Written evidence submitted by UK Research and Innovation (UKRI)


About UKRI


Launched in April 2018, UKRI is a non-departmental public body sponsored by the Department for Business, Energy and Industrial Strategy (BEIS). Operating across the whole of the UK with a combined budget of more than £7.9 billion (2021-22), UK Research and Innovation (UKRI) brings together the seven disciplinary research councils, Innovate UK and Research England. Our vision is for an outstanding research and innovation system in the UK that gives everyone the opportunity to contribute and to benefit, enriching lives locally, nationally and internationally. Our mission is to convene, catalyse and invest in close collaboration with others to build a thriving inclusive research and innovation system that connects discovery to prosperity and public good.




The inquiry asks for evidence, including:


Cross-UKRI Response


UKRI observes that the venture capital (“VC”) market is strong in the UK overall, but much of that strength is in the golden triangle of Cambridge, Oxford and London (along with Edinburgh and Glasgow). A strong VC market supports the creation of net new jobs and attracts businesses and highly skilled people to the UK. The more widespread it is across the UK, the more it will support the levelling up agenda.


Previous government interventions supported the co-ordination of investors in London and Scotland (through the co-investment funds) and public money creating or boosting local funds, e.g., Northern Powerhouse. Furthermore, the British Business Bank (“BBB”) has supported angel syndicates. BBB’s increasing focus on regional programmes is a positive move, and UKRI is keen to work with BBB to support even closer engagement with entrepreneurs leading highly innovative businesses across the country to understand the issues that affect them specifically. Continuation of local funds utilising public funding is vital with no gap between one scheme and the next. More importantly, however, is the need for government to act as a coordinator of investors through schemes like co-investment funds, especially at seed stage. This would attract more capital to areas outside the golden triangle, support entrepreneurs to find investors and could even co-ordinate new angel investors, thereby solving many of the market failures around lack of capital, access to capital and information. Co-ordinating new angel investors would, in particular, support long-term sustainable growth in venture capital investments outside of the golden triangle. The existing programme for angels focussing on supporting established angel groups (therefore, mostly in the golden triangle) and corporate finance companies.


UKRI and BBB are exploring opportunities for closer working. As part of this, we have conducted a data analysis project to understand the early-stage ventures and SMEs which have received funding from both UKRI (Innovate UK and Research Councils) and BBB. This project identified that UKRI and BBB support for early-stage innovative business are complementary. It also provides insights into the timings of UKRI and BBB investments and capital investment raised. Project outputs are due to be published in Summer 2022, and will allow us to explore opportunities for improving early venture financing and for working with partners to explore supporting scale-up.


The government’s Innovation Strategy also included a UKRI commitment to ‘establish a UKRI-wide Commercialisation Funding Framework’. The new Framework will ensure that opportunities are supported throughout their commercialisation journey. It will ensure programmes are designed and delivered to enable researchers and business to work together to take, to help ensure innovators consider access to finance, and to help take ideas to market.


The government has also made venture investing more attractive through tax breaks such as the Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme. UKRI notices that both schemes are due an update to increase their scope. For example, SEIS allows for early-stage investments of up to £150k which is now considered a very small amount of capital for a tech start-up. A point worth considering would be state-aid concerns recognising only the 50% tax break (£75k) to count as state-aid.


More investors are entering the Deep Technology (“Deep Tech”) market which increases capital and competition. Grant funding initiatives which are coordinated with private investors (such as Innovate UK’s programme) is an important part of this and helps the early development of applicable and market-validated technology. Additional support around “company-building” would also help.


UKRI is working with BEIS to implement one of the key recommendations in the 2019 Mike Rees report[1] into university-investor links around communicating UK university research commercialisation performance more effectively. UKRI (through BBSRC, STFC and NERC) along with other government partners (including DSTL/DASA, BEIS, UKAEA) has also funded the UK Innovation & Science Seed Fund (“UKi2S”), which is a complementary intervention in the very early-stage high-tech investment landscape. UKi2S invests very early in ventures emerging from the public sector research establishments (PSREs) and Research & Innovation Campuses and in certain key themes (Synthetic Biology) and helps its public sector partners exploit the commercial value of their research by providing early-stage, high-risk patient capital for high-potential businesses which often struggle to access the finance they need in order to develop at the earliest stages of growth. UKi2S has utilised its government sourced funds to invest £22m high risk patient equity capital, which in turn has been followed by over £750m[2] of private investment ranging from angels to VCs and large multi-national corporate investors. As evidenced in the independent review of UKI2S by SQW[3], published in 2020, the Fund has proven that the provision of public funding via UK Government as an anchor, and often founding, investor at the earliest stages of business growth is a highly successful approach to starting and growing R&D intensive businesses across the UK.


