my own that have always thrived on attracting extraordinary global talent, would love to be in a situation, looking to the UK, where we were assured that the most talented individuals we admit to our undergraduate and especially PhD programmes can come in and are not subject to the huge friction and uncertainty of the visa situation, and nor are we as institutions.
It is also the case that universities are in a challenging situation when it comes to understanding funding flows. The willingness of the university system in the United States to fund, at very significant scale, labs, research activities and infrastructure in this somewhat small handful of places has been extraordinarily important in driving economic growth. The evidence suggests that it really is a very important piece of the economic growth story. That is definitely up for challenge right now. We are definitely looking at the other side of the Atlantic and asking that question. We wish it could be a little different at the moment.
Q272 Lord Ranger of Northwood: Fiona, thank you for your evidence so far. It has been thoroughly detailed. You have pretty much answered my question, so I am going to pivot a little. Fifteen years ago, I was sitting in City Hall. Working with the then Government, we looked at how we capitalise on this emerging technology boom that was about to happen around start-ups and scale-ups. We were looking at what challenges we could take away, how we could provide access to data, how we could make it easier to attract talent and how we could ensure that the barriers that started to come up in and around east London, where this ecosystem was developing, would not stop the emergence of a vibrant environment. Tech City and things like that happened. It was fantastic.
If we fast-forward 15 years, I hear you talking about the frictions that are here but not there. There are clear signals in the US. There is more money, more academic engagement and more willingness. Is it inevitable that our brightest and best innovators will go to the US? I hear what you are saying. They are telling you that they have gone there because of the lack of these frictions. What can we do to compete? It is 2.0 or 3.0 time here. What could we do to bring back that vigour to our ecosystems?
Professor Dame Fiona Murray: First, it is really important to recognise what an extraordinary transformation there has been. I first visited Silicon Roundabout, Shoreditch in 2012. It is really important to recognise the huge transformation that has happened in the UK economy. Some amazing start-ups have been built in London, both in the financial sector, insurtech and so on, and around our leading universities.
There are some very important companies in hardware, space-related technology and quantum. I would call out companies such as Pragmatiq. That is a really important example.
IonQ is a very instructive example, as a company that has built upon a huge investment in quantum. It is useful for us to understand the acquisition of Oxford Ionics by IonQ. Is that a success story or a failure story? I think of it as a success story and I am happy to describe why. We should be incredibly pleased with much of what has happened.
In software, we can get this transformation reasonably quickly. Software companies are very capital-efficient. They can test and evaluate very quickly; they can engage with customers; they can adapt and learn. When we are trying to build companies in deep tech based on hardware, it just takes longer. The job opportunities at some of those deep tech companies are huge. If I am building a quantum computing company or a fusion energy company, I can build an entire job stack. I do not just have jobs for a few computer scientists. I have to put concrete into the ground. I have a significant amount of engineering. I have an entire stack. That is going to take longer.
We have to be patient. We are seeing huge improvement. I am seeing people come back. The CEO of Pragmatiq is a very good example of somebody who worked in Intel for many years and who has come back to join as a growth-stage or scale-up stage CEO. We have a huge opportunity to attract people back, not necessarily to start the companies but to become the next-generation CEO who is going to up the ambitions and scale. We need to do the same with boards and board membership. We need to bring British talent back, press people on their sense of patriotism and so on. There is a lot to commend what has already happened.
It is definitely the case that we have some scaling issues. As I have said, the market is one issue. As a country, we live a little uncomfortably between two models. There are two ways to make an effective market that drives companies and scale‑up. The first is to have a big market. The US and China are good examples of that. The other is to have very focused and targeted markets. An example of that would be Singapore or Israel. I can be a very vibrant economy on a very small set of things. Those companies test out, get very rapid signals back from their own markets and then scale globally.
In the US, they can test out rapidly and scale internally. In Britain, we are awkwardly in between. It is a funny thing to be medium size. We have to try to take on the best characteristics of the small countries, to be very fast and send out these very strong signals as to the things that we really want, and to be willing to be quite focused. I appreciate that the industrial strategy has narrowed down a list of sectors, but even within that we have to be willing to be even more focused on areas where we think we have very significant comparative advantage and really clear-eyed about what we are good at. That is hard to do.
