Policy paper

UK Tech Competitiveness Study

Published 27 May 2021

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Note to the Digital Economy Council - October 2020

Dear Digital Economy Council members,

The Tech Competitiveness Study Expert Panel completed its report assessing the overall health and competitiveness of the UK tech sector in February 2020. Since the study was announced last summer, the panel has engaged with a wide range of UK tech sector stakeholders, including start-ups, scaleups, venture capital firms, blue chip companies, accelerators, incubators and business representative organisations. Our overall assessment was that the UK tech sector was in good health and well placed to compete with global players such as the US and China.

COVID-19 dramatically changed the underlying environment the UK tech sector operated in, as it did for the wider economy. Although the tech sector was better placed than most to adapt to the new environment and withstand the move to virtual working, it is important to recognise the incredibly tough economic conditions the tech sector still faces. For many tech companies, both demand and investment opportunities have significantly reduced, and many tech start-ups do not have enough cash reserves to withstand a long economic slowdown.

However, the importance of the tech sector and technology in general has never been more apparent. Technology allowed large parts of the economy to continue functioning during the lockdown. The pace of digital adoption by consumers and businesses in the past six months might otherwise have taken years, even decades in some sectors. As the UK economy begins to recover, the importance of maintaining the current rate of adoption and consolidating the gains already made has never been clearer.

The context in which the Tech Competitiveness Study report was drafted has changed dramatically - however, our recommendations remain in place. They target fundamental drivers of tech leadership and innovation success over the medium and long term. The priority recommendations in the report, which include measures to close the digital skills gap, strengthen regional tech ecosystems and to harness the power of AI for the public good, remain just as valid, if not more so, than they were in February.

We believe that due to recent and anticipated advances in data analytics, cloud computing, AI and especially quantum computing, the fourth industrial revolution will arrive in this decade. COVID-19 has, if anything, accelerated the pace of technological innovation even further. It is imperative that the government acts urgently to ensure the UK is at the forefront of this digital transformation. If we get this right, we are incredibly optimistic that the UK will remain a global tech leader and secure its place in the world.

We would like to thank ministers for the opportunity to commission this study, and we have been heartened that the evidence base we built in the report has informed the upcoming Comprehensive Spending Review, R&D Roadmap and new Digital Strategy. We would also like to thank officials from DCMS, BEIS, HMT, DFE and DIT for their support over the last year in engaging stakeholders, building up the evidence base and steering the report’s content.

We look forward to presenting the report at the Digital Economy Council meeting on October 1st, and further opportunities to engage and cooperate with the government in future.

Yours sincerely,

The Tech Competitiveness Study Expert Panel

Cindy Rose, CEO of Microsoft UK

Avid Larizadeh Duggan, non-executive director at Barclays

Stephen Coleman, co-founder and CEO of CodeBase

Suzanne Ashman Blair, partner at LocalGlobe

Julia Hawkins, partner at LocalGlobe

Introduction

The UK tech sector and digital economy more broadly has much going for it. We have a thriving start-up scene; a vibrant investment community; cloud-first government policy; a great pool of UK and global talent; and an enduring spirit of innovation.

Headline figures on the strength and continued growth of Venture Capital (VC) investment in UK tech continue to be extremely positive. 2019 was another record year, with total VC investment exceeding £10 billion for the first time. We are the fourth largest market (after the US, China and India), punching well above our weight against our European competitors – with more investment than Germany and France combined.

However, our international competitors are transforming their offerings to start-ups and scale-ups and have seen increased growth. Competitors have also had some success in positioning themselves as an attractive alternative destination for tech investment and for ambitious founders. The need for the government to clearly champion the sector and take further action towards cementing the UK as the best place for tech businesses to start and grow, is greater than ever.

The 4th Industrial Revolution

Occasionally, the steady march of human progress is punctuated by intense periods of change driven by technology. It is clear we are in just such a time right now. How we learn, work, play and consume has changed dramatically in just a few years. Whole industries have been created and existing ones transformed. As jobs change, the very notion of work is being redefined.

What is driving this period of unprecedented change? Today, new capabilities built on cloud computing and advanced data analytics have connected us to people, information, and services instantly from anywhere. They have given us the ability to navigate vast oceans of data by making connections and correlations that help identify the signal in what would otherwise appear to be noise.

Now, rapid advances in artificial intelligence (AI) make it possible to reason over and extract valuable insights from such vast amounts of data far more quickly and efficiently than ever before. AI capabilities - such as speech recognition, natural language comprehension, facial, gesture and object recognition - mean we are entering a new era in which computing possesses the ability to speak, see, listen and learn.

Mixed and virtual realities are adding new dimensions to our world and revolutionising not only how we play but how we interact with information and each other. Blockchain technology offers a more transparent way to record and secure vital data so that new businesses can rapidly build trust with their customers and partners. And, if the pace of change in recent years has felt extraordinary, just over the horizon, lies the world-changing potential of Quantum computing: an entirely new form of computing exponentially more powerful than anything available to us today.

The impact and potential of all these advances is so profound many believe it to be the beginning of a fourth industrial revolution. How we respond over the next few years will have profound and lasting implications for the British economy and our way of life. Like previous industrial revolutions, the current transformation brings with it both the promise of sweeping opportunities and the challenge of significant disruption. We will see traditional jobs give way to new occupations and career paths. Traditional businesses will be superseded by entirely new industries, imagined and brought to life by small entrepreneurs combining world-changing vision and a passion to make it real.

The question of how to maximise the opportunities this change and disruption presents, while mitigating the risks, is one that is being asked by governments, businesses and individuals in every corner of the world. But here in the UK, it has uncommon urgency as we reassess our political and commercial connections with governments and trading partners around the globe.

Advancing UK competitiveness and global leadership

The UK gave the world the first industrial revolution, today we are in a better position to lead the digital technology revolution than most other nations.