The Council for Science and Technology[4] has highlighted the need to develop a more diverse cadre of specialist investors in the UK by promoting the mobility of people across academia, industry and finance, especially those with deep S&T expertise. From a talent perspective, this has been linked to lack of such investors and asset owners with deep sector knowledge or entrepreneurial experience as a key weakness in the UK system. UKRI’s Strategic Plan[5] outlines how we will incentivise diverse, flexible careers with people moving easily between sectors, business and academia and pivot our skills and training provision to ensure researchers and innovators are equipped with the breadth of professional, entrepreneurial and technical skills needed for a wide range of careers.


Lastly, the VC market is reportedly nervous at the moment with economic uncertainty leading to more conservative valuations and investments. There is still a lack of knowledge around investment-readiness in many great companies which hinders their chance of success. This merits the strengthening of the VC industry in the UK to meet wider government objectives whilst seeking a resilient recovery not just during the post-pandemic era, but also after the Brexit announcement and Net Zero commitment.


Innovate UK input on Investor Partnerships


Innovate UK, part of UKRI, does not intervene directly in the VC industry in providing capital to VC funds in the way that BBB does. However, Innovate UK’s investor partnership programmes have operated (since an initial pilot in 2017) to align private investment, particularly from VC funds, into technology-led, R&D-intensive micro, small and medium-sized enterprises (“SMEs”) with stimulus through grant funding for R&D projects from Innovate UK. The investor partnerships model tackles the challenges faced by highly innovative UK businesses with strong growth potential in accessing the finance required to grow and scale. It does this by leveraging Innovate UK’s expertise, connections and grant funding whilst encouraging commercial investors to provide finance and business acumen to younger businesses operating in underserved markets.


Beauhurst research into the early-stage investment market shows that the “equity gap” persists in particular at the ‘seed’ investment stage. Their data shows that, while the number of seed stage deals increased during the Covid-19 pandemic as investors supported their existing portfolios, the volume of seed equity raised in the first quarter of 2022 fell away while volumes grew markedly at the ‘venture’ and ‘growth’ investment stages[6].


BBB has identified evidence of under-capitalisation of UK businesses compared to firms in other countries, notably in the US. This is particularly evident in Deep Tech businesses. BBB’s definition of Deep Tech represents a strong proxy for a wider group of research-intensive, R&D-led, capital-intensive firms that are typically those supported through Innovate UK’s programmes. BBB’s analysis in its Small Business Equity Tracker Report[7] for 2021 indicates that while Deep Tech firms in the UK and the US can be expected to have similar fund-raising trajectories (and survival rates), a gap in the level of investment is apparent from initial seed rounds, where US firms raise 1.3 times as much as UK firms, and steadily increases until later funding rounds stage, where, by round 6, firms in the US raise rounds that are 6.8 times larger (£52m vs £8m). As a result, the average UK Deep Tech raises £24m compared to a US Deep Tech raising £113m by round 6 of investment.


Investor partnerships address this “Deep Tech equity investment gap” by accelerating VC investment into highly innovative SMEs through direct alignment with R&D grant support at an early stage, so that innovative SMEs are better able to attract the necessary level of follow-on investment as they scale and grow. This alignment aims to ensure businesses are adequately capitalised, to reduce founders’ typical equity aversion and to reduce a tendency to use public sector grant funding as a substitute for private investment. The partnerships also work to build investor capability and confidence in areas aligned to BEIS strategy, encouraging them to invest in new ways, both in terms of sectors and stage of investment.