We need to recognise that it might not always be in the big, shiny and sexy things. It might be in the first tier of a supply chain. If I can give you a very specific example, Tokamak Energy is a very interesting fusion company that spun out of Oxford. It started in direct competition, in effect, with an American spin-out from MIT called Commonwealth Fusion Systems. It is a really instructive “twins separated at birth” example. Commonwealth has been able to accumulate billions in funding; Tokamak found that more challenging. It was harder for it to get the early funding at scale, so its experiments were slower. What Tokamak has done is really interesting. It has said, “We don’t think there is the capital access to do the US version, but there is an enormous opportunity in the supply chain of these magnets and materials that are going to be hugely important to a variety of industries”. It has really focused there. Sometimes we have to just get a little cleverer about that and recognise our comparative advantage.
That would be my general take on this. First, there are huge successes that we can point to. Those successes have gone well beyond London and the golden triangle. Pragmatiq is building facilities up in Newcastle; there are some amazing things happening still in south Wales around compound semiconductors and so on. There are lots of interesting opportunities there. That is the important thing, but we still have to focus.
There are some other frictions, and I am happy to go into more of those. This is a continual piece of work that we have to be willing to do, particularly because our markets are smaller. Friction relative to market size is as much of the issue. In the US they are reducing the frictions more and their market is larger.
Q273 Baroness Walmsley: One of the major differences that we have heard about is significant risk aversion in institutional investment in the UK compared to the US, contributing to a shallower pool of private capital available for companies in the UK. What advice would you have for us in trying to address this?
Professor Dame Fiona Murray: This is a question that we have all been wrestling with for quite a long time. I really commend all the Mansion House work that people such as Saul Klein have been doing. I see a quite significant movement. Organisations such as M&G have been extremely forward leaning in allocating into growth capital and allocating some of that growth capital into university funds, such as Oxford Science Enterprises, Northern Gritstone and so on. We are beginning to see that happening.
There are probably things in the weeds and the frictions that are for the experts in these areas to talk about, but a very particular kind of expertise is required to evaluate very early-stage types of particularly private asset classes, such as very early-stage venture capital, university-aligned venture capital funds or even early‑stage growth funds. In general, our large pools of capital—whether that is our endowments or our pension funds, the L&Gs and the M&Gs—have not necessarily had that expertise in-house.
Part of that, again, is because they are smaller. It would be very difficult in a smallish pool of capital to have an expert in every particular area. As those pools of capital grow, and as we consolidate some of our pension funds, scale now works in our favour. They can begin to have the specialised individuals they need. It is very important for the Government to continue to promote the importance of these kinds of vehicles and, in particular, to be willing to provide support.
At the moment, there are a number of very nice examples. The NSSIF—National Security Strategic Investment Fund—has a fund of funds mechanism. It provides capital to particular funds, especially those focused on areas of strategic importance and strategic advantage. It is, in effect, also giving a few people security clearance, so they understand key market opportunities and needs, and can have particular conversations about trusted capital. That is building an ecosystem of early-stage funds that have good relationships with the Government, understand what the Government need, and can come and ask challenging questions.
We need to do that for growth-stage funds and to signal that, as a country, we probably need half a dozen of those. It is as much about saying we want them and ensuring that they have good relationships with government departments as it is about doing their work for them.
It is very important for us to think through whether the British Business Bank and the National Wealth Fund should do direct investment or whether they should allocate a lot of their capital to supporting the private sector in growing these funds. There is a tension at the moment as to whether the National Wealth Fund should just do the investments itself. If we do that, we are sort of doing the private sector’s job for it, rather than pressing it to build its own expertise.
I would love to see an and/both. I do not want to undermine the excellent efforts of the National Wealth Fund, but we need to make sure the private sector is encouraged to say, “We want half a dozen of these big pools of growth capital” and to invite some of the leading fund managers into those activities.
I would call out Lansdowne Partners, M&G and so on. They are really beginning to do this and very much hope for close relationships. On the understanding that they are not getting any preferential treatment, it would be very helpful for us to do more of that.
The Chair: Before we get on to the next question, we touched on risk aversion with Baroness Walmsley’s question. You have the great benefit of having been in the US for a long time. You know the UK very well, of course. Is it true that the UK environment is generally more risk averse than the American environment?
