This article gives a theoretical basis for Will Hutton's Observer article 29.12.24 saying we need to stop tech sell offs in UK. We need more near market research and investment in keeping industries in the UK. Thanks.
I saw that and was probably partly remembering it as well as Hutton. I like triangulation, and this seemed a different angle. Besides I have been blaming Thatcher about many things for many decades so no doubt helps it to resonate. Thanks again.
the covid future fund which matched govt £s with VC cheques didn't work out too.well so is a non starter. VCs aren't very bright and their investment thesis is based on home runs not widespread portfolio success. Innovate UK's spray and pray model is a better solution but needs a reset in the way it goes about it.
"The Future Fund is a government scheme to support UK-based companies ranging from £125,000 to £5 million, subject to at least equal match funding from private investors. The scheme, alongside other Government support schemes, aims to support companies facing financing difficulties due to the Coronavirus outbreak. The Future Fund scheme is being delivered by the British Business Bank." - https://www.british-business-bank.co.uk/for-financial-advisors/legacy-programmes/future-fund
This was a scheme that was different to ones I've proposed in critical respects:
- it invested in companies, not funds
- it did not depend on the involvement of VCs
- it was limited to distressed companies
- it took place during the uniqueness of Covid.
It isn't evidence *at all* for your contention.
However, the government investments I'm proposing would, via the VC funds, end up investing in a very wide portfolio of companies - thousands.
Interested to see how this debate with TBI evolves!
Does the Scale UK idea really go beyond the "neoliberal" paradigm? You say it would be better than R&D tax credits because it would be "discriminating", but how? As I understand, you'd have an arms-length fund limited to choosing which VCs to tag along with (and it's doubtful there would have so many credible options to choose from, if TBI's £1b is considered insufficiently ambitious). Also interesting to consider on what conditions the best VCs (the small minority that make money for their investors) would want to invest public money.
15 years ago all the talk was of the "equity gap" being situated in the low £ millions. It seems to have graduated into the 10s or 100s of millions today. What explains that?
The idea is that the VCs are discriminating in the companies they pick to invest in, not that Scale UK is discriminating between VCs. In fact, I think it should be pretty un-discriminating in that.
There will be plenty of options. There's a generation of trained VC talent wanting now to step up to being a Partner - i.e. leading their own fund. And they will be v happy to take investment from pretty much wherever they can find it.
Most VC funds make money even though most of their investments don't - critical distinction.
VC in the US has kept on funding bigger and bigger rounds. That's our main competition and the main reason why the gap has got bigger. It also perhaps is connected to the fact that stock markets in the UK aren't really working properly any more.
As for paradigms, this certainly goes beyond the goldfish syndrome which is where neoliberalism has led us in the UK. It involves mobilising state capital to support fast-growing companies all the way to maturity. So it would be a significant change, which is the important point to me. However, as you say, it might be possible to construct a neoliberal case for this kind of activity; I think it probably depends on your interpretation of neoliberalism.
I don't think that's correct about fund returns. The distribution of fund returns is highly skewed: "VC fund returns follow the Pareto principle, where a small subset of outlier funds yields significant returns, while the majority of funds achieve comparatively modest performance" (BBB, UK Venture Capital Financial Returns 2023). Most funds may make money in the sense that over 50% of them make a modest positive return, but obviously that's not what you invest in VC for.
In which case, a fund of funds still has to make important, discretionary decisions about its investments - unless it's happy to take a very poor risk-adjusted return for the taxpayer by investing indiscriminately. (This return itself would no doubt be lower by virtue of the giant slug of public funding entering the market, and no doubt adverse selection.) Personally I'm not sure I would have much faith in the government's ability to create and maintain a body capable of making these decisions well. On reflection I agree this model would, for these very reasons, go beyond the neoliberal paradigm - but I'm not sure that's a good thing in this case!
The direct (co)investments model - Advance UK - seems more honest and transparent. It would also force government to decide what its strategic priorities were and back these up with investments rather than cheap talk.
Agree with you absolutely that, if government thinks it can legitimately force pension funds to invest pensioner assets in UK private equity, it should just cut out the middlemen and do it with the government balance sheet. The perfect place to start would be for government to start backing public sector DB pension liabilities with such investments. I won't hold my breath waiting for this to happen.
Bear in mind that the primary purpose of the Scale UK investments by the government is not to make money. It is to get capital into the parts of the economy where it can be used most effectively. This is why it can be compared to tax credits.