In 13 investor partnership programmes launched between 2017/18 and 2020/21, Innovate UK has allocated grant funding budgets of £67.5m, with a total projected aligned VC investment of £110m. As at March 2022, £38.4m in grant funding has been awarded to 153 SMEs alongside £101.5m in aligned equity investment made or led by 27 investor partners. Over £370m in subsequent additional follow-on investment in the form of equity or convertible loans from investor partners or other investors has been raised by SMEs involved in these programmes.


The investor partnership programmes have covered a range of sectors and industries, supporting the UK’s ambition to be a “science superpower” and to exploit the economic growth potential of innovation. Investor partnerships have been delivered in the following areas as part of Industrial Strategy Challenge Fund programmes:


The Transforming Food Production and Transforming Foundation Industries challenges support innovations that address the significant challenges of reducing the carbon emissions in these industries as part of the UK’s Net Zero ambitions.


Other sector-based programmes have included:


A Regional Angel Investment Accelerator pilot programme has been delivered to encourage early-stage investment in the North, North East and South West of England. Accelerating angel investment and seed funding is an important pre-cursor for SMEs that go on to seek venture and grow stage investment from VC funds. This programme has also demonstrated that investor partnerships can support the government’s ‘levelling up’ policies by supporting innovation outside London and the South East through attracting additional investment into underserved parts of the UK, with a proven link to the BBB Regional Angels investment programme. This approach also encourages more investment into SMEs founded by under-represented groups (such as female founders), supporting Innovate UK’s established activities in equality, diversity and inclusion in innovation.


Investor partnerships operate through staged competitions. Initially, equity investors (VCs, Corporate VCs and qualifying angel groups) with appetite for aligned investment in specific or broader scope areas are invited to apply to become investor partners by demonstrating credibility, capability, capacity and continued good financial standing. Subsequently, SMEs are invited to apply for funding by submitting a high-quality research and development project and demonstrating that they are suitable for equity investment and are investment ready. SMEs that meet both the innovation threshold and secure aligned equity investment from within the pool of investor partners will be supported.


Some 40 investors have been selected to join the “pool” of investor partners, of whom 27 have made aligned investment. These investors are primarily UK-based VC funds, a number of which have also received investment from BBB through its Enterprise Capital and Regional Fund programmes (including Longwall Ventures and Maven Capital Partners). Several overseas-based investors (for example SpeedInvest, a European fund and HG Ventures, a US private investment firm) have also been encouraged to increase their exposure. Investor partnership programmes have also attracted Corporate VC investors (for example Rabo F&A Innovation Fund and Legal & General). The range of investment strategies of investor partners is varied and includes specialist sector-based investors (e.g. Syncona in life sciences and Clean Growth Fund in net zero), specialist Deep Tech investors (including IP Group plc, IQ Capital and Oxford Science Enterprises plc) and impact investors (e.g. Social Tech Trust and Prostate Cancer Research).


An interim evaluation of the initial 2017 pilot programme, carried out by independent consultants SQW, confirmed that overall, the pilot played a fundamental role in enabling or accelerating early stage, very technical R&D which was deemed too risky/early stage for private investment alone.  The pilot accelerated access to finance, with a direct impact on projects’ technological progression and on the businesses’ development. The EU’s EIC Accelerator programme and a number of individual country schemes borrowed heavily from Innovate UK’s investor partnerships in their design.


Innovate UK is committed to continuing to use investors partnerships to leverage private investment from the VC market to support SMEs and deliver economic growth through innovation. The government’s UK Innovation Strategy[8], in its “Unleashing Business” pillar, highlights that “businesses’ ability to access the right type of finance at each stage of development is critical to allowing innovators to develop their ideas and enabling businesses to grow. While the UK already has a robust R&D funding system, we want to ensure that it is easy for businesses and innovators to navigate, address any outstanding gaps, and encourage a more connected supply of public and private sector finance.” Innovate UK’s Plan for Action[9], in its “Growth at Scale” theme states: “we will embed the use of investor partnerships to accelerate investment into innovative, high-growth-potential businesses”.


June 2022




[2] Uki2S Data as of 31 March 2022




[6] Equity Investment Market Update Q1 2000, Beauhurst

[7] Small Business Equity Tracker 2021 Report, British Business Bank.