Good analysis but in the end, are we just talking about the tendency of elites of all political shades to obsess over very large machines? I don't see how venture capital is a solution, non-existent track record on investing in technology that responds to societal needs. My vote - it would be better if we had S&T policies that involved citizens more deeply in policy design and gained their active consent. In the 1990s and early 2000s such policies were actually proposed at the EU level but nothing happened.
You’re a brave man taking that view on HS2, and even braver quoting Simon Jenkins in support 😉 Building a high speed rail line in crowded and quite small England was always going to cause problems. The terminology is still being used in the context of adding a new line between Liverpool and Manchester.
I know. Started off as avoiding the need to build a new runway at Heathrow before morphing into something about time savings and additional capacity, as well as connecting northern cities (which it only did as a side product of connecting them to London). An example of an idea that was doomed to succeed.
There are a lot of people who will brook no criticism of HS2, which is one reason why we are where we are. See it as an example of state - rather than project - failure.
As per comments on your previous piece, I remain unconvinced by one of your main policy prescriptions - coinvestment of significant (multi-billion £) public funds in VC funds, with the VC funds calling the shots on investments. A policy proposal on which you share common ground with TBI (though you would go much bigger than TBI - it's not clear TBI's heart is really in this idea).
Why? Because I think there's every reason to believe the taxpayer would end up with the short straw from these arrangements. I'd expect the VCs - who are both infinitely more knowledgeable than the public sector about VC and hyper-incentivized for financial return - to find ways to make this so.
I expect the counter is that the public sector would only invest pari passu with the VC fund's private limited partners. But as soon as you get beyond that very broad principle you start having to make decisions about precisely how this would work.
For example, given the objectives that the policy is designed to achieve, government would need to impose restrictions on what the fund could invest in (UK HQ and UK jobs etc.), how investments could be monetised (no US big tech buyouts! - maybe the blacklisted firms would have to be listed out), restrictions on GP fees etc. And you'd need some credible process, in a world of limited resources, for determining which VCs the public fund-of-funds would and would not invest in.
Now, as soon as government bureaucrats are tasked with drawing up these restrictions and the decision-making processes you can imagine the problems that will arise. Soon enough the strings attached will mean that the best VCs (the small number most likely to deliver the big returns without which VC is a poor investment) see the costs outweighing the benefits. You end up with the VCs mainly motivated by juicy annual fees paid for by the taxpayer and who know that, by the time anybody pays attention and can't be fobbed of with "it's too early to assess", everybody will have forgotten which administration even instituted the policy.
The counter to this might be that this is a problem in theory but not in practice: everything could be kept very straightforward so that the public fund-of-funds is operating as close as possible to autopilot, with incentives aligned and the VCs calling the shots. In that case, the test is a next level of detail about how this might actually work - how would the fund-of-funds make investment decisions, what would the restrictions be on the VCs' freedom of manoeuvre etc. I'm doubtful that, once you get into this, it will seem all that attractive.
There's no shortage of examples of sensible-seeming policy principles (e.g. that there should be a high speed rail network across the UK, as most other developed countries) turning into extraordinarily wasteful initiatives. I could be wrong and there is a way to do this that is robust to this kind of policy degeneration, but I do think it depends on the next level of detail. I'd be interested to see your thoughts on that detail.
I'd suggest a good test of the policy would be whether the very best VCs in the world (the ones with a reputation to lose) with a relevant track record wanted to get on board. It would be better to consult with them about the basis on which they'd get on board, and work from there, than the usual policy-making process.
So there is a precedent. The EU’s European Investment Bank had a scheme and was primed to make VC investments when Brexit happened. The British Business Bank then picked up the investments, accepting that the EIB had done the due diligence. I’m told each 1 pound invested this way is currently valued at more than 2.
As for the various kinds of additionality, if ministers want that, that’s what Advance UK is for.
Also to the point, from a recent letter to Reeves from the PM's Council for Science and Technology:
"ii. Access to venture capital for UK startups has increased tenfold in the last decade, and a strong domestic early-stage investment capability has been developed. Together, these have produced one of the strongest global pipelines of innovative companies to invest in, in both unicorns (valued at over $1 billion) and thoroughbreds (with greater than $100 million in revenues). However, a lack of scale up capital has starved both UK companies and venture capital, and while we are close to Silicon Valley in rounds up to $15 million (early stage) we are still significantly behind in rounds of $15-100 million (breakout) and over $100 million (scale up)[1].
iii. The opportunity to step into these funding gaps has not been lost on some of the world’s most sophisticated venture investors. This includes Andreessen Horowitz, BVP, General Catalyst, Lightspeed, Iconiq, Sequoia, Stepstone and Top Tier, all of whom have established local operations in recent years, joining existing firms such as Adams Street, Accel and Index Ventures."
William, I very much enjoy your analysis of industrial strategy. Thank you.
Good analysis but in the end, are we just talking about the tendency of elites of all political shades to obsess over very large machines? I don't see how venture capital is a solution, non-existent track record on investing in technology that responds to societal needs. My vote - it would be better if we had S&T policies that involved citizens more deeply in policy design and gained their active consent. In the 1990s and early 2000s such policies were actually proposed at the EU level but nothing happened.