One hears of entrepreneurs going to the US. We had one witness a few weeks ago who said that within a few hours of being in Silicon Valley he was meeting venture capitalists who were offering, almost there and then, to back his organisation. He says he has never experienced anything like that in the UK. Are Americans fundamentally less risk averse?
Professor Dame Fiona Murray: What can I say? Silicon Valley is a very odd place. I am going to be very honest with you. Silicon Valley is not really America. This is my point. The US, particularly the innovation economy, is a set of regions. Silicon Valley has some very specific characteristics. You have some incredibly large funds and hugely high‑net‑worth individuals. They are often investing in software, where they can learn very rapidly about how well a company is likely to do. They can get market signals extremely quickly. They rely very heavily on social networks and connectivity.
I would be very surprised if the individual who got off the plane was a stranger. It would surprise me if that person had not been referred to the investors by highly trusted individuals. I cannot imagine that he walked off the street unknown. It relies on a very dense set of social ties and social networks.
It is fair to say, though, that it is a larger economy, and so, if you look at the average size of the venture funds, they are larger. I look at the university‑affiliated funds, such as Engine Ventures, which is connected to MIT, and so on. Those focused on deep tech tend to be larger, which means they are able to make more bets. If I make more bets, I can have a more diversified portfolio and I can take more risk by construction. If I can make 20 investments in my portfolio, I am going to be able to make many more wild bets than if I can only make three. There is basically a fundamental scale issue. This is why I believe we need to make sure that our public money goes to amplify scale instead of giving little bits of money to everybody and spreading it like butter across the system.
If that is true, it becomes a reinforcing loop. I can then be ambitious and ask, and I know I might get it. What happens is that people are trained, in a sense; they are expected to be ambitious. Nobody will laugh at them for saying, “I’m going to have a space-based solar company. I am going to put solar panels up. I need $25 million for my first demonstration”. Nobody would think that was strange.
The other thing I might point out is that the initial conditions of these ambitious deep tech companies are funded by institutions but also by individuals, so high-net-worth individuals and family offices. Those high-net-worth individuals, sometimes through formal venture vehicles but also through individual vehicles, have been profoundly important. They are willing to put significant amounts of money at risk. That requires you to have a certain number of billionaires in your midst.
Again, some of that is a reinforcing loop. Some of it is in the weeds of capital gains, for example. If I am a very successful entrepreneur in the US, the first thing that I am going to do is start to invest in the next generation of entrepreneurs. The capital gains rules really make that more plausible, particularly in areas such as defence and security. In a healthcare climate where people might have a personal interest, we definitely see significant pools of individual capital. Breakthrough energy is a very good example in climate. That is a lot to do with people’s individual desire to put more capital at risk. It is easier to take that risk when, as a group of investors, you are wealthier and you have more capital at work.
The Chair: Thank you. That is very helpful. We are going to move on to defence and security now.
Q274 Baroness Neville-Jones: I would like to draw on your experience with the NATO Innovation Fund and talk about defence. I do not know whether you have had the opportunity to follow the UK scene at all, but we have just had the strategic defence review. The authors said some important things, including about the need for MoD procurement. They have created an armaments directorate, which will procure for the Armed Forces overall instead of having competing procurement systems for the different services. There is also a strict injunction to procure partnerships with industry on an outcome basis. If I might say, the procurement system was already moving to the notion of, “Here’s the problem” rather than, “Here’s the requirement”. Nevertheless, it has some way to go.
The issue arising out of the moves that are being made is that, while there is a strong sense of urgency, we face a situation in which a lot of our defence companies have disappeared and we have to rebase. In that sort of situation, what would your advice be to those who are trying to get the industrial base for defence manufacturing going again in this country? How best could we get the investor community interested in that?
Professor Dame Fiona Murray: First, you are absolutely right that the MoD was already moving in some of these really important directions. I had the opportunity to be engaged in some of the very early innovation activities. I think it was called the Defence Innovation External Advisory Panel. The MilCap, the person in charge of military capabilities, was Sir Rich Knighton. In him, you have somebody who deeply appreciates innovation. He is an engineer who likes technology. That is very important. The move to a NAD is also a really important opportunity.
