Written evidence submitted by the D Group (IGR0095)

Context:

Our work has reinforced the view that we have a moment of generational opportunity across a range of partners in industry, as well as academia and research, focusing on defence and security, to create not only new jobs, but shift towards a more collaborative, data-centric ecosystem. However, leveraging the inherent strengths of regional economies in answer to national defence priorities will require a step-change in delivering national infrastructure, the public-private partnership and in the way established ‘anchor companies’ and young start and scale ups work together.

This submission is based on research from the D Group’s report on the UK’s defence innovation ecosystem, available here:

https://www.dgroup.co.uk/releases/unleashing-the-uks-innovation-capability-to-support-our-national-interests

Introduction:

International competitors can develop and adopt innovations faster than the UK given their faster moving, more responsive innovation ecosystems. Primes can sometimes struggle with in-house innovation given the scale and stringent requirements within which they operate. SMEs face a valley of death when trying to break into a market, with there being many points of failure on the journey from concept to commercialisation.

The UK must explore rapid 6-8 week cycles seen in modern conflict zones such as Ukraine, where problem identification to solution development and deployment is necessarily quick and responsive. How can we hit this level of responsiveness? Is it even possible in the UK? For the UK to reach this adaptability, it would require an approach that removes bottlenecks within its defence procurement and innovation process. Without significant improvements in pace, there is a risk that the UK will lag behind other nations, particularly as geopolitical pressures intensify. Today’s innovation landscape is fast-evolving, and speed is critical for national security.

There have been and are many ongoing attempts to improve our innovation ecosystem, with Government, military, Civil Service, industry, finance, and academia all running innovation programmes with varying degrees of success and staying power. This is not a new challenge, nor are the benefits of realising greater innovation. However, the context in which these efforts are made is changing. Only through a greater scale of collaboration can the huge strategic value and commercial potential of our innovation ecosystem be realised.

In practice, this means finding new ways of working together. The UK has some of the world’s most innovative universities and world-class IP, much of which is waiting to be unlocked through access to finance and commercialisation. Where we have a strong ecosystem of primes, SMEs and market entrants, the relationship between them can become strained when working together on large projects.

In other parts of the world, regional innovation ecosystems have succeeded where the underlying conditions for generating, testing, prototyping, iterating and scaling are strong. Fundamentally they;

-          Have streamlined legal and regulatory systems that are not cost heavy on new and/or smaller companies.

-          Transport infrastructure that makes travel to/from the ecosystem cost effective and consistent.

-          Access to affordable office and research and development space.

-          Energy infrastructure that can support lower overheads. This is particularly important for energy intensive work such as AI training and use. Without ready access to affordable energy, overheads for small companies can simply be too high.

Focusing on these foundational factors should be the first priority of Government in supporting regional innovation. The more able innovative people and companies are to invest, iterate, scale, grow and ultimately profit in the UK, the more likely they are to remain here and continue to support a strong and healthy regional ecosystem. News this week suggests China’s Deepseek r1 has reached parity with OpenAI’s o1 model. While the veracity of information about the size of the budget (speculated to be ~USD5m) and small team size is unclear - the efficacy of the model demonstrates that with effective policy in access to infrastructure, low regulatory burdens and a pipeline to high quality research universities - much can be achieved.

Innovation support organisations should be focused on solving particular pull-through challenges

Based on our survey of primes, SMEs and young companies (done in partnership with Ploughshare for the paper,), some felt there was a lack of clarity around where innovation support organisations sat in the value chain. There was a sense that while there are good levels of support for challenges at various stages of the value chain, there was no clear path to take an idea from concept to commercialisation.  For newer defence companies in particular, there was interest in the US DOD system in which partnership with a Department representative supports relationship building with the right organisations. 

Infrastructure:

The UK can improve its capacity to experiment, test, and manufacture. Without this, there are delays, cost and uncertainty when trying to develop an idea and subsequently commercialise it. This pushes companies to test and manufacture abroad, further incentivising shifting operations out of the UK. This is particularly salient if the UK is to fully develop and exploit its advantages in AI, semiconductor design and quantum computing. Infrastructure doesn’t just refer to working space, transport and internet connectivity, but also to energy access. The UK’s Grid is struggling to supply sufficient power to the data centres needed in these industries, effectively bottlenecking progress.[1]A National Energy Strategy setting out the UK’s intended energy mix, and underpinned by regional plans could support the urgent need to extend the Grid and enhance its capacity.