Even so, looking at what you're saying about returns, HMG should expect most of the funds it invests in to make modest returns and some to be stellar, which overall is going to be in between the two, which is what I'm expecting. I don't know why you think this would be a v poor return for the taxpayer.
Seems reasonable to expect Scale UK returns to be poor given that (risk adjusted) VC returns are on average poor already, even before a flood of government money comes into the market. Unless there's reason to think government would be good at picking out the VC funds that will deliver the stellar returns!!
I guess I've not understood how government investing in a VC fund of funds avoids the "picking winners" (or, losers picking government) problem. It just moves it up a level.
I get that the primary policy objective isn't financial return for the taxpayer. But would a poor financial return on Scale UK be consistent with meeting the primary objective? Seems to me that high returns and economic impact should be in sync here.
In any case, is lack of capital really the root reason for a lack of UK scale ups? If so, what explains reluctance to provide scale up capital in the UK - which is, in spite of all, still a pretty investment-friendly place? The capital seems to be there to grow businesses like DeepMind or Revolut. Would public investment in VC funds really give us more businesses like those? I have my doubts.
The idea that UK VC delivers poor returns is one of the reasons given by pension funds for not investing in them. It's not for me to say there are no better classes for them to invest in. But I think we have to be careful about the language we're using. "Poor" has many interpretations, including loss-making. That's not the track record of VC in the UK, as evidenced most basically by the sustained growth in the sector over many years. It's a comfortably profitable class of investment.
Picking winners - I half regret using this phrase because it causes exactly this sort of problem. As you're suggesting, to invest is to pick something you hope will be a winner. The term should be consigned to history. To see what is really meant by the phrase originally, you have to consider fiascos like Concorde, the British programme to sell nuclear reactors to the world and HS2. See Tom Kelsey's recent history https://academic.oup.com/ehr/article/138/594-595/1363/7499305
Whether for Scale UK high returns would be linked to economic impact - I don't know. Both Space X and Tesla went through difficult periods when I expect investors lost money - but the US is obviously much stronger with them than without them.
Is the shortage of capital a problem - if you want to keep firms in the UK and reap the benefits as they mature, then the answer is an unqualified Yes! Why do you think PsiQuantum and so many others have moved to the US?
Appreciate the response (and the original article, which I found full of insight).
To try to be clearer.... It's irrelevant what returns UK VC as an overall asset class delivers (and whether that overall return is considered "poor" or not). The point I want to stress is that it is a few high performing VCs that drive returns for the asset class ("a small subset of outlier funds yields significant returns" - this is a fact). I believe that, for it to make economic sense for government to pump money into VC, you have to believe government (or more realistically its chosen agents) can somehow select the future top performers in the asset class from all the dross and get the money to these top performing funds. (I'm not talking about individual investments in companies - I'm talking about investments in VC funds.) And there's absolutely no reason to believe it can do this well. (Why? For the same reason that there's no reason to think government can successfully do anything incredibly difficult that it has either no, or a terrible, track record in.)
Unless you think that there's a divergence between the VC funds' returns and their economic impact - in which case maybe it's not such a problem if government invests taxpayers' money in the dross. But this seems implausible. Tesla and Space X have been both fantastic investments for the VCs that were in early and hugely impactful economically, so they certainly aren't contrary evidence.
I'm also just not sure shortage of capital is a causal factor. It's my contention that, if the investment opportunities were there, the capital would follow. Of course I can't prove this, but the UK doesn't seem to struggle to attract foreign investment. I get that a lot of this is just buying up existing businesses (football clubs and the like), but I'd like to know the theory that would explain capital being readily available for these kinds of investments in the UK but not for growing businesses. (My theory is that the UK economy doesn't generate enough growth businesses to invest in!)
As for PsiQuantum, there are all sorts of reasons other than ease of access to growth capital that such a business might want to move to Silicon Valley. It would be alarming if businesses were moving to Sweden or Australia, but we're flattering ourselves with comparisons with the global tech, economic and political hegemon.
I expect it's better for government to focus on creating an environment conducive to business growth, though there are no silver bullets (fixing the UK's regulatory dogs dinner might make a difference).
I do wonder why you presume that the Scale UK would be definitely profitable, to the extent of billions. Perhaps the closest comparison to that size of scaling capital is Softbank, far from a consistent success, and that's without its investment pool being confined to the UK. The power law of venture capital is awkwardly dependent on a small section of the portfolio outperforming the losses of the rest, but there's a clear danger that wouldn't happen.
