There’s a lot riding on the future success of Britain’s innovation economy. In the post-Brexit world, government ministers are talking up the prospect of Britain become a “science superpower” while also rarely missing an opportunity to assert that the U.K. is already one of the best places in the world to start and scale a company.
But is it, though? The U.K. has a lot going for it, including a thriving startup community and research universities that are strong in key areas such as artificial intelligence and bio-science. Set against that is the fact science and technology-based businesses have traditionally struggled with securing the finance needed to scale up.
So when Britain’s Finance Ministry conducted a review of innovation economy finance back in 2017, a few uncomfortable truths emerged. When compared to their counterparts in the U.S., fewer U.K. tech businesses were seeking equity finance and those that did pitch to investors were asking for smaller sums. And when policymakers looked at the finance ecosystem, they found that only 12 percent of funding pumped into innovative businesses came from institutions, such as pension funds, compared with a figure of 65 percent across the Atlantic.
So there was a problem – at a certain stage of their development – many British startups were not accessing the capital they needed. And within that big picture, there was a shortage of “patient capital” – a particular problem for businesses that needed time to both develop their technologies and take them to the marketplace.
“We were established to address these issues,” says Judith Hartley. “We were given £2.5 billion to invest in later-stage rounds.”
Hartley is CEO of British Patient Capital, a body funded by government and operating as a subsidiary of the British Investment Bank. The remit of the BPC is to provide patient funding in companies at the Series B stage and beyond while also demonstrating to other potential investors – notably institutions – that investing in early-stage companies can deliver good returns.
Three years on from the launch, I’m keen to find out how much impact the BPC has on Britain’s investment landscape.
A Partnership Model
The first thing that has to be said is that the BPC is not a direct investor in individual companies. “We invest in funds – best of class funds,” says Hartley. And by investing alongside others, the organization intends to have an impact above and beyond the £2.5 billion allocated to it by the government. The aim – according to its remit – is to unlock a further £5 billion in investment from partners.
So what has that meant in money terms? In its 2020 annual report, BPC announced total investments stood at £1.0004 billion across 42 portfolio commitments. The organization also chalked up a return on capital of 7.4 percent.
In that respect, there is still a considerable pot of money to invest and there isn’t a focus on any one particular subset of the innovation economy. “We are sector agnostic,” says Hartley. “But there are themes.”
Around 19 percent of investments are related to the future of work and education, while life sciences and health and fintech account for 15 and 13 percent respectively Companies working in deep tech in the form of Big Data and A.I. have also been taking the BPC’s shilling, accounting for around 13 percent of the total.
“These themes seem to have been largely insulated from the Covid crisis, says Hartley.
In terms of the headline numbers – sums invested, returns – BPC is fulfilling its remit, but there is perhaps a question to ask about its purpose. Things have changed since 2017. For one thing, recent figures published by Tech Nation suggest the UK is benefitting from increased investment from North America and Japan, with the bulk of the money going to later-stage rounds. In that respect, perhaps the gap in the market isn’t what it was.
Hartley says there is still a need for the BPC. “The value issue is still there,” she says. “It’s not as acute as it used to be, but it is still there.”
And there is also still work to be done to persuade institutions such as pension funds to commit more cash. Ian Connatty, Managing Director at the BPC, says there are factors deterring investment from this quarter. “Venture is a high-risk risk business and losses are an inevitable part of it,” he says. Many institutions will be reluctant to be exposed to that. “There is also an illiquidity issue,” he adds, “Funds may be committed for ten years.”
Institutions, also have long memories. “Some will have had their fingers burnt during the dot com ear,” Connatty adds.
So it remains key that BPC can demonstrate a commercial return. In this respect, the market has also changed. The U.K. is producing more unicorns (companies with $1 billion valuations), a fact that might encourage more conservative investors to commit funds. But Hartley and Connatty are keen to stress this is not solely a game of unicorns. Dragons – companies that might have a lower market valuation but nonetheless produce a high return -should also be an important part of the portfolio. “A company doesn’t need to be as big as a unicorn to have a big outcome in a fund,” says Connatty. For instance, a fund may invest early in a future dragon and thus have a bigger share of the rise in value. “With a unicorn, you often invest later and have a small part of a big outcome. But you can also have a large part of a pretty good outcome.
As Connatty acknowledges, the BPC portfolio is still relatively young and its longer-term impact on the investment ecosystem can’t be fully assessed.
But should government money be spent on investments of this type? – should it be the realm of VC funds? Well, ultimately, BPC will be sold to the private sector, in the meantime, there is a gap in the market to fill.
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