We have a long history of leadership in leading-edge science and research and of transforming scientific advances into powerful and productive innovations. The technologies which underpinned the first industrial revolution more than two centuries ago—the steam engine, the power loom, the blast furnace and precision machine tools—were all developed here in the UK. The fundamental concepts that provided the foundation for modern computing date back nearly 150 years to the work of Londoners Charles Babbage, who built the first mechanical computing device, and Ada Lovelace, who wrote the first computer algorithm. Furthermore, Britain has been a leading pioneer in the development of AI since Alan Turing proposed his famous ‘Turing test,’ which for decades has been the standard to measure whether a machine can be considered truly intelligent.

Today the UK is showing the same pioneering spirit. We have fostered the proper conditions for innovation and growth of new technologies through a cloud-friendly regulatory and policy environment; a robust ecosystem for start-ups and scale-ups with access to capital markets; and a dynamic and world-class academic research base marked by a first-class talent pool.

Our universities and research institutions are among the best in the world. We are fifth on the World Intellectual Property Organisation’s Innovation Index, the second fastest-growing market in the world for cloud technology, and number two in the world when it comes to AI readiness. As a nation, we have embraced the power and convenience of digital technology across every aspect of our lives at home, work and play. As the world moves swiftly into this next industrial revolution, the UK clearly stands out as one of the most dynamic and innovative digital economies in the world.

Over the last decade, smaller-sized, earlier stage firms, start-ups and scale-ups alike, have helped catalyse and foster the success of the UK tech sector whilst contributing to the UK’s global competitiveness and our national economy. In 2018, the UK tech sector contributed more than 7.7% of UK gross value added (GVA). Over the last eight years, digital tech sector GVA has increased by 4.1b% to 149 billion in 2018.

The challenge ahead is to ensure the UK retains its position as a top destination for tech businesses, inventors and investors well into the future. That is why the government has commissioned this study - to report on how the UK can cement its position as one of the best places in the world to start and scale a tech business.

In this context the government asked Cindy Rose from Microsoft UK, Suzanne Ashman and Julia Hawkins from LocalGlobe, Stephen Coleman from CodeBase and Avid Larizadeh Duggan from Barclays to lead a study into the competitiveness of our technology sector, to ensure the country remains one of the best places in the world to start and grow a digital business.

Prevailing headwinds

Balanced against tailwinds of our past progress set out above, and the current status of the UK as a global technology leader, we face several headwinds to the UK’s aspirations for future global competitiveness.

Talent & skills For the UK, it is estimated by the UK Commission for Employment and Skills, some 518,000 additional workers will be needed to fill the roles available for the three highest skilled occupational groups in the digital sector by 2022. This is three times the number of computer science graduates this nation has produced in the past decade[footnote 1] At the same time, current approaches to immigration and hiring fall short of meeting this demand for a diverse and inclusive tech workforce. Given the strong international competition for the same pools of talent, this is a fundamental barrier to current aspirations and any hopes of future success.

Role of government While this report cites the supportive policies of governments past and present in contributing to the UK’s technology prowess, there is the opportunity for this and successive governments to do even more. Government can act as an informed catalyst for market creation and enable innovation by creating an environment attractive to smaller tech enterprises and start-ups.

UK R&D While home to world-class R&D, this tends to be spread across disparate centres of gravity, each possessing their own attendant bureaucracies whose inherent complexity and opaqueness make it difficult to access grants and funding for eager entrepreneurs and start-ups. UK R&D also seems rooted in the incremental and has been slow in supporting ‘moon-shot’ style ambitions designed to advance the state of the art in a fundamental way. Though we are seeing changes to see with the Prime Minister asking the Council for Science and Technology to define their moon-shot for the UK. This report also highlights the UK’s comparative weakness when it comes to its ability to commercialise homegrown intellectual property, a source of competitive disadvantage.

AI and data ethics With data as the currency of the new digital economy, trust in AI - and how data is collected, handled and used - is of increasing concern to the public. Currently, the UK lacks a unified strategy for developing a shared ethical framework to provide industry-wide consistency and assurance relevant to the wider ethical and governance frameworks in AI. While this issue of data ethics is critical to both the users and organisations responsible for it is safe and secure management, how we approach it will have a macroeconomic impact on UK productivity and economic growth. An absence of public trust and confidence in emerging technologies presents a risk to the potential success of a new tech start-up or scale-up operation.

Accessing capital The UK tech sector – in particular SMEs – have hugely benefited from a robust and globally recognized venture capital investment approach. However, increasing competition from across the Channel, a marked reduction in flow of capital used to seed the smallest of start-ups and a lack of diversity among investors require immediate attention. Our aim should be to lift everyone up by enabling a diversified portfolio of bets across a range of technologies in which the UK can and will lead in the future.

Regional ecosystems restructure While we celebrate the pockets of strength of the UK start-up and scale-up ecosystem, we have identified structural gaps which significantly hinder the creation of and support for UK start-ups and their ability to scale. We especially note that outside of London it is more difficult to navigate the complex landscape of support. We are missing opportunities to support and grow the next generation of start-ups across the UK. Factors impeding success include inconsistency in the way in which incubator and/or accelerator networks operate across the UK as well as the lack of acknowledged industry standards or metrics to monitor the quality and impact of the support provided.

The UK Tech Competitiveness Study – our approach

Over the last few months, this review has engaged stakeholders across the UK, discussing the domestic and global challenges faced by the tech sector and asking how we can lay the foundations for continued technology innovation in decades to come. Our analysis of the challenges facing the sector and the opportunities open to the UK are in this report, alongside our proposals for government action.

There are some big ideas in this report that call for strategic interventions in the technologies that will define the fourth industrial revolution. But this report also sets out several smaller, more immediately deliverable changes which could make a significant difference to a start-up on the verge of taking the leap to the next stage of development.

There are ten headline recommendations, summarised in the next section and our full list of detailed recommendations are set out at the end of this report.

We propose that government take measures to ensure the recommendations are actionable and that BEIS, DCMS, DfE, DIT, HMT and other relevant departments and agencies, have the policy and other administrative resources to implement our recommendations. We advise that each recommendation should have a named Sherpa in the departments as proposed below. Moreover, many of these recommendations require close collaboration, communication and clear ownership across departments for successful execution given the many interdependencies across the recommendations.