There are a few things to say here. First, we need to ask, “What are the problems that we need to solve? What are the capabilities that we need to have?” This is about having a coherent capability demand signal. Again, this is very consistent with my broad view about these things. Let us be clear about the problems that we need to solve, whether that is navigation in the North Atlantic, Arctic operations or whatever it might be, as opposed to having very narrow specifications for particular widgets and solutions. That allows for the coupling of private sector ingenuity to the very important defence and security mission. We need to be really clear about those demand signals, those problem sets and opening those up.
We also need to recognise that the defence primes are going to continue to be extremely important. They are often systems integrators and have significant success. We need to support two flavours of companies. The first is the SMEs that sit in the industrial base and are basically flowing up through into the defence primes. The second is what I would think of as scale-up innovation-driven enterprises, these “start up to scale up” companies, which really are distinctive. They have very high growth ambitions. They want to grow quickly. They need to have a conduit directly into the MoD and build their own supply base. I worry that sometimes we conflate talking about SMEs and industrial-based supply chain companies with these high-growth innovation-driven enterprises, which are the people we have just been talking about. They need a sophisticated fast response from the MoD.
There is a really big opportunity for this UK Defence Innovation unit, directed by the NAD, to engage with the ecosystem and to pull through from these ambitious non-traditional start-ups and scale-ups. To do that well, it is really important that we send signals and put forward challenges into the system, so people understand that we are really supporting those early-stage explorations with front‑line commands in a way that is not too fragmented, and get very serious about test and evaluation.
It is incredibly complex at the moment. If I have an underwater drone company—there is a really interesting company down in Portsmouth called Kraken that does autonomous vessels—I need to test in a legal way that does not get me in the way of coastguard or maritime activities. How do I test and evaluate? How do I demonstrate and generate the evidence that this thing works so MoD can make some quick decisions? How can I get not just a nice-to-have testing contract, but a contract at scale without having to re-compete repeatedly? Those are the four buckets of things that we need to try to do well.
My recommendation would be that UK Defence Innovation does not try to do this for every single part of the capability requirement set, but starts with a few things. The US experience with the Defense Innovation Unit has been firstly focused on drones and then they have expanded from there. Trying to do everything at once is very hard for a new organisation. It is important to allow this organisation to grow and evolve, and not to ask it to do everything all at once.
Baroness Neville-Jones: If I have understood correctly, one of the things that you are saying is that SME does not necessarily equal innovation.
Professor Dame Fiona Murray: That is correct.
Baroness Neville-Jones: For innovation, you need to have a particular eye on the requirements of those who are innovating, which includes infrastructure or, in the example that you gave, the ability to test.
Professor Dame Fiona Murray: That is right, yes. We tend to refer to SMEs as if they are interchangeable with these scale-ups and high-grade companies. They are not the same. A lot of my work has been about distinguishing them. We do not have a good name for them. I call them innovation-driven enterprises—IDEs. That is just a cute alliteration to distinguish them. Both are really important.
Baroness Neville-Jones: It is an important distinction to make, though.
Professor Dame Fiona Murray: I think so. If we say that we have a one-stop shop for SMEs, the sorts of things that I would want to provide for these smaller companies in the supply chain might be to do with supply chain financing, debt and so on. If I am really trying to support some of these high-growth innovation-driven enterprises, it is much more about rapid contracting, venture capital, and test and evaluation. They want fast responses and they need a more sophisticated or, let me say, different approach. We need to be very clear about that distinction. Our defence innovation team needs to understand both of those and to distinguish its support mechanisms.
Baroness Neville-Jones: Does DoD manage to do rapid? One of the problems with government procurement is that they find rapid hard. Does the DoD manage rapid? Can the MoD learn anything?
Professor Dame Fiona Murray: The DoD does rapid. It does not do it everywhere, but it has done it in some very specific places. It has created this thing called the Defense Innovation Unit. Our UK defence innovation entity—I am not sure what it is called yet—could probably learn a lot from that. There are already discussions to be had.
What have we learned from them? We have learned that their real job is, again, signalling, providing people a pathway to contracts and doing it at pace. Again, this is about reducing friction. You could think of them almost like shepherds, who guide people through and make sure they understand the contracting mechanisms.
They have done it in some very specific areas. As I said, they have been quite focused on doing it in UAS—so autonomous systems, in effect—drones and what have you. They are starting to do more of that with manufacturing and so on. A lot of progress has been made in space command. Because it is a new command, it is not encumbered by old systems. Again, we have to try this out in areas where the spirit is willing and not do it in the hardest place possible.