Interesting comparison. An important difference is that Softbank is making the investment decisions whereas with Scale UK those would be delegated to the VCs. Even so, SoftBank has done better than a lot of people think. Quick look at share price data that goes back to 2011... Over 13 years, its share price has tripled in value. The Treasury would be very, very happy with that.
I don't see anything awkward in what is the basic VC model. There are VC firms that have made money that way *every year* for decades. It takes quite a heroic defeatism to think that somehow this tried and tested form of investment is going to now suddenly going to fall over.
The handful of (US) VC firms that have made stellar returns over decades would almost certainly not want to take public money, unless it was a very bad deal for the taxpayer (and even then...). Why would they?! They don't struggle to raise capital.
Could GB Energy be that company to invest and retain assets that you mention to be potentially successful here? Maybe too early to tell and maybe I've missed something clear on what GB Energy will do 😅
I'm honestly still unclear about the likely scope of GB Energy's activities. But there's little sense vesting these two funds in GB Energy unless you intend to limit their remit to energy investments, which is not what I am proposing.
Interesting that this needs setting out in such detail. Too many technology policy people haven't read enough of people like Richard Nelson and Chris Freeman.
How is your Scale UK proposal different from the BBB? Just focused more clearly on larger, later investment rounds?
The BBB is a useful institution but it's fundamentally a bank staffed by bankers. That's a very different task to investing and a very different team to investors. It's been pushed to do investing, I think, because of i) lack of Parliamentary time to set up a new institution; ii) it's easier to avoid a whole bunch of questions that come up when you start designing an institution to do investing. So you could do the fund of funds type thing maybe via the BBB, but not more aggressive kinds of investment, such as coinvesting directly alongside VCs. I see it as a learning process and I'd like to have the right institutional foundations for that, so I'd rather have an institution dedicated to investing. I still think that's on the cards despite the idea of the National Wealth Fund being parked in the BBB for now.
This article gives a theoretical basis for Will Hutton's Observer article 29.12.24 saying we need to stop tech sell offs in UK. We need more near market research and investment in keeping industries in the UK. Thanks.
Very to the point. Thank you. I hadn't seen that - https://www.theguardian.com/commentisfree/2024/dec/29/britain-great-again-stop-flogging-our-top-companies-to-the-us.
My previous article, which the TBI complained about, is perhaps even more directly making the same case as Will Hutton. See https://williamcullernebown.substack.com/publish/posts/detail/153417514?referrer=%2Fpublish%2Fposts
I saw that and was probably partly remembering it as well as Hutton. I like triangulation, and this seemed a different angle. Besides I have been blaming Thatcher about many things for many decades so no doubt helps it to resonate. Thanks again.
the covid future fund which matched govt £s with VC cheques didn't work out too.well so is a non starter. VCs aren't very bright and their investment thesis is based on home runs not widespread portfolio success. Innovate UK's spray and pray model is a better solution but needs a reset in the way it goes about it.
"The Future Fund is a government scheme to support UK-based companies ranging from £125,000 to £5 million, subject to at least equal match funding from private investors. The scheme, alongside other Government support schemes, aims to support companies facing financing difficulties due to the Coronavirus outbreak. The Future Fund scheme is being delivered by the British Business Bank." - https://www.british-business-bank.co.uk/for-financial-advisors/legacy-programmes/future-fund
This was a scheme that was different to ones I've proposed in critical respects:
- it invested in companies, not funds
- it did not depend on the involvement of VCs
- it was limited to distressed companies
- it took place during the uniqueness of Covid.
It isn't evidence *at all* for your contention.
However, the government investments I'm proposing would, via the VC funds, end up investing in a very wide portfolio of companies - thousands.
Interested to see how this debate with TBI evolves!
Does the Scale UK idea really go beyond the "neoliberal" paradigm? You say it would be better than R&D tax credits because it would be "discriminating", but how? As I understand, you'd have an arms-length fund limited to choosing which VCs to tag along with (and it's doubtful there would have so many credible options to choose from, if TBI's £1b is considered insufficiently ambitious). Also interesting to consider on what conditions the best VCs (the small minority that make money for their investors) would want to invest public money.
15 years ago all the talk was of the "equity gap" being situated in the low £ millions. It seems to have graduated into the 10s or 100s of millions today. What explains that?