We would like to emphasise the importance of getting the right personnel to successfully lead each of the initiatives in the recommendations below. This means ensuring from the very beginning that people with the relevant proven expertise from industry, entrepreneurship, academia and civil service are selected with care to work together. The quality of the talent and their relevant tech experience is critical.

We noticed throughout our consultation that government is often thinly spread across too many initiatives receiving small amounts of funding and lacking good measurements, KPIs (key performance indicators) or OKRs (objectives and key results). This makes it difficult for decision makers to determine impact and decide whether to double down on or de-fund these initiatives.

Too often initiatives simply continue with too little funding to be impactful. We urge government to focus on a few actions with clear measurable objectives, and to assess as quickly as possible in order to either increase their level of funding and support or stop them completely.

It will also be important to ensure that the success or otherwise of the measures in this study is measured correctly and that adjustments are made if needed. In order to do this, we recommend that rigorous success metrics for each of the recommendations are identified. For some recommendations, the success metrics are clear e.g. measuring the number of start-up founders and employees in diverse groups for the recommendation seeking to increase diversity across the sector.

For other recommendations, success metrics which measure the level of competitiveness in the digital sector at a macro level might be more appropriate. These include the Gross Value Add (GVA) for the tech sector, the number of start-ups and scale ups and the amount of Venture Capital investment in UK technology companies. The panel is happy to work with the relevant teams to help define the specific success metrics and develop appropriate dashboards to assist in tracking these metrics on an ongoing basis.

Finally, we recommend that a group of individuals consisting of the four members of the panel and one representative from each department meet once a quarter to evaluate the progress of the recommendations’ implementation.

The road ahead

The road ahead for the UK is one where our tech sector will play an increasingly critical role in defining the success and fortunes of a post-Brexit United Kingdom. Measuring success will be as varied as the recommended activities themselves. However, all of the ideas and recommendations set out in what follows are designed to advance Britain’s global technology leadership and competitiveness; build on an environment which nurtures a diverse range of leading to next-generation tech powerhouses; and, finally, ensure the UK tech sector continues to thrive and power all aspects of the British economy.

Despite the uncertainty in the world today, this report and its recommendations focus on how technology and the advances it delivers can shape and influence our collective future. Armed with these recommendations and secure in our rich history of innovation and technological accomplishments, we are deeply optimistic the UK can build on its position of strength as a global tech leader, a world leading destination to start and grow a technology business and continue as a competitive force on the global stage.

Summary of recommendations

Our headline recommendations under each theme are summarised below. We have highlighted the first three as top priorities. This summary is followed by a more detailed list of the ten recommendations from the panel and an Annex with further suggestions on how to execute each of them.

1. Filling the tech skills gap - Owner DfE & Support from BEIS and DCMS

We recommend action at all levels of education to meet the tech skills gap. In workplaces we suggest using the National Skills Fund, the apprenticeship levy and other measures to make digital upskilling of the workforce a priority. In schools we recommend earlier teaching of advanced digital skills. In universities we recommend integrating entrepreneurship training with technology degrees and research activity.

2. Regional ecosystems restructure - Owner DCMS & Support from BEIS and MHCLG

Here the panel propose a mixture of restructuring and investment to strengthen the tech start-up and scale-up regional ecosystem. We recommend the establishment of at least four new programmes focussed on strategic sectors for the UK encouraging corporates and start-ups to collaborate on industry challenges; a national scheme, working in at least five cities, upskilling start-ups and scale-ups; and a new grant scheme to increase impact of incubators and accelerators outside of London. We also recommend government should launch a single online gateway, where founders, start-ups, scale-ups and investors can connect and find the most relevant and impactful resources available, and digital learning content can be made available to early stage companies in every corner of the nation and regions.

3. Ethical AI and data for the public good - Owner DCMS & support from BEIS

We make two headline recommendations here. Firstly, that government should show international leadership by developing a shared ethical and governance framework that sets out how to apply the OECD’s AI principles. Secondly, we recommend action to support the right frameworks, leadership and security to encourage data sharing for better policy making and innovation.

While the above three recommendations are priorities, the additional 7 below are equally important in ensuring the UK’s tech competitiveness:

4. A clear mission for emerging tech - Owner BEIS & support from DCMS

We set out a series of recommendation to ensure the UK leads the world in the development and deployment of emerging tech and associated applications. These include the establishment of the planned UK ARPA with a clear mission and a series of principles that should underpin the new model; Helping the UK build on its strength in data science and AI by providing an uplift to the core funding for the Alan Turing Institute and other key institutions and programmes identified by government to build on its AI and data science leadership; And enabling the UK to becomes world leading at commercialising its intellectual property with an environment that encourages founders, talent, universities, local and international investors.

5. Marketing the UK as a Destination for Entrepreneurs and Start-ups - Owners DCMS, BEIS & DIT jointly and HMT for EMI

We recommend communicating the strength of the UK in building global tech companies and improving the incentives to attract tech talent to the UK. The panel recommends expanding the EMI scheme to 1,000 employees as the global headcount limit and the asset limit to £150m in gross assets.

6. Expand Support for Digital Transformation - Owner BEIS & support from DCMS

Our headline recommendation here is the need to identify and expand on transformation support, as well as to vet, invest in and migrate existing effective programmes to other regions.

7. Driving the commercialisation of innovation - Owner joint BEIS, UKRI and Innovate UK

To ensure Innovate UK programmes meet the needs of the tech sector, we recommend scaling up the Smart programme to meet demand while reviewing its selection criteria and ring fencing some of the budget to target areas of difficulty. We recommend the Innovation Loans and Investor Partnership programmes be fully rolled out with a level of funding that will meet the demand of highly qualified, suitable applicants; the Smart Grants application process be made easier for start-ups; and support for leadership and commercial skills improved.

8. Fill the gaps in access to finance - Owner BEIS

We recommend a series of actions to address funding gaps to support a pipeline of early stage firms, including pushing aggregated capital firms to create pre-seed funds, tax relief for firms investing in pre-seed companies, and using procurement to make it easier for start-ups to access customers.