Similarly, transport connectivity is vital. Building new facilities, labs or co-creation spaces will not support innovation unless they are attended by people incentivised to take risks and collaborate. This is why it is crucial to consider the entire innovation ecosystem when building collaborative environments. Connecting them via transport infrastructure, cultivating supporting business services and ensuring individuals are actually motivated to use them are the only ways to fully realise the value of these environments, lest they become white elephants.

In researching our paper on the UK’s innovation ecosystem, we also found that outside of Oxford, Cambridge and London, university lab space was actually under-utilised, partially due to clear and consistent information about availability. Clarity around availability and a simple system to allow bidding for access slots could provide young companies the facilities they need to develop their offerings - rather than looking for and waiting on lab space. The Government should also explore accelerating the process for building and expanding access to lab space, particularly where innovation clusters have emerged. This could potentially be done through expanding the use of National Policy Statements to include innovation infrastructure, where they are currently reserved for energy, transport and water.[2]

IP

University IP is commercialised primarily through ‘spinning out’ via university Technology Transfer Offices (TTOs). The TTO helps protect the IP, often through patents and assists in formulating a business plan. A newly established spin-out company then seeks investment from various sources such as venture capitalists, angel investors, or government grants. The university typically retains an interest in the spin-out, benefiting from its success through equity, royalties, or both.

However, with constant pressure on budgets, universities are incentivised to capture as much value as possible from commercialisation.[3] TTOs in many cases aim to maximise shareholdings and royalties, rather than focusing on supporting founders to commercialise their ideas. VC Nathan Benaich’s spinout database suggests this often culminates in a drawn-out process, featuring “egregious” equity settlements that disincentivise founders and potential investors.[4] The Association of the British Pharmaceutical Industry found that while TTOs might be well equipped to perform licensing agreements, they often lack commercial experience and in some cases inhibited access to scientists, acting as a barrier to collaboration with the private sector.[5]

There is strong evidence to suggest that academic, rather than university ownership of IP is conducive to commercialisation.[6] Higher university equity stakes are associated with less capacity to fundraise from VC, with lower stakes associated with a higher spinout rate. This has led to ‘sneak-outs’ in some cases, in which inventors who bypassed their TTOs at least once are more likely to start a business.[7]

While this may have improved somewhat with policy recommended from the Spin Out Review, there is still much progress to be made in spin outs seeking to scale their companies within the UK. Fundamentally, the UK will struggle to compete against international competitors until our world class universities accept taking smaller stakes. This is especially detrimental when seeking scaling funds - VCs and PE firms are often put off by a 30% ownership stake on the captable.

Building communities of trust through regional networks is vital for enabling effective collabo- ration across the defence ecosystem. Achieving meaningful integration demands collaboration across large and small defence players and requires the government to take on a catalytic role: shaping problem-solving frameworks and driving alignment. Ensuring cohesive partnerships across the board will allow the UK to bridge gaps between public and private sectors, enabling a coordinated response to threats. While collaboration can be difficult due to ownership and prioritisation conflicts, it is essential for success.

The North West has an established industrial base and unique potential to become a major driver of technological advancement – but historically the Ministry of Defence has been more light-touch there. There is optimism about the region’s role in spearheading innovation and job creation across cyber, aerospace, and nuclear sectors, making it a focal point for national security. The North West’s industrial capabilities enable a goldilocks role for the UK: providing a just-right mix of flexibility and influence to work effectively with global allies – as well as providing an excellent petri dish for similar schemes that can be rolled out across the nation.

These benefits can be observed in evidence from analysis of University of Cambridge’s relationship with Silicon Fen. This highlights the effective role of senior university academics in facilitating university-firm technological collaboration, particularly through the creation of spin-off firms.[8] Spinning out innovative ideas into local firms facilitates the transfer of innovative concepts into commercial application and can be a key source of sustainable economic development. However, this model could work even better if built upon with greater connective infrastructure, more research and collaborative space, and more accessible property.