The idea is that the VCs are discriminating in the companies they pick to invest in, not that Scale UK is discriminating between VCs. In fact, I think it should be pretty un-discriminating in that.
There will be plenty of options. There's a generation of trained VC talent wanting now to step up to being a Partner - i.e. leading their own fund. And they will be v happy to take investment from pretty much wherever they can find it.
Most VC funds make money even though most of their investments don't - critical distinction.
VC in the US has kept on funding bigger and bigger rounds. That's our main competition and the main reason why the gap has got bigger. It also perhaps is connected to the fact that stock markets in the UK aren't really working properly any more.
As for paradigms, this certainly goes beyond the goldfish syndrome which is where neoliberalism has led us in the UK. It involves mobilising state capital to support fast-growing companies all the way to maturity. So it would be a significant change, which is the important point to me. However, as you say, it might be possible to construct a neoliberal case for this kind of activity; I think it probably depends on your interpretation of neoliberalism.
I don't think that's correct about fund returns. The distribution of fund returns is highly skewed: "VC fund returns follow the Pareto principle, where a small subset of outlier funds yields significant returns, while the majority of funds achieve comparatively modest performance" (BBB, UK Venture Capital Financial Returns 2023). Most funds may make money in the sense that over 50% of them make a modest positive return, but obviously that's not what you invest in VC for.
In which case, a fund of funds still has to make important, discretionary decisions about its investments - unless it's happy to take a very poor risk-adjusted return for the taxpayer by investing indiscriminately. (This return itself would no doubt be lower by virtue of the giant slug of public funding entering the market, and no doubt adverse selection.) Personally I'm not sure I would have much faith in the government's ability to create and maintain a body capable of making these decisions well. On reflection I agree this model would, for these very reasons, go beyond the neoliberal paradigm - but I'm not sure that's a good thing in this case!
The direct (co)investments model - Advance UK - seems more honest and transparent. It would also force government to decide what its strategic priorities were and back these up with investments rather than cheap talk.
Agree with you absolutely that, if government thinks it can legitimately force pension funds to invest pensioner assets in UK private equity, it should just cut out the middlemen and do it with the government balance sheet. The perfect place to start would be for government to start backing public sector DB pension liabilities with such investments. I won't hold my breath waiting for this to happen.
Bear in mind that the primary purpose of the Scale UK investments by the government is not to make money. It is to get capital into the parts of the economy where it can be used most effectively. This is why it can be compared to tax credits.
Even so, looking at what you're saying about returns, HMG should expect most of the funds it invests in to make modest returns and some to be stellar, which overall is going to be in between the two, which is what I'm expecting. I don't know why you think this would be a v poor return for the taxpayer.
Seems reasonable to expect Scale UK returns to be poor given that (risk adjusted) VC returns are on average poor already, even before a flood of government money comes into the market. Unless there's reason to think government would be good at picking out the VC funds that will deliver the stellar returns!!
I guess I've not understood how government investing in a VC fund of funds avoids the "picking winners" (or, losers picking government) problem. It just moves it up a level.
I get that the primary policy objective isn't financial return for the taxpayer. But would a poor financial return on Scale UK be consistent with meeting the primary objective? Seems to me that high returns and economic impact should be in sync here.
In any case, is lack of capital really the root reason for a lack of UK scale ups? If so, what explains reluctance to provide scale up capital in the UK - which is, in spite of all, still a pretty investment-friendly place? The capital seems to be there to grow businesses like DeepMind or Revolut. Would public investment in VC funds really give us more businesses like those? I have my doubts.
OK. Para by para.
The idea that UK VC delivers poor returns is one of the reasons given by pension funds for not investing in them. It's not for me to say there are no better classes for them to invest in. But I think we have to be careful about the language we're using. "Poor" has many interpretations, including loss-making. That's not the track record of VC in the UK, as evidenced most basically by the sustained growth in the sector over many years. It's a comfortably profitable class of investment.
Picking winners - I half regret using this phrase because it causes exactly this sort of problem. As you're suggesting, to invest is to pick something you hope will be a winner. The term should be consigned to history. To see what is really meant by the phrase originally, you have to consider fiascos like Concorde, the British programme to sell nuclear reactors to the world and HS2. See Tom Kelsey's recent history https://academic.oup.com/ehr/article/138/594-595/1363/7499305
Whether for Scale UK high returns would be linked to economic impact - I don't know. Both Space X and Tesla went through difficult periods when I expect investors lost money - but the US is obviously much stronger with them than without them.