9. Refresh the high-level expertise available to government - Owner DCMS

Our headline recommendation here is to establish a UK Tech Competitiveness Council which can provide ongoing guidance to Ministers on strategic measures for improving tech competitiveness.

10. Greater diversity in tech – Owner DCMS

We also recommend an increase in government support to enable the Tech Talent Charter to continue efforts to increase recruitment and retention of female, BAME, disabled and neuro-diverse workers, as well as continuing to deepen the charter’s regional activity outside London and the South East.

Detailed recommendations

1. Filling the tech skills gap

The tech industry is expanding more than two and half times faster than the rest of the UK economy with a reported 1,672,000 positions created in the digital economy in 2018[footnote 2]. With such growth, recruiting the right talent is a substantial challenge for scaling businesses.

As the tech industry expands, all other industries are becoming more tech focused. According to the 2018 CBI Education and Skills Annual Report:

  • 66% of executives reported struggling to fill vacancies for digital roles
  • 20% say they are unable to find employees with basic digital skills, such as writing documents using a word processor or using spreadsheets effectively
  • 50% reported challenges in recruiting software engineers or data analysts

The inability to fill this talent shortage has been estimated to cost the UK tech sector $27.7 billion of unrealised growth by 2030. The existing university curriculum in Computer Science is falling short of expectations and not meeting the needs of employers seeking tech talent. There is a noticeable gap between the skills taught and the resulting employability of the graduates in Computer Science. 90% of jobs require computer skills, yet Computer Science continues to have the highest proportion of unemployment of any subject.

The panel heard that the course content is often out of date and universities believe it is too expensive to re-design courses. In addition, softer skills and leadership skills are not being taught as part of the curriculum. Despite over 80% of employers demanding graduates with formal work experience, not all offer it. Formal work experience is a powerful employability leveller. The Institute of Coding notes that students with formal work experience are 3 times more likely to be in a graduate level job.

Why this is important

From a recruitment standpoint, 83% of executives at UK companies said a lack of access to the right skills was the No.1 threat to the UK labour market competitiveness[footnote 3].From an entrepreneurship standpoint, since 2014, the UK has produced more than twice the number of $1 billion valuation tech companies than any other country in Europe, and venture capital investment increased by 44% in 2019, outpacing the US and China. There is evidence of tangible impact to the economy of supporting the business & academia connection, helping start-ups become more successful by enabling universities to create tomorrow’s entrepreneurs.

Desired outcome

The government is in the best position to accelerate technology and entrepreneurship skills transfer across academia, public and private sectors; magnifying the impact of technology and social science innovation on industry and society, in particular increasing SME access to those skill sets and skilled individuals.

  • This skills transfer will ensure the UK supports start-ups and innovators within academia to gain the relevant entrepreneurial skills to be successful
  • It could provide a platform for lifelong learning by supporting ongoing engagement and interaction between people in employment/employers and academic / teaching institutions
  • As well as build the digital capability of all generations to keep up with the pace of technology, ensuring the UK has an upskilled, flexible workforce, delivering increased productivity and increased international competitiveness
  • To accomplish the above, there needs to be a government wide strategy to support digital skills. We recommend exploring how to coordinate and align government department activity - DfE, DCMS, BEIS – towards a common objective. Government should assess whether skills should be split across the 3 departments or rather owned by one enabling better information transfer and coordination.

While we are not focussing on schools in this study given the amount of work that is being already done by government in this area, we know that schools are a critical part of the pipeline and government should maintain focus to ensure computer science and more advanced skills - such as creating digital products, understanding emerging technologies, digital safety, computational thinking and ethics are integrated into the curriculum from a younger age (i.e. key stage 3).

Headline recommendation 1: Address the skills gap across schools, universities and workplaces; reinforcing initiatives that embed digital upskilling in the workplace, and inject entrepreneurship and work experience in university degrees and research

For our workplaces, we recommend that the government should encourage and help companies to become more responsible for training their own staff and to build the capabilities and systems to do so. For companies too small to have the proper training programmes and capabilities, the government should direct them and support them in working with organisations which can provide this kind of resource.

As part of an expected government review into the apprenticeship levy, the government should consider a greater focus of the levy on covering digital upskilling of existing workforce. There should be a continued focus to address the need for upskilling and training in the regions, connecting and developing regions outside of London. This is also relevant for university students (see recommendation below.)

Government should identify organisations with theright leadership, experience and methodology,and encourage them whether financially, through better access, lending them credibility, etc to work with small and medium sized businesses, to help train their employees and connect them with universities. We recommend that digital upskilling of the UK population is a priority for the proposed £3 billion National Skills Fund.

For our universities, we recommend that the government should give more incentives to companies to create work experience for graduates taking into consideration regional variations in opportunities and uptake. We should build on the success of the Institute of Coding, capitalise on its framework and renew its funding.

For students seeking to launch start-ups, we recommend a national offer of relevant and focused entrepreneurship training, informed by industry and academic expertise. Government endorsement at a national level of entrepreneurship training is important rather than being limited to a London/Oxford/Cambridge triangle. Resulting impact would support growth of regional incubators and accelerators (see Recommendation 2 on regional ecosystems).

2. Regional ecosystems restructure

There is an opportunity to help tech across the UK thrive by growing and improving existing tech ecosystems and the current provision of tech incubators and accelerators. Effective clustering and digitizing provision will increase the likelihood of start-ups getting the support they require and in turn their ability to be invested in and ultimately grow and thrive.

The challenges to achieving this include the current inconsistency in the way and the quality in which incubator/accelerator networks operate across the UK as well as the lack of acknowledged industry standards or metrics to monitor the quality of the support provided. According to Nesta and BEIS, there are roughly 560 accelerators, incubators, start-up hubs and online resources, such as those delivered by Tech Nation, available across the UK, provided by both public bodies and the private sector.

However, there is little sign posting to help entrepreneurs identify the right support for them. Founders need to have the ability to find the right advice for their industry sector, their region, their business lifecycle stage or their particular communities, such as female, disabled, or BAME founders. In addition, there isn’t a way to gauge either the quality of the support available from incubators, accelerators and start-up hubs or the impact they are having via feedback from former or current participants.

