UK innovation economy is the most under-priced asset in global markets
Don’t write off Britain’s science and innovation sector. We are building global companies and attracting international attention, says Saul Klein
If you listened only to the mood music in the City, you’d think the UK’s innovation story was already over.
But in the week that London-founded ElevenLabs raised $500m from investors, making it the UK’s latest decacorn, it’s time the City woke up to the quality in breadth and depth of British innovation talent.
Hand wringing over low domestic growth and the potential disruption that AI could cause is prompting many to write off the UK science and innovation sector. But as the recent sale of another home grown AI business Faculty to Accenture demonstrates we have plenty of world class talent, building global companies that attract international attention right here.
The UK is sitting on one of the most mispriced long-term assets in global markets: its innovation economy. Few countries have anything comparable, and fewer still are failing to back it with their own capital. The tragedy is compounded because international investors are increasingly more aware of the value beneath our feet than we are.
The technology sector has a reputation for following the hype but the story of UK innovation is grounded in data and facts. We have the evidence to show that we are great at innovating – and it’s high-time the City paid attention.
Britain is already a global innovation power
By almost every meaningful metric, the UK is now the world’s third-largest innovation economy, behind only the US and China, despite being only the sixth-largest economy by GDP. On a per capita basis, it is the number one innovation sector.
It produces more unicorns and Colts and Thoroughbreds than France, Germany, Sweden and the Netherlands combined. These are not hyped tech companies inflated by venture funds, but real businesses with measurable revenues. Colts have annual revenues of at least $25m, while Thoroughbreds have revenues of at least $100m a year.
When I returned to the UK from working with early tech companies in San Francisco and New York 23 years ago, the UK had fewer than 10 venture capital backed companies. Now we have more than 20,000 VC-backed businesses employing roughly 100,000 people, of which 800 are Colts or Thoroughbreds.
Looking to sectors of the future, the evidence continues to stack up. For instance, a vital metric for AI leadership is the deployment of large-scale compute. We are clear number three in the world, with double the number of large-scale AI systems of 4th placed Switzerland.
Companies and countries rarely lead every technological shift. Microsoft missed mobile but dominated cloud and AI. Apple missed early internet software but led smartphones. Investors need to think in terms of decades-long waves of innovation, not just trading windows.
The next wave is one of AI, advanced materials, engineering biology, photonics, semiconductors, space and quantum, through which we can mitigate climate change, support our aging population, cure diseases and long-term health issues, as well as increase our energy security. These are all areas which align with Britain’s strengths.
We have four of the world’s top 10 universities in Oxford, Cambridge, UCL and Imperial. Five of Europe’s top 10 university spinout institutions are British. We excel in creating startups, however capital is not flowing from our pension funds and insurers to scale these companies from early stage through to global growth.
Missing dividend for UK savers
UK institutions control roughly £6 trillion in investable capital but less than 1% is allocated to the domestic innovation economy. That’s why international investors dominate Britain’s most successful companies and assets. Canadian, Australian and Japanese capital backs Octopus Energy. Australian super funds own most of King’s Cross. Some of the largest pension backers of UK venture funds are Bavarian, Danish and Korean.
Yet while overseas allocators happily build exposure to the UK’s innovation economy at a discount, domestic capital stands on the sidelines. Research by Jonathan Haskell and Stian Westlake suggests this under-allocation costs UK citizens up to £143bn per year in lost potential.
Now, however, for the first time in decades, the UK has put in place the infrastructure to bring more domestic capital to support innovation at scale. Under the Mansion House reforms, major asset allocators have doubled their commitments to UK innovation and pension consolidation will strengthen this pipeline further and accelerate the rise of regional tech clusters in cities like Leeds and Manchester.
More than £100bn could be deployed into the sector over the life of this parliament, through a National Wealth Fund and long-term vehicles such as the British Business Bank, the National Security Strategic Investment Fund and Sovereign AI.
At the same time, regulation, once seen as a national weakness, is a distinctive advantage: the new Regulatory Innovation Office and increasingly progressive stances at the FCA and CMA position Britain as one of the safest and most trusted jurisdictions for scaling frontier technologies.
Venture capital follows a power law: just 1.8 per cent of startups become unicorns and 1.3% reach $100m in revenue, meaning most returns come from a small number of winners. Public markets are no different: 2.4 per cent of companies generated 100 per cent of £76 trillion in returns.
That is why asset allocators must understand where the UK’s innovation strengths lie. For the first time in generations the conditions are aligned: world-class research, a deep pipeline of startups and scaleups, growing domestic capital, international trust and a regulatory system that supports innovation.
The question is not whether the UK innovation economy will succeed, but when the City will recognise what it has systematically underpriced and allow British savers to share in the value being created far beyond the Square Mile.
Saul Klein is executive chair and co-founder of Phoenix Court