The IMF predicts the UK will fall into recession, inflation is still high, and there is a real sense of gloom about the UK’s economic prospects. Even so, one bright spot stands out: the growth of the UK as a hub for startups and entrepreneurship. The amount invested in British start-ups has grown rapidly over the past decade, from £1.6 billion in 2011 to almost £28 billion in 2021. London is a leading destination for venture capital in Europe, with its start-ups raising twice as many funds managed by their peers in Paris in second place, and just behind Silicon Valley and New York globally. There’s just one problem with this success story: Britain’s best startups are being hunted.
The turmoil in the wider economy means that the once fertile UK venture market is drying up. Last year was the first on record where the amount of money invested in startups declined. Instead, companies look for money overseas, and find it often comes with strings attached in the form of requests to relocate.
The American venture market provides a certain draw. Silicon Valley is the uncontested startup capital of the world, New York is a bigger financial center than London, the American consumer market is bigger and richer, and American investors are more than happy to give startups more money for riskier ventures. We are always in danger of losing our best startups to American investors who want to be near the companies they helped build. Europe also took action. European funding bodies still give money to British companies for scientific endeavors such as drug development and space exploration; they just ask them to move operations to an EU country to continue their business.
We now risk seeing the founding generation lured abroad. In response, you’d think the government would do everything it could to get us back on track. It does anything but. Of particular concern to some of our nation’s most innovative entrepreneurs are the planned cuts to the generosity of the R&D tax credit. This incentivizes investment in developing new goods and services, and has become important for fostering cutting-edge innovation. Scheduled to come into force this April, research from Coadec suggests the reforms will cost an average of £100,000. Combine this with rising corporation tax, general Government hostility towards tech companies, and a poor domestic investment outlook, and it’s no surprise that companies are leaving.
Startup founders are not like the rest of us. They are dedicated to the company they are trying to build, and are more than happy to move between countries to make it work. Although only 14% of the British population is foreign-born, 49% of the UK’s fastest-growing companies have at least one foreign-born founder. Anecdotally, many of them are here because the UK is the best place for them to grow their business. When that is no longer the case, they will move on – taking the promise of jobs and further inward investment with them
We have seen this process happen with Estonia. A small country on the edge of the Baltic, it has the highest number of billion-dollar startups founded per capita. But while Estonia clearly has an enviable level of entrepreneurship, its population is too small and too far from other tech centers to provide the ecosystem needed to sustain startups. As a result, many of them move along the scale. Looking at ten Estonian startups valued at over a billion dollars, only two of them, Bolt and Veriff, are still based in the country. Skype is now based in Luxembourg, Gelato has moved to Norway, and Playtech to the Isle of Man. Zego and Wise (formerly TransferWise) are now based in London and ID.me, Pipedrive and Glia are in the US.
We should be proud of our startup ecosystem, but we should also remember that the competition for our company is global. Capital goes to the best companies, and their founders go to the best opportunities. Britain is in danger of losing its edge – and, like Estonia, its startups.
Aria Babu is Head of Policy at The Entrepreneurs Network