Despite there being strong regional coverage of incubators and accelerators, effective intra and inter regional networks are not being created that allow start-ups, scale-ups, investors, universities and corporates to efficiently interact – it is this interaction which forms the foundation for effective clustering. Across the roughly 560 incubators and accelerators in the UK, there is no formalised network encouraging or coordinating collaboration. This lack of coordination misses the opportunity for competitive differentiation through leveraging regional capabilities and best practices.

Why this is important

  • To maximise UK tech competitiveness, it is critical to capitalise on the regional capabilities that exists in many of the cities outside of London, however, 68% of tech VC investment value was raised in London. There is also an emerging trend in 2019 data that indicates a decreasing number of deals in early stage (seed) businesses (pan-UK), of which London over indexes on.
  • Without coordinated action to support and develop regional ecosystems, effective networks won’t develop which could limit investment in the regions, particularly at seed stage
  • Underinvestment in the regions could impact long term prosperity of the UK’s tech competitiveness by restricting the volume and quality of new start-ups being created and in turn scalable businesses
  • Founders of new tech start-ups and businesses that are starting up and scaling up have many resources available to them but often have no idea where to start, how to find the resources that are most relevant to them and how to parse high quality resources from the rest.
  • Traditionally, the regions of the UK were dominated by their natural geography (think mining, fishing, etc.). The digital world frees the regions from such restrictions. New digital companies rely on human capital above all else, so any regional digital strategy needs to be about enabling people to perform to the best of their abilities, and allowing them access to the necessary infrastructure (e.g. education spaces, fast broadband and public cloud infrastructure). Equal access to this infrastructure is the only way to help create a meritocracy.

This is a unique opportunity; the lack of physical geographical constraints means there is the possibility of doubling down on scalable human resources. Not grasping this opportunity risks leaving entire regions behind.

Desired outcome

  • Regional clustering of expertise around industries of strategic importance enabling innovation that helps maintain or improve the UKs relative competitive position
  • Uplift in entrepreneurial skill set amongst regional start-up ecosystems that in turn supports an increase in investment, absolutely and proportionally, into regional ecosystems
  • Creation of a single online destination that enables people to search for relevant public and/or private sector support at each stage of their business lifecycle (including funding, training, education, types of accelerators, export and programmes) in one place. This single online destination/ marketplace would benefit from peer to peer reviews and modern social media tools to gauge quality and impact of the UK’s broad range of accelerator and incubator provision.
  • Enabling start-ups outside of London to have a chance to thrive

Headline recommendation 2a: Investment in strategic and regional ecosystems

Government should Invest in a minimum of four new industry programmes, based outside of London and co-led by experienced individuals from government and the private sector, aligned to sectors deemed strategic priorities for the UK. These programmes will bring corporates and start-ups together to collaborate on industry challenges which will support clustering of expertise in regional locations, and in turn attract investment. We also believe there are two other actions that government can do to support this work:

  • Recognise and highlight the roles that the UK Tech Cluster groups, corporates and SMEs have done within projects to date. This could be done through an event or through a publicity campaign. There are examples from across the UK of corporates such as Nissan, Barclays, National Express, Siemens and P&G using the UK Tech Cluster as intermediaries to successfully collaborate with tech SMEs but more needs to be done.
  • A longer-term action would be the creation of a tax relief for corporates which encourages working with SMEs on innovation activities through an (accredited) SME engagement scheme, for example those run by UK Tech Cluster organisations. Tax relief would be eligible on both the money flowing to the SME and fees payable to the intermediaries to support the innovation process.

We also recommend creating a national scheme that will, in a minimum of five target cities, fund the delivery of programmes that provide start-ups with expert-high-quality support in how to build and scale a tech business. These programmes should be delivered by leading private and public experts with a relevant track record of success focused on upskilling start-ups and scale-ups across specific communities to make a success of tech businesses, addressing entrepreneurship, technical and business upskilling.

We recommend creating a grant scheme to increase the impact out-of-London incubators and accelerators by incentivising them to: better understand tech investment, provide better environments for tech start-ups/scale-ups to thrive, provide meaningful mentorship, support and programmes, create and join networks and improve deal flow. This could be supported by a best practice guide, created by current best operators.

Headline recommendation 2b: Create a single online gateway to make support more discoverable

We recommend government should launch a fully searchable single online gateway with three elements. First, a ‘TripAdvisor’ style gateway where founders, start-ups, scale-ups and investors can connect and find the most relevant resources available. This single online destination would benefit from peer to peer reviews and modern social media tools to gauge quality and impact of the UK’s broad range of accelerator and incubator provision. Second, it would be a ‘one stop shop’ for the full range of government support resources for businesses. Third, this gateway would also serve as an open learning platform where content is aggregated and made available from multiple sources, for example specialty webinars, expert podcasts, peer to peer learning, etc.

We recommend that government should update its mapping exercise to identify every incubator, accelerator and start-up hub across the UK. Research with potential customers should be carried out but our expectation is that the online portal must have the appearance of a modern digital marketplace rather than a traditional government website.

3. Ethical AI and data for the public good

The wide scale use of data & AI presents a huge opportunity for the UK. However, we have identified a need to build a foundation of public trust in data collection and AI technologies (and those who make it).

There is some industry sector specific work being done in this area, but it is inconsistent and not well understood. Only a very small number of tech companies are adopting a data ethics and AI framework of principles as they design, develop and deploy AI. Many start-ups simply do not know how to develop their own principles. They need clear and easy to implement advice from experts in order to establish a foundation on which to build public trust.

In addition, data is important for all digital (and traditional) businesses, whether they use AI or not. An open, trustworthy data and information infrastructure is an essential precondition for a thriving data economy and a competitive tech sector. The value of data significantly increases as it is shared and aggregated. Data, however, is not currently made available in ways that ensure it gets to the organisations who can make best use of it.

