8 ways the incoming government can support start-ups

It’s no secret – UK investors have less appetite for risk than their US counterparts. Compared to the US, it's hard for UK businesses to secure funding – and it’s holding the country back from scaling up our own large and successful companies.

Many factors are at play stifling this growth and not all are within the Government’s control. For example, the UK Venture Capital scene is much more risk averse than its US counterpart - UK investors are far too timid with a lower propensity for risk. In contrast, US VCs’ risk approach is epitomised in their ‘1 in 10’ investment strategy. If one company swims, that success will cover the loss of the nine that sink. This approach has led to huge success, particularly in the tech sector - eBay, Facebook, Google, Amazon and Apple all emerged from this risk-tolerant investment culture.

There are moves the venture capital sector can make to shift this culture, but are there ways the Government can get involved in supporting start-ups further to boost UK growth?

What has the government already done?

A big potential source of cash in the UK for start-ups and scale-ups is pension funds. But – you guessed it – pension schemes are also reluctant to support Venture Capital funds, as they have historically performed more poorly than other buyout funds.

Introduced in 2023, the Mansion House Reforms went some way to encourage pension funds to enter the fray. This scheme unlocked a potential £75bn for high growth businesses from defined contribution and local government pensions, supporting the current Prime Minister’s priority of growing the economy whilst delivering tangible benefits to pension savers.

Government-backed programmes were also set up in 2014 in the form of the British Business Bank, which has also gone some way to provide much needed start-up loans for companies. Through its subsidiary – the British Patient Capital – it manages a £2.5bn programme for investment into venture and growth capital funds in the UK, going where pension funds have previously feared to tread.

Looking to the future

As a result of some of these initiatives, there are some promising first steps to supporting growth and a less risk-averse investment culture in the UK, but what do we need to see from the incoming government, no matter which party succeeds in the General Election?

Here are eight suggestions:

• Extend British Patient Capital - providing more late-stage finance for companies to scale up will prevent them from relocating to the US where the VCs have deeper pockets.

• Support existing tax incentives for investment into riskier, high-growth enterprises such as Venture Capitalist Trusts (VCT), the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and grants from Innovate UK. As announced in the Autumn Statement 2023, the sunset clauses in the EIS and VCT legislation have been extended to 6 April 2035 continuing the availability of Income Tax relief for investors in qualifying companies.

• Spend government money on UK businesses - more government procurement for UK-based SMEs and high growth companies can help stimulate growth. Silicon Valley in the US has benefited enormously from procurement by DARPA (defense), NASA and other agencies.

• Make the London Stock Exchange more attractive for technology stocks, driving it to be the best in Europe again and competitive with Nasdaq. The proposed forthcoming listings changes should help boost UK growth and competitiveness and put a stop to our stellar companies like ARM moving away.

• Be cautious with VC taxation. Labour has plans to amend the taxation of VCs’ carried interest from the current capital gains basis (28%) to the more onerous income tax basis (45%). This could push our star VCs to abandon the UK.

• Promote collaboration and potential amalgamation of business angel networks to improve quality deal flow and attract more high net worth investors.

• Focus support on high growth companies that will increase employment (“companies with extraordinary potential”) with less emphasis on those SMEs that will never grow.

• Create better interconnected tech ecosystems. Tech companies, venture capitalists, local authorities, trade bodies, professional services firms, and universities all support start-ups in different ways. These institutions need to better connect with each other – competition permitting - to encourage continued regional growth. Reading Tech Cluster is one example – and the UK can learn from Silicon Valley, which is supremely well interconnected, perhaps unlike anywhere else in the world.

There are so many promising entrepreneurs in the UK with innovative ideas – particularly in the tech sector. Supporting and harnessing their potential could be a key catalyst for growth for the UK economy, creating successful new businesses providing employment and investment, something the country desperately needs.

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