That is what we have learned from the US. Let us go with the newer systems and newer commands.
Baroness Neville-Jones: We find that with the integrated command in the UK, which is the digital and data end of it all. Can I ask you just one last question? Is there anything that you have learned from your time with the NATO Innovation Fund that we ought to be aware of and thinking about?
Professor Dame Fiona Murray: The NATO Innovation Fund is structured as a private venture capital fund with contributions from 24 sovereign nations, including the United Kingdom. We have a commitment to find companies and make early-stage equity investments in companies that will bring capabilities to the alliance. I will tell you that we have found extraordinary companies in the UK. We have made significant investments in the UK, Germany and elsewhere in Europe. There are amazing technologies.
There are three things that we do for these companies that they think are important. First, we provide them with unique support to find their way into contracts in the UK, Germany and other allied nations. It is very difficult for a start-up company to have enough boots on the ground to be able to find its way in. We are trying very hard to help them understand the best test and evaluation settings, the best early-stage contracts and the best competitions.
Secondly, they want support around protecting their intellectual property and ideas from adversarial capital. We have found there are reasonably significant amounts of capital trying to come in, perhaps less in the UK and more in other parts of Europe, or other threats that are trying to take some of this technology. We have been working with those companies to make sure that they are well protected from those things and they understand good and less effective sources of capital. When you are short of capital, there is always a danger that somebody with a nefarious intent is going to come in.
The third thing is about responsible use and making sure that these companies, which are developing dual-use technologies and things that can be used in military settings, have a framework for responsible use that is consistent with a wider set of ESG values and allows them to access capital. Again, we are increasingly seeing a shift in the capital stack towards a real willingness to invest in these kinds of companies.
Those are the things that we see companies really wanting. Relatively speaking, the UK is doing quite well. Again, on adoption, it is still hard for our companies to find the right front door into the MoD.
The Chair: We are going to move on to the role of universities in driving innovation. You are very well placed to answer questions about this.
Q275 Baroness Northover: We have some challenges here in the UK, of course, but the UK has been historically very strong in terms of its university research sector. Over the years, there have been frequent attempts to leverage that into economic growth. That is an emphasis now. You have said a little bit about this, but could you tell us what works in terms of encouraging universities to drive innovation and help businesses to scale up? That would be very helpful. Could you draw upon your experience in particular from MIT?
Professor Dame Fiona Murray: Yes, of course. I am a very proud graduate of a British university. Both my children are coming to do their undergraduate degrees at St Andrews. That will give you a little bit of a sense of some of my views or at least some of their preferences.
MIT is a particularly extraordinary institution. It is not a typical American institution, although there is quite a lot that we can learn from it. Again, the first thing I would say is this point about concentration. When we look at American universities and their contributions in terms of research, patenting, start-ups and the education of innovators, we tend to look at the likes of MIT or Stanford. It is a dozen universities. We should recognise that we do not necessarily need, and it is not potentially possible, to have every single one of our universities contributing in the most maximal way to this particular type of innovation activity. With that said, all our universities have a real role in the skills stack that we need in our industries of the future. We should really understand that.
With respect to making sure that our research engines are transformed, the UK is doing well. It is fair to say that in many of our leading universities we are beginning to see real transformation and change. I would frame it around the people, the infrastructure, and the money.
On the point about people, there is a lot we can learn around training. The training is not just what they learn in the classroom. They could watch a video of me, but it is also the culture. The fact that the course exists and people are encouraged to take it is a cultural point that says, “We, as a university, think that innovation and entrepreneurship is important. It is something for our STEM talent as well as those who are educated in economics, humanities and so on”.
We really focus the education and training around entrepreneurship and innovation on our graduate students. It is important for our undergrads, but, to get the best out of our labs, we really have to focus on our PhD students, our MBAs and so on.
Baroness Northover: It is easier for you to do that for undergraduates with the American‑style degree, where people are taking a number of credits in different areas. There is more specialisation in the UK. Although there are more degrees now that span more than one subject, the American system is better geared to do that, is it not?