Organisations mainly use data they collect to create services for their customers rather than to benefit larger groups in society. Data may be held by the private sector, in different sectors, or simply within silos in the same organisation. Often the people who hold data do not recognise that they have an incentive to share. When it is made available, data is shared in a variety of formats with limited interoperability, which makes it harder and costlier to compare, link, and combine, or to make tools that work with data from multiple sources. Open standards for data are a public good and creating, supporting and maintaining them requires the creation of sustainable data institutions to coordinate collective action.

Why this is important

A shared ethical and governance framework, which sets out how to apply the OECD’s AI principles in practice when designing, deploying and monitoring new AI systems will provide industry-wide consistency and assurance for start-ups and their customers:

  • AI should benefit people and the planet by driving inclusive growth, sustainable development and well-being.
  • AI systems should be designed in a way that respects the rule of law, human rights, democratic values and diversity, and they should include appropriate safeguards – for example, enabling human intervention where necessary – to ensure a fair and just society.
  • There should be transparency and responsible disclosure around AI systems to ensure that people understand AI-based outcomes and can challenge them.
  • AI systems must function in a robust, secure and safe way throughout their life cycles and potential risks should be continually assessed and managed.
  • Organisations and individuals developing, deploying or operating AI systems should be held accountable for their proper functioning in line with the above principles.

At a macroeconomic level, driving trust in AI will have a positive impact on the UK’s productivity and economic growth. This will lead to an increase in the availability of and access to key source data sets, which in turn will lead to opportunities to innovate with new business models and will fuel the start-up ecosystem. Competitiveness driven by data availability can be further supported by enabling an organisation such as the Open Data Institute to execute the government’s strategy to increase the availability of data.

Making data more accessible benefits industry sectors. A study by Deloitte and ODI for the Transport Systems Catapult showed £14 billion of benefits from innovative uses of data in the transport sector. The government’s initial analysis of the potential geospatial economic opportunity identified up to £11 billion/year value from better access to geospatial data. The Energy Data Taskforce found there could be cumulative savings of up to £40 billion by 2050 if data was shared more effectively.

Making data more accessible also addresses 21st century market failures. Sharing and opening data is necessary to tackle information asymmetries, such as those described in the Independent Review of AI, that limit the ability of innovators to build new services as they lack access to data.

Making data more accessible has social and environmental, as well as economic, value. Research by Deloitte for TfL estimated that open data has created £90m-£110m of value to passengers per year through extra journeys and reduced travel. Public transport is more accessible for those with mobility problems and the increased use of public transport will have helped reduce emissions and air pollution in London.

Desired outcome

  • The UK has a unique opportunity to show international thought leadership, and become the world leader in ethical tech. This would increase consumer confidence, adoption and usage internationally, and drive tech sales and innovation here at home.
  • The UK, through The Centre for Data Ethics and Innovation, CDEI, leads globally by establishing a best practice framework on how to apply the OECD’s AI & data ethics. All organisations, including start-ups, scale ups and others adopt the OECD principles as a minimum standard.
  • There is increased access to secure, interoperable data leading to increased competitiveness, SME growth and better delivery of the UK’s infrastructure and public services.
  • The UK sets the standard globally on information management through the leadership of the Centre for Digital Built Britain. Widespread trust in data openness and business growth due to increased data sharing through the leadership of the ODI.

Headline recommendation 3a: Supporting Leadership on application of ethics in AI

We recommend that the UK government lead on developing a shared ethical and governance framework. This would set out how to apply the OECD’s AI principles in practice when designing, deploying and monitoring new AI systems. The aim should be to provide industry-wide consistency and assurance for start-ups and their customers.

We should make these efforts part of the story we tell the world about our economy. The ‘trusted tech’ message should be part of the UK’s international Great Britain campaign. Government should consider creating an annual British Ethical Design Awards.

Headline recommendation 3b: Supporting frameworks, leadership and security for data sharing

In response to the Data for the Public Good recommendations, the Centre for Digital Built Britain has been tasked by the government to deliver a framework for effective information management, enabling interoperability of data across the UK’s infrastructure and the sharing of data between organisations. Working with CDBB, government should move beyond the built environment and work with industry to develop and expand this work across sectors, and thereby lay the foundations for a structured national approach to information management, to maximise the benefits of a standard framework. The UK has an opportunity to set global standards, but this national-level framework must be delivered at pace as the challenges of data sharing only become more entrenched as time passes.

The panel also recommends increasing funding to the Open Data Institute who are well-placed to act as a national leader to build trust and increase openness of data. ODI should also be tasked with ensuring businesses of all sizes understand the benefits of open data and have access to essential training, advice and guidance on how to share their data securely.

Finally, government should create a one-stop-shop, with representation from all the relevant security agencies, which can offer advice at the earliest phase of policy making to help ensure data openness and security are not seen as being at odds with each other. We recognise that a balance needs to be struck between data-openness and the restriction of certain data and the consideration of this balance is best served at the point policy design. It follows that consultation with this new advice platform should become a requirement and form an integral part of policy formulation. However, the means to secure this advice needs to be uncomplicated and have the necessary central direction to be influential.

4. A clear mission for emerging tech

The UK is a European leader in deep tech: cutting-edge, disruptive technologies based on scientific discoveries. UK venture capital funding into deep tech companies reached €3.1 billion in 2019, up from €0.9 billion in 2015. Our nearest European competitors, France and Germany attracted a combined figure of €2.7 billion[footnote 4].The UK’s public R&D investment has increasingly adopted ‘mission orientated’ funding approaches – exemplified by the Industrial Strategy Challenge Fund. Our view, and that of many stakeholders with whom we engaged, is that the ISCF has established a very welcome model of partnership-based delivery. It has drawn together the expertise of academic and research institutions, large corporate R&D investors and smaller firms. The focus on inspirational and high-profile missions - such as applying AI to the prevention & treatment of chronic disease or halving the energy use of new buildings – has provided collaborators with clear permission and an imperative to innovate.

