How best to drive economic growth has emerged as a key battleground in the UK general election, with the Conservatives focused on keeping taxes low, and Labour promising economic stability alongside a more proactive and strategic role for the state in encouraging growth. But amid the back and forth of the campaigns, the opportunity to turbo-charge growth by prioritising the needs of scaleup businesses and software firms has been overlooked.
The UK is facing a once-in-a-lifetime opportunity to transform its software industry into something truly world leading, which would deliver a step-change in UK economic growth and productivity. Yet to realise this potential, policymakers must take some bold decisions. If not, we risk being left behind as a new set of transformative technologies such as AI, blockchain and quantum computing emerge.
This is not just about enabling our tech sector to thrive. These “transversal” technologies are increasingly becoming embedded into other traditional industries in which the UK once led — changing the very nature of these sectors in the process. If we do not tackle our underperformance in software, we may also fall behind in other areas.
At stake is nothing less than the UK’s economic growth, strategic autonomy and technological sovereignty. Fortunately, some quick policy wins could ensure the incoming government hits the ground running.
Diagnosing the problem
The good news is that the UK has a good foundation on which to build. We rank as the third best-prepared country globally for AI, behind the US and Singapore. The recent ‘UK Tech in the Age of AI’ report from Tech Nation reveals that the UK’s AI sector has been valued at $92bn (£72.3bn), larger than any other country in Europe — with a third of European AI companies based here. Collectively our UK tech startups are believed to be valued at approximately $1tn and growing. We also benefit from access to talent from some of the world’s best universities for STEM and computer science, with two of the global top 10 based in the UK.
However we’ve so far failed to channel this local leadership in startups into globally scaled businesses and ambition. The UK may do well at attracting migrant tech talent, but overall we are a net exporter of entrepreneurs — we lose more entrepreneurs than we gain to other countries — especially the US. And, while the government has enthusiastically nurtured a thriving startup sector, we’re poor at supporting them on the next phase of their development, into the world of scaleups. It takes much longer to scale a UK business from $10-100m than it does in the US. Currently a good US software company can scale to $100m revenue in 10-12 years, a great one in 6-8. Shockingly in Europe it takes 15.5 years, and the UK takes even longer at 17 years.
Few of our promising startups survive this arduous journey. With lack of liquidity, and increasing pressure from all stakeholders, our founders are more inclined to sell their business “early” for the first half-decent offer that comes along.
Some quick wins
1/ Improve access to finance
Both main political parties have promised reforms to channel more capital to private companies, and those listed on growth markets like AIM. The current government’s “Mansion House compact” is predicted to unlock up to £50bn of pension fund investment into high-growth companies. Reforms to encourage pension fund investment are also on the agenda for Labour. Policies like these are welcome.
But we need specific support for our scaleups. I propose creating a “Scaleup Investment Scheme” designed to encourage more private investment into software businesses of $10-100m in annual revenue. It could be modelled on the current (excellent) initiatives like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), designed to boost economic growth and reduce investment risk. But the criteria would need to be changed to include higher fundraising limits, and extra thought would also have to be put into the size and age of the company that should benefit from such investment.
We should also direct the British Business Bank (BBB) to provide catalytic public investment, designed to unlock larger pools of private risk capital in support of scaleup firms. BPI in France already does this for startups and invests billions of euros every year into French firms. Labour’s pledges to enable the BBB to more strongly support growth, especially in the regions, and plans to set up a £7.3bn “National Wealth Fund” to leverage £3 of private investment to every £1 of public investment over the next five years, are welcome. But we might also consider allowing UK Research and Innovation to invest a portion of its budget, from the public sector, into innovative scaleups.
2/ Encourage private investment in new capabilities
AI looks set to disrupt and transform almost every sector of our economy, including established software businesses — and we need to encourage business leaders to embrace it. Our industries need to be the global disruptors rather than the disrupted.
The next government could encourage this process by extending "full expensing" (currently limited to things like laptops, vans and office chairs) to cover all investments made by firms in cloud and AI. This would allow businesses to offset 100% of these costs against corporate tax.
3/ Nurture talent and skills
It’s clear that the current Apprenticeship Levy scheme isn’t serving the needs of software firms. A more flexible system that allows these businesses to upskill workers in new capabilities, such as AI, is desperately needed. The next government must also revisit the Skilled Worker visa programme to ensure that all relevant roles — such as multi-lingual tech sales & support workers — are included, enabling UK firms to benefit from the best international tech talent.
4/ Harness public procurement
The public sector spends £300bn annually on products and services, representing a significant lever that government can use to drive economic growth and innovation, but one that is largely untapped today. Public bodies should be encouraged to use the powers available to them under the Procurement Act 2023 to buy more from UK software firms and innovative SMEs. The Government Digital Service could lead by example by establishing a specific programme to test and accelerate adoption of UK software solutions across the public sector.
5/ Save a seat at the table for scaleups and software
While policymakers from all sides increasingly recognise the need to support scaleups to accelerate UK economic growth and productivity, translating this into concrete action remains a challenge. To overcome this the voices of scaleup firms, and software-enabled businesses more generally, need to be heard at an earlier stage of the policymaking process.
Whichever party prevails on July 4 should consult closely with the software sector to ensure its needs are heeded as the next government formulates policy. This could be achieved by appointing a UK Software Champion to represent the sector, and ensuring that the non-executive board members at key departments like the Department for Science, Innovation and Technology, Business and Trade, and HM Treasury, include champions for startups, scaleups and software businesses.
The time is now
When not just economic growth but the nation’s strategic and technological autonomy are at stake, a government of any political persuasion would be wise to actively engage with industry stakeholders to work through both the problems and opportunities with urgency. The UK has developed a strong startup economy, to which we are now adding exciting AI businesses, but we need to convert that early promise into global success. This will only happen if we also focus on accelerating the growth of scaleups.
Scaleups represent 1% of all UK SME businesses, but 22% of the revenue (£497bn), so increasing the number of scaleups by a further 1% would aid significant growth, allowing our nation to flourish, and our tech sector to be the envy of the world.
Let's put the right policies in place now. It’s time to scale our ambition.