Is the shortage of capital a problem - if you want to keep firms in the UK and reap the benefits as they mature, then the answer is an unqualified Yes! Why do you think PsiQuantum and so many others have moved to the US?
Appreciate the response (and the original article, which I found full of insight).
To try to be clearer.... It's irrelevant what returns UK VC as an overall asset class delivers (and whether that overall return is considered "poor" or not). The point I want to stress is that it is a few high performing VCs that drive returns for the asset class ("a small subset of outlier funds yields significant returns" - this is a fact). I believe that, for it to make economic sense for government to pump money into VC, you have to believe government (or more realistically its chosen agents) can somehow select the future top performers in the asset class from all the dross and get the money to these top performing funds. (I'm not talking about individual investments in companies - I'm talking about investments in VC funds.) And there's absolutely no reason to believe it can do this well. (Why? For the same reason that there's no reason to think government can successfully do anything incredibly difficult that it has either no, or a terrible, track record in.)
Unless you think that there's a divergence between the VC funds' returns and their economic impact - in which case maybe it's not such a problem if government invests taxpayers' money in the dross. But this seems implausible. Tesla and Space X have been both fantastic investments for the VCs that were in early and hugely impactful economically, so they certainly aren't contrary evidence.
I'm also just not sure shortage of capital is a causal factor. It's my contention that, if the investment opportunities were there, the capital would follow. Of course I can't prove this, but the UK doesn't seem to struggle to attract foreign investment. I get that a lot of this is just buying up existing businesses (football clubs and the like), but I'd like to know the theory that would explain capital being readily available for these kinds of investments in the UK but not for growing businesses. (My theory is that the UK economy doesn't generate enough growth businesses to invest in!)
As for PsiQuantum, there are all sorts of reasons other than ease of access to growth capital that such a business might want to move to Silicon Valley. It would be alarming if businesses were moving to Sweden or Australia, but we're flattering ourselves with comparisons with the global tech, economic and political hegemon.
I expect it's better for government to focus on creating an environment conducive to business growth, though there are no silver bullets (fixing the UK's regulatory dogs dinner might make a difference).
I do wonder why you presume that the Scale UK would be definitely profitable, to the extent of billions. Perhaps the closest comparison to that size of scaling capital is Softbank, far from a consistent success, and that's without its investment pool being confined to the UK. The power law of venture capital is awkwardly dependent on a small section of the portfolio outperforming the losses of the rest, but there's a clear danger that wouldn't happen.
Interesting comparison. An important difference is that Softbank is making the investment decisions whereas with Scale UK those would be delegated to the VCs. Even so, SoftBank has done better than a lot of people think. Quick look at share price data that goes back to 2011... Over 13 years, its share price has tripled in value. The Treasury would be very, very happy with that.
I don't see anything awkward in what is the basic VC model. There are VC firms that have made money that way *every year* for decades. It takes quite a heroic defeatism to think that somehow this tried and tested form of investment is going to now suddenly going to fall over.
The handful of (US) VC firms that have made stellar returns over decades would almost certainly not want to take public money, unless it was a very bad deal for the taxpayer (and even then...). Why would they?! They don't struggle to raise capital.
Could GB Energy be that company to invest and retain assets that you mention to be potentially successful here? Maybe too early to tell and maybe I've missed something clear on what GB Energy will do 😅
I'm honestly still unclear about the likely scope of GB Energy's activities. But there's little sense vesting these two funds in GB Energy unless you intend to limit their remit to energy investments, which is not what I am proposing.
Interesting that this needs setting out in such detail. Too many technology policy people haven't read enough of people like Richard Nelson and Chris Freeman.
How is your Scale UK proposal different from the BBB? Just focused more clearly on larger, later investment rounds?
The BBB is a useful institution but it's fundamentally a bank staffed by bankers. That's a very different task to investing and a very different team to investors. It's been pushed to do investing, I think, because of i) lack of Parliamentary time to set up a new institution; ii) it's easier to avoid a whole bunch of questions that come up when you start designing an institution to do investing. So you could do the fund of funds type thing maybe via the BBB, but not more aggressive kinds of investment, such as coinvesting directly alongside VCs. I see it as a learning process and I'd like to have the right institutional foundations for that, so I'd rather have an institution dedicated to investing. I still think that's on the cards despite the idea of the National Wealth Fund being parked in the BBB for now.