Only one per cent of small and medium-sized businesses are scale-ups – fast-growing businesses – yet they contribute £500bn to the UK economy.
The problem is funding. The UK funding ecosystem is underdeveloped compared to the ecosystem across the pond in the US, and a lack of venture capital funding, in particular, has been holding the sector back.
There are promising signs that the ecosystem is recovering and maturing.
However, the Deloitte Scale-ups confidence survey has found that the UK still faces significant challenges, namely, access to government funding and competition with the US for expansion.
“We are seeing green shoots all around,” principal at Atomico, Sarah Guemouri, said. “Despite a slow start to the year, we expect capital invested as a whole to exceed last year’s figures.”
VC investment in the UK tech sector came in at £7.4bn for the first half of 2024, up 16 per cent from the same period last year and representing 32 per cent of the European total, according to figures from Dealroom.
America retains its charm
Despite improved early funding, many of the UK’s potential unicorns have moved to the US for funding.
It is the primary destination for UK scale-ups looking to expand. 53 per cent of scale-ups look to the states, 12 per cent to North America and only 6 per cent look to expand in the native UK, according to the survey.
According to Deloitte, after five years, US tech startups are 40 per cent more likely to have successfully secured venture capital funding than those in Europe.
“While we have seen time and time again the ecosystem’s ability to spur innovation and scale companies from seed to billion-dollar valuation at the same rate as the US, we continue to see a material funding gap across Europe,” Guemouri said.
The US is not only more lucrative than the UK but also dominates the UK scale-up market: “A large portion of [venture capital funding in the UK] comes from the US,” a partner at Deloitte Duncan Down said.
Another problem for Starmer to solve
Down said the UK’s lack of staying power hasn’t been helped by a draught of government involvement in the sector.
Scale-ups are increasingly turning to equity funding from new investors rather than government grants and subsidies.
In the UK, over half of scale-ups turn to equity investment for funding, while just over a fifth look to the government.
“If the UK government were to increase its involvement in the technology industry, it could potentially benefit the sector by creating more jobs and encouraging innovation to remain in the UK.
With greater government intervention, UK scale-ups may explore more opportunities domestically, rather than in the US,” he said.
There have been calls for to change regulations to make it easier for scale-ups to access cash flow, liquidity and funding.
For scientific scale-ups in particular, a lack of specialised lab space, clunky commercialisation processes and complex listing rules mean the UK is less attractive to founders wanting to take their businesses to the next level.