Professor Dame Fiona Murray: It is, although what our undergraduates, particularly our technical undergrads, find most interesting are the courses where we put interesting problems in front of them. They are doing engineering work or scientific work focused on a real problem, and we then wrap innovation education around it. What would it take to turn that into a real product? The education is a lot less about writing a business plan. We try to weave it into existing classes and a number of extracurricular things.
The US system has some advantages. We cannot change this in the UK, but we can at least think about what to do. An American PhD is five years long—it took me five years to get my PhD in engineering—with two years of courses and three years of research. That means I can do lots of things wrapped around it with respect to innovation and entrepreneurship. We have very significant success in educating our STEM PhDs and bringing them together with management business school students and others to focus on building their ideas, turning their research into businesses and so on.
In the more compressed PhD timeframes in the UK, it is a little more challenging. Programmes such as Entrepreneurs First, which Matt Clifford founded, are really important. They focus on giving individuals the extra time and space to do some of that. There are also really interesting accelerated programmes. We have one called Blueprint, where people have their PhD project and are really focused on what it would take to turn that into a business. There are some quite modular educational pieces that could be slotted, creatively, into curricula, in order to bring a combination of structure to demystify innovation and entrepreneurship, along with a culture in which it is acceptable to think about turning your PhD into a business.
We get huge support from our faculty members. You have to have support from the professors. The professors often give support, particularly here. In our tenure cases, we count commercialisation as an important contribution to impact. That tells you quite a lot about how we think about encouraging people to go to industry on sabbaticals and things.
The Chair: That is a very big difference.
Professor Dame Fiona Murray: There is a lot there that is quite interesting. That would be an important set of quite low-cost things that we could learn.
On the money side, again, we need more significant translational grants. Our translational grants are in the realm of $250,000 a year rather than $50,000. They are fairly straightforward. You do not have to find the perfect fit with Innovate UK. They are quite straightforward programmes.
We also need more significant fellowships, particularly through our national labs. Programmes such as Activate and Breakthrough give significant fellowships to individuals who have left their PhDs or post-docs to focus on building out their ideas into deep tech start-ups. More support for venture building would be really powerful and helpful.
The last thing that I would say goes back to this infrastructure point. We recognised quite early on that, when our faculty members and students started a deep tech company, they spent the first two years and the first $5 million replicating all the equipment that they had in the lab to repeat the experiments before they could do something. We started to make the core facilities and core infrastructure—an atomic force microscope or whatever it might be—accessible to start-ups on simple contracts with simple terms and without IP reach-through. Once they had left the university, they could then still use some of the equipment. After all, the Government have paid for the equipment, so it is part of economic growth. We have found that to be surprisingly useful for people who are building up their companies.
The Chair: Thank you. We have more questions for you. We are sorry to have so many questions, but we are really interested in what you are saying.
Q276 Lord Lucas: When you think of examples of academic research that was successfully commercialised, what were the characteristics of that research and its environment? What went right early on?
Professor Dame Fiona Murray: The things that tend to characterise things going right often have to do with the set of humans who are creating the initial early-stage company. There is often a moment at which an idea is really ripe for commercialisation. There has been enough research funding that it has been very well developed. There has been enough translational funding that there is no longer significant scientific risk; there is typically more engineering risk in it. At that particular moment, you have a set of humans: a PhD student who is just finishing or a post-doc who really wants this to be their career path and a faculty member who is interested.
It is quite a confluence of things, but, if I could pick out two, the first would be that the piece of work is far enough developed, beyond having a scientific impact, to have been de-risked from the scientific point of view and to have become something that is using private sector money to build a prototype. At that point, you are reducing engineering risk. It is not a science project any more.
The second is the people. When it has gone right, there is often a professor who thinks this is important and interesting, and is willing to allow a team to go off and do it. They give their support, but remain a professor, rather than thinking they would be the best CEO in the world. Most professors are terrible CEOs.
You need a confluence of humans. That might be a PhD or sometimes a former student who has come back. You need a small and trusted set of individuals, two or three, who will really begin to take this forward. Moderna is one of the most famous examples. Form Energy, which does grid-scale storage, is another. There is a long list. Those tend to be the characteristics.
For the ones that have not gone well, either they have come out too early, while it is still a science project—I can think of a few examples—or there has not been a productive relationship between the professor, the student with technical expertise and somebody with managerial sensibilities.