However, the panel recommends a stronger focus on longer-term more ambitious challenges and better integration of the expertise of businesses and scientists for greater impact. In doing so we recommend that the UK emulates the best elements from approaches in other countries. We can learn from France and Germany, and the high-profile success of DARPA in the United States. There are also lessons to draw from non-governmental initiatives that have sought to focus on longer-term and more unproven propositions, such as the WellcomeTrust’s Leap Fund which seeks to support higher risk research into transformative solutions.

The government’s decision in 2014 to create a national centre for data science has been translated into The Alan Turing Institute, a high-profile, vibrant national institute for data science and AI, bringing together 13 leading UK universities, five strategic partners with key user sectors, international researchers, government departments, as well as UK and international corporates and SMEs. The Institute is advancing world class research, applying its research to real-world problems, training the leaders of the future, and leading the public conversation. Governments across the world also recognised the importance of data science and AI institutes. France announced €1.5 billion of investment into AI and €225m of new investment into four research institutes. Germany announced a €3 billion funding commitment over 6 years in their 2018 National AI Strategy, with an additional €3 billion matched by industry. This included funding for 12 research centres focussing on AI technologies.

However, since the Institute’s inception, the pace and extent of the next industrial revolution driven by data science and AI has been seriously underestimated. The level of demand for partnership with the Institute, across academia, industry and government has far exceeded expectations and current capacity, with core funding on a flat basis. A significant uplift in funding is needed to meet this demand, with the Institute planning to expand its world-class research activities, foster innovation within government and across industry, and play a key role in the digital skills agenda.

Britain’s higher-education sector is world-leading, and intellectual property being developed in university labs is attractive to investors. Our universities have produced some of the brightest deep tech businesses globally. In terms of research impact, the UK punches far above its weight, consistently ranking first in the world, ahead of both the US and China.

Translating the pioneering intellectual property that is developed in universities’ labs into commercially viable products is difficult, as is supporting academics to become entrepreneurs. The ecosystem is tackling this challenge through the establishment of Knowledge Transfer Partnerships and other centres for business support within Higher Education institutions, as well as the creation of investment bodies specific to certain universities. Grants are often an important factor in a spinout’s growth trajectory, and Innovate UK is the most significant grant body for the UK’s young companies.

The UK government has committed to work with industry to boost spending on R&D to 2.4% of GDP by 2027, equating to approximately £80 billion, which was welcomed by UK Research & Innovation. The UK Government pledged £4.7 billion in the 2016 Autumn Statement, and an additional £2.3 billion in 2021-22, raising total public investment in R&D to £12.5 billion in that year alone.

However, the UK lags behind the US and China in commercialising our intellectual property. Between 2015-2019, scale-ups in the USA raised ten times as much as the UK. Chinese scale-ups raised four times as much. Nevertheless, when considering University spin out companies, if we rank universities globally by the amount of capital raised by their spin outs, the UK holds five of the top ten positions. In addition, the top position goes to the UK University of Cambridge (Global Venture Review 2013-17). Therefore, we can see pockets of UK exceptional success.

Worryingly, equity investment into UK university spinout deep tech companies declined in 2019, a year when the amount of investment into high growth companies in general more than doubled. There is now a significant issue in the lack of early and growth funds being allocated towards this space. In addition to the lack of capital, Rees’s independent report into University-investor highlighted the risk of only having a small number of early stage investors, which the majority of spin out funding stems back to. This risk has been realised with the implosion of IP group in late 2019, compounding the lack of funding. The view of the panel is that the ownership stakes currently demanded by universities also put off would-be founders and investors.

Why this is important

There is enormous economic value in emerging technologies solving huge societal problems, such as using artificial intelligence to improve efficacy, speed and cost of cancer diagnosis, artificial intelligence to forecast natural disasters like floods and clean energy solutions that can help curb global warming.

The impact of big science and AI innovation alone to the UK economy is significant, and growing:

Desired outcome:

  • The UK remains at the forefront internationally and leads the world in the development and deployment of emerging tech and associated applications.
  • The UK becomes world leading at commercialising its IP with an environment that encourages founders, talent, universities, local and international investors; thus, enabling the businesses developing these technologies to succeed.

Headline recommendation 4: Double down on UK’s world leading position in emerging technology

We welcome the work being done to expand on the ambition set out in the Queen’s Speech with a major investment in an UK ARPA style model to help fund high risk, high return research.We urge Ministers to work with the tech sector in developing the model, recognising the role of digital tech start-ups in supporting transformational innovation and new technologies in the economy. To ensure we realise the benefits of this ambition for the growth of the UK digital tech sector, the panel offers the following principles:

  • ARPA should be designed around an ethos of mission-driven tech R&D; with the goal of funding ideas that are transformational in their impact; and with the risk appetite to back ideas over a horizon of more than five years.
  • The model should be based on leveraging existing networks and developing new collaborations with the private sector, research institutions and individuals. The inclusion of Start-ups and Scale-ups is critical as they will provide the agility, talent, cutting edge methodologies to move projects forward.
  • From the outset we must recruit the right capability and leadership at all levels. To succeed the new agency needs leadership that drives clear prioritisation and agile decision making, with the authority to stop projects that are not making the progress we need.
  • The new model should focus not just on the research but also on its commercialisation.

Government should help the UK build on its strength in data science and AI by providing an urgently needed uplift to the core funding for the Alan Turing Institute as supported by EPSRC’s 2019 mid-term review of the Institute’s initial funding, where it was recommended that ‘BEIS and UKRI should give serious consideration to longer term funding for The Alan Turing Institute.’ Given the scale of data science and AI, this is a significant focus area as the UK moves towards the 2.4% of its GDP target of research and innovation spend.

The Institute’s current model now has several limitations, both in terms of funding and governance. This in turn impacts the ability to form the breath of relationships and collaborations needed and inhibits the Institute’s ability to deliver against the original aspiration. The funding would enable a radical change to the Institute’s governance model, thus allowing it to set its priorities independently and serve academic institutions not on its board, government departments, industry, charities and foundations alike.

We recommend ensuring the proposed National Quantum Computing Centre is able to provide government with advice from industry on what support will be needed to ensure the UK remains a global leader in this emerging technology field, and that Quantum R&D translates into a new generation of Quantum start-ups and scale-ups.