The UK has a strong network of innovation support organisations, designed to support all TRLs and innovation pull-through from concept to commercialisation. However, awareness of these organisations and understanding of the support they offer is limited. This is partially because innovators do not always understand their own capability and capacity gaps, but also because it is not immediately clear what support structures are available, or which one is best placed to address a particular challenge. In 2017, the Scaleup Institute’s SME finance monitor report found that only 16% of scale ups are aware of the British Business Bank. Ways to streamline access points to innovation finance and support systems should be considered, such as merging innovation support organisations that have similar priorities and strategies, as well as information campaigns to promote a single source of truth as to what support is available. 

Taking a holistic view here is important given there are currently many different initiatives and organisations across the ecosystem with strong concentricity of activity and interest. It is a testament to the UK’s enthusiasm that these efforts exist. But the lack of awareness or willingness to use them suggests we are spreading our efforts too thinly. A focused strategy will be necessary to make the most of our innovation ecosystem, and government should consider balancing the merits of separate efforts with their own working practices, with that of a consolidated and more navigable innovation support system.

Increase the surface area by which Govt, MOD, agencies, academia, industry etc can interact with each other – still too disparate and players still do not fully understand each other. This is  important for the defence innovation ecosystem, in which both Government and primes face the challenge of articulating their needs to innovative new companies, particularly when those companies are not already within that ecosystem.[9]Given the complexity of the procurement system, the Government should also consider education and awareness building opportunities for those working on acquisition, who might not be aware of the tools at their disposal cut through bureaucracy when seeking to acquire new capabilities.[10]

Region focused investment funds tend not to perform well.[11] Among other things it crowds out more efficient private investment. The ‘Growth Zone’ approach is welcome, in that it allows local Government the opportunity to sandbox a streamlined regulatory approach and improve the underlying conditions for innovation.

With these conditions in place, Government could explore demand side support:

Leveraging government organisations and Corporate Venture as ‘buyers of first resort’ to develop markets and ‘benchwarm’ promising young companies/direct support for potentially useful products

There are growing options in the UK when it comes to the ‘supply side’ of innovation; funding and supporting concept development, starting a company and more recently, scaling. However, realising the full potential of the innovation ecosystem and harnessing it in the national interest requires bringing an innovative product to market. It is not always the case that there is an immediate product market fit, particularly for promising novel technologies. By acting as a ‘buyer of first resort’ or as a ‘venture buyer’, a government organisation or corporate venture can provide demand for a product before it becomes commercially viable.

This approach is substantively different to ‘picking winners’, which has a history of mixed success across different governments and contexts, because it guarantees purchases (or the existence of a closed market), rather than direct investment into a company or project, preserving and leveraging market baked incentives. The development of the internet via DARPA, transistors through NASA’s Apollo Programme and cost effective launch capability through the commercial orbital transportation service program (COTS) are well-known successes. COTs successfully leveraged private sector mechanisms and competition to support the development of strategically valuable technologies  and a market that has maintained the US’ leadership in the space sector.

While cases from the US cannot directly translate to the UK given the scale of capital intensity, the idea behind the private and public sector supporting the development of strategic technology and markets by acting as an initial buyer can be applied in a focused way.

Leveraging the UK’s innovation ecosystem has become increasingly important through the 2020s, as the world enters a more unpredictable, unstable geopolitical context. Out-innovating international competitors and threats to national security is vital if the benefits of innovation are to be recognised domestically. This has raised the salience of improving the way in which innovation in defence and national security is cultivated and procured into capability. The UK has the foundations of a strong defence innovation ecosystem, but it must adapt quickly to this new paradigm. Finding new ways to collaborate is key to striking the balance between maintaining and upgrading existing capability and utilising emerging and disruptive technologies for advantage.

While there are lessons to learn from the innovation ecosystems of other countries, they must be understood in their own national contexts. For example, the US is often referenced as an exemplar, with Silicon Valley held up as a model ecosystem. However, efforts to construct a similar system through region-focused innovation funding is unlikely to be successful.

6 February 2025