Lord Lucas: Can I just ask quickly about the contrast between the UK and the US? I am asking this as someone who is not an academic and therefore probably uninformed. It seems to me that what you are describing as a PhD is a lot more relevant than what happens here. Even in the sciences, a student can spend the whole of their three years doing something that is of no consequence and no interest; it is just a problem that happens to be lying around. It is not part of building a future. In this country, universities as a whole, when they are choosing what research to do, have much less of an eye on whether it will make the UK more prosperous than is the case in the States.
Professor Dame Fiona Murray: The UK continues to do extraordinary scientific research that is definitely building deep and powerful scientific foundations. In a place such as MIT, it is true that the majority of our professors are engineering professors. If you were to meet them, they might seem a lot like applied physicists, but nevertheless they are sort of engineers in their heads. They are interested in solving real problems. If you interviewed 100 of them, they would tell you what problem they are trying to solve in both a scientific and a practical sense. They have the capacity to articulate their work in both of those ways and are rewarded for doing that. We take that very seriously. We reward people in the tenure process for being able to do that.
It is also true that our money comes much more through particular departments. It was Lord Willetts who pointed this out some time ago. In the UK, the money comes through UKRI in general. It is organised by discipline. In the US, the money comes through defence, energy or NASA/space. Even our research money is branded through particular departments that own very large problems. They own health problems, defence problems or energy problems. That makes a difference. The ways in which those challenges are articulated tend to be a little more focused on some of those iconic problems. That is how people think about what they are doing.
Likewise, the aim of DARPA, and potentially of ARIA, which I know has been discussed, is to frame big, important and ambitious problem sets where you could really do some very serious work.
Q277 Lord Stern of Brentford: Thanks so much, Fiona. We have taken so much of your time, and we have learned enormously. I had not heard all this before, only bits. There is a probably fairly brief answer to my question. I am speaking to you as a professor of entrepreneurship who has also been very active directly with firms of various kinds.
You have spoken about frictions and barriers. I wanted to ask about the elephant traps. Frictions and barriers slow people down or stop them, but elephant traps are things that wipe out what looked like a good idea. That is part of the story of trying things out, seeing what happens, discovery and so on. You do not want to maximise the number of elephant traps. If there are major pitfalls out there, you want to try to understand them and steer in directions that avoid them.
Could you give us examples of that kind of pitfall or elephant trap? How can Governments help to avoid them or at least not lay more traps themselves? I know it could be a long answer, Fiona, but I am not pressing you for one at all because we have imposed on your time.
Professor Dame Fiona Murray: Just so I understand, do you mean traps for a singular company or traps that exist in our economy and our system more broadly?
Lord Stern of Brentford: I mean traps for particular sorts of companies or examples that illustrate more broader problems.
Professor Dame Fiona Murray: If we think about these companies that are coming out of universities, these deep tech ventures, we have to have an expectation that a significant number of these will not succeed. If all of them succeed, we probably have not taken much risk or done anything very interesting. It is important to say that all these systems and mechanisms have to be configured to stop things as well as start things.
We have to be willing to shut things down and say, “We tried 100 things here. We really like these 10. Now we like these five”. Being willing to give more money to the things that we like and stop funding the things that we do not is, in general, a really important discipline for government departments, investors and companies themselves. I always encourage entrepreneurial teams to do what I call a killer experiment, so the thing that would kill them, to show when it does not work as much as to show when it does.
In terms of things that really can cause companies to have significant problems and challenges, there are probably two types. First, for these deep tech companies that are starting to try to build significant physical manufacturing—that is really important and essential; it is the opportunity for economic growth and jobs, and so on—the risk is being enveloped in regulation. That is true in the US. I have suggested that we have less of it, but it is still an issue, with the complexity in the local and regional planning regulations around the siting of particular facilities and so on.
A very good example that has been an elephant trap in the UK and the US is the regulation around the processing of critical minerals, for example. To be resilient, we probably need to do that. We have neither found a way to regulate our way through because we know it is dirty nor funded totally novel ways of doing this in a regulatory pathway. Planning, siting and all of that is a huge potential trap. We could unleash big change in particular places in our economy and our country, if we decided to make that a little more straightforward.