You’re a brave man taking that view on HS2, and even braver quoting Simon Jenkins in support 😉 Building a high speed rail line in crowded and quite small England was always going to cause problems. The terminology is still being used in the context of adding a new line between Liverpool and Manchester.
The point is, it didn’t need to be high speed!!
I know. Started off as avoiding the need to build a new runway at Heathrow before morphing into something about time savings and additional capacity, as well as connecting northern cities (which it only did as a side product of connecting them to London). An example of an idea that was doomed to succeed.
So what is it that’s brave here?
There are a lot of people who will brook no criticism of HS2, which is one reason why we are where we are. See it as an example of state - rather than project - failure.
Well it’s like brooking no criticism of the Iraq war. You can’t go there because it’s an argument you can’t win.
Don’t get me wrong. It’s a debate that needs to be had, but it’s rarely a pleasant experience. All power to your elbow.
Another terrific piece, thank you.
As per comments on your previous piece, I remain unconvinced by one of your main policy prescriptions - coinvestment of significant (multi-billion £) public funds in VC funds, with the VC funds calling the shots on investments. A policy proposal on which you share common ground with TBI (though you would go much bigger than TBI - it's not clear TBI's heart is really in this idea).
Why? Because I think there's every reason to believe the taxpayer would end up with the short straw from these arrangements. I'd expect the VCs - who are both infinitely more knowledgeable than the public sector about VC and hyper-incentivized for financial return - to find ways to make this so.
I expect the counter is that the public sector would only invest pari passu with the VC fund's private limited partners. But as soon as you get beyond that very broad principle you start having to make decisions about precisely how this would work.
For example, given the objectives that the policy is designed to achieve, government would need to impose restrictions on what the fund could invest in (UK HQ and UK jobs etc.), how investments could be monetised (no US big tech buyouts! - maybe the blacklisted firms would have to be listed out), restrictions on GP fees etc. And you'd need some credible process, in a world of limited resources, for determining which VCs the public fund-of-funds would and would not invest in.
Now, as soon as government bureaucrats are tasked with drawing up these restrictions and the decision-making processes you can imagine the problems that will arise. Soon enough the strings attached will mean that the best VCs (the small number most likely to deliver the big returns without which VC is a poor investment) see the costs outweighing the benefits. You end up with the VCs mainly motivated by juicy annual fees paid for by the taxpayer and who know that, by the time anybody pays attention and can't be fobbed of with "it's too early to assess", everybody will have forgotten which administration even instituted the policy.
The counter to this might be that this is a problem in theory but not in practice: everything could be kept very straightforward so that the public fund-of-funds is operating as close as possible to autopilot, with incentives aligned and the VCs calling the shots. In that case, the test is a next level of detail about how this might actually work - how would the fund-of-funds make investment decisions, what would the restrictions be on the VCs' freedom of manoeuvre etc. I'm doubtful that, once you get into this, it will seem all that attractive.
There's no shortage of examples of sensible-seeming policy principles (e.g. that there should be a high speed rail network across the UK, as most other developed countries) turning into extraordinarily wasteful initiatives. I could be wrong and there is a way to do this that is robust to this kind of policy degeneration, but I do think it depends on the next level of detail. I'd be interested to see your thoughts on that detail.
I'd suggest a good test of the policy would be whether the very best VCs in the world (the ones with a reputation to lose) with a relevant track record wanted to get on board. It would be better to consult with them about the basis on which they'd get on board, and work from there, than the usual policy-making process.
So there is a precedent. The EU’s European Investment Bank had a scheme and was primed to make VC investments when Brexit happened. The British Business Bank then picked up the investments, accepting that the EIB had done the due diligence. I’m told each 1 pound invested this way is currently valued at more than 2.
As for the various kinds of additionality, if ministers want that, that’s what Advance UK is for.
Also to the point, from a recent letter to Reeves from the PM's Council for Science and Technology:
"ii. Access to venture capital for UK startups has increased tenfold in the last decade, and a strong domestic early-stage investment capability has been developed. Together, these have produced one of the strongest global pipelines of innovative companies to invest in, in both unicorns (valued at over $1 billion) and thoroughbreds (with greater than $100 million in revenues). However, a lack of scale up capital has starved both UK companies and venture capital, and while we are close to Silicon Valley in rounds up to $15 million (early stage) we are still significantly behind in rounds of $15-100 million (breakout) and over $100 million (scale up)[1].
iii. The opportunity to step into these funding gaps has not been lost on some of the world’s most sophisticated venture investors. This includes Andreessen Horowitz, BVP, General Catalyst, Lightspeed, Iconiq, Sequoia, Stepstone and Top Tier, all of whom have established local operations in recent years, joining existing firms such as Adams Street, Accel and Index Ventures."
https://www.gov.uk/government/publications/letter-to-the-chancellor-on-scale-up-finance-for-innovative-science-and-technology-companies/cst-advice-on-scale-up-finance-for-innovative-science-and-technology-companies