The other big trap that we run into is that, in our capital markets, we really do not have enough coverage, enough analysts who really understand our companies, particularly these deep tech ones. That means that, as I am thinking about where I am going to list, one of the things that I think about is, “Will anybody understand me? What will they compare me to? What will the multiples be?” If I think there will be many more people who understand me in the US, that drives me there. That is a big issue for us, but we can solve it only on a sector-by-sector basis.
Oddly, I am quite positive about the fact that, for example, in defence security resilience—I really do mean resilience seriously, not just as an add-on—we have very deep understanding and insight. We have big companies. We have had analysts for many years. We could become a place with analysts and a stock market that would really welcome those kinds of companies. We could create pockets of real listing opportunity on a sector-by-sector basis and overcome the other big elephant trap, which is the financial one, especially in terms of listing.
Lord Stern of Brentford: Thanks so much, Fiona. I look forward to catching up on other things.
The Chair: We are reaching the end. You have been absolutely wonderful in answering all our questions. We have touched on ARIA already, but Lord Borwick has a question for you.
Q278 Lord Borwick: I was very enthusiastic when ARIA was started, but it was started without the DARPA challenges, which is one of the big public images of DARPA. Is ARIA as risk taking as it pretends it is or is it trying to do things so sensibly that it does not make any mistakes?
Professor Dame Fiona Murray: I probably do not have enough detail on what it is precisely doing to give you a really satisfactory answer to that question.
Lord Borwick: It is probably not yet clear exactly what it is doing.
Professor Dame Fiona Murray: It would be very interesting to ask Ilan what went well and what did not go well. It would be very interesting for the current CEO to have an exit interview with him, if he was willing to do that. I knew him from Boston before he came to the UK.
If I was to look at it from the outside, from what I know, I worry that ARIA is trying to do too many things. It has quite a lot of different challenge areas writ large. My view would be that we probably need a smaller number that we give more money to, rather than spreading it quite so thinly, which is something that we like to do as a country.
I do not know whether, in any one of those given areas, we have really made some choices and shovelled significant funding at a small handful of groups, as opposed to giving a bit of money to 25 people with complicated collaborations. We have a significant amount of money at our disposal, I think £800 million, but we probably cannot spread it out over 10 or 12 challenges.
I would really be hopeful that those challenges, as laid out, could at least be traced forward to some particular end users, such as government departments or customers who might think it was interesting, so the people working on them could be excited about their practical application. One of the bits of genius of DARPA has always been a real ability to trace through to some quite inspiring person who can tell you, “If you could develop insulin on the battlefield, this is what would happen”. It is a gigantic science challenge that has huge spillover benefits, but it is also a very interesting real-world problem. ARIA probably needs to do a bit more of that.
Baroness Neville-Jones: I think you are right.
Lord Borwick: I think so too.
Q279 The Chair: Dame Fiona, you have been terrific. I have one last question on behalf of the committee. As you know, our committee will be writing a report to the Government with recommendations as to how to improve this problem about the scaling-up of UK science and technology companies. At the end of this really useful session, I would like to know what you would summarise as the most concrete recommendations that we should make particularly regarding innovation policy. If you were to make a few concrete recommendations, what would those be?
Professor Dame Fiona Murray: I am very happy to send you that by email. It is hard for me. We have talked about the system. I have described how a lot of this is about some very specific sets of frictions and so on. If you do not mind, I would prefer to answer your question with a little more thought, as you want only a few recommendations.
Can I just make one, though? I read your questions very carefully. There is this commitment to wanting Britain’s first trillion-dollar company. If it were me, I would prefer to have 500 $2 billion exits. Genuinely, I do not mean to be trite. I mean that quite seriously.
There was a very specific time when these companies with very particular dynamics, which have become the standard setters for a decade, were created. We do not know what the next cycle of industries will look like. They will not have the same winner-take-all characteristics. As an economy, if we had 500 companies with $2 billion exits, we would create a set of individuals who themselves would become investors. Think of the jobs that we would create. As a country, that ambition would be more impactful in the long run. Without going against government policy, that would be my personal comment. I am happy to send you a few grainy recommendations by email, if I may.
The Chair: That would be terrific. Thank you. One theme that you have referred to quite a lot through your evidence is that we are in danger, in this country, of spreading our funding too thinly. You said that quite a few times. That is a very strong message, but you have been very helpful indeed. Thank you so much for joining us. It has been really informative. We appreciate it very much.