Government should promote research, development and innovation that brings together multiple emerging technology disciplines. This includes, for example, how AI will interact with 5G, augmented reality, the internet of things and quantum technologies. The UK has a unique blend of strengths across these technologies, which should be capitalised upon to position us as a global leader.

We recommend the British Business Bank to be mandated to allocate £1-2 billion over the next 3 years to invest in funds focussed on IP-based businesses. This is to ensure ongoing commercialisation of world leading IP that is developed in the UK, especially post-implosion of Woodford IP Group.

There should be a review of the current intellectual property policies of UKRI and R&D intensive universities to encourage greater commercialisation of university IP . This should include considering a standard recommendation that all UK Universities follow the UCL Portico or Imperial Founders Choice model regarding taking less than 10% ownership of their spin outs. We recommend linking this change to a national Proof of Concept fund from UKRI that will carry out independent technical due diligence and invest a convertible note into start-ups able to secure external investment.

5. Marketing the UK as a destination for entrepreneurs

Despite the UK’s fantastic base of established and emerging companies, there are concerns that the UK’s attractiveness for entrepreneurs and start-ups is diminishing - in part because of uncertainties around Brexit, but also because we are not celebrating the UK’s success loudly enough. Anecdotal evidence suggests some markets do not currently consider the UK as a potential destination for digital tech when seeking international expansion.

We have seen many EU countries provide new incentives for entrepreneurs and make it easier for companies to be formed. In France the message has come directly from President Macron that France intends to become a start-up nation and home to entrepreneurs. To match the message, there has been significant expenditure on marketing the tech sector to overseas entrepreneurs - La France Tech’s budget is c. €15m a year.

Start-ups need to be creative with their compensation packages in order to attract the best talent, they are unable to compete for this talent with salary and benefits alone. Cash compensation for similarly experienced technical talent at earlier-stage start-ups in London is less than half of what it would be at Google or Goldman Sachs. But start-ups can offer employees a meaningful ownership stake, in the form of stock options – rewarding the risk employees take with a young unproven business with a promise of a pay-out should the start-up succeed.

Why this is important

It is especially important in the current environment to improve incentives and raise awareness of the UK as a fantastic base to start and grow a company. Access to capital, experienced Founders, world-leading academic institutions and markets make the UK a world-leading destination for any entrepreneur.

However, other European countries are steaming ahead and without improved incentives in the UK, the best Founders will not choose the UK as their base. Indeed, UK Founders will similarly choose to build their businesses elsewhere.

Desired outcome

  • Improve incentives to ensure entrepreneurs in the UK want to stay to build businesses and international entrepreneurs seek to move here.
  • Funding of an organisation (bidding process based on a set of success metrics) to lead the strategy and execution of the campaign as described in the below section. The selected organisation to work across departments but report into the cabinet office with the Prime Minister being the main spokesperson.

Headline recommendation 5a: communicate the strength of the UK in building global tech companies

Overhaul the incentives available to tech or innovation-based start-ups and scale-ups paying particular attention to issues of staffing, taxation, overly burdensome regulation, competition policy and access to capital.Communicate the strength of the UK in our ability to build iconic tech companies across the country due to our access to:

We recommend delivering campaigns targeting existing and potential tech entrepreneurs:

  • For international founders: An international campaign focused on STEM grads to bring the brightest and most ambitious to the UK, by explaining the opportunity there is here to create and grow a successful business, in an environment where talent succeeds. It should highlight our open immigration policy, the ability for companies to attract and retain talent (including expanded EMI scheme above), and ability to trade and export with ease with the rest of the world. The campaign should work closely with proven entrepreneurs in the sector and use digital and social media to engage with the under-35 age group. Bring Tech VVIPs to the UK for London Tech Week events to show the ambition of the UK to attract the world’s top talent.
  • For UK founders: More active communication is needed to target the tech community directly, especially to clarify implications of Digital Services Tax, GDPR, investment tax relief incentives as well as tax treatment upon success (or failure) (especially as companies compare the UK to France, for example).
  • For UK public: A domestic campaign aimed at parents, young people and educators that shows why young people should consider tech as a great career whether they are studying sciences, maths, law, arts, design or any other discipline. There are fantastic careers, as a Founder, or working in a start-up in a wide variety of technical and non-technical roles such as marketing, business development, product design, strategy. Above all it should communicate that tech is reaching all parts of the UK from the Cornish start-ups to the Northern Ireland future unicorn. Tech is inclusive and needs motivated people of all ages, skills and diversity.

Headline recommendation 5b: Expand incentives for entrepreneurs

Over the past decade, the UK has benefitted from thoughtful policymaking and flagship incentive schemes around Entrepreneurs Relief and EMI, which have had a material impact on attracting the very best talent. UK policy remains significantly ahead of most of Europe.

The EMI scheme has been a great success, with high numbers of start-ups and scale-ups participating. However, the current restrictions on EMI are not reflective of the UK tech sector’s maturity levels and the scheme limits are proving to be outdated and restrictive, unintentionally penalising employees of fast-growing tech companies.

Our study has found that the UK now has more than 50 tech start-ups which have surpassed the company size criteria for EMI. As a result, these companies are being forced to adopt less employee-friendly approaches for second generation hires, limiting their ability to attract, reward and retain the best talent in the UK. This has been identified as a significant factor inhibiting the growth from early stage to larger companies.

The panel recommends expanding the EMI scheme to 1,000 employees as the global headcount limit and the asset limit to £150m in gross assets.

6. Expand support for digital transformation

The pace of technology-driven disruption is only accelerating. We see it manifesting itself in myriad ways across all sectors. For instance, this year it is expected that the average amount of healthcare data will increase to 1GB per person, per day. In retail, hyper-personalization has become a baseline expectation for 78% of shoppers. Likewise, it is estimated that 70% of manufacturing tasks will be automated by machines by 2025. For millions of UK businesses and organisations of all sizes and stripes the choice is no longer will they or won’t they but rather how they will embrace digital transformation.

Why this is important

For those that choose to embrace transformation over disruption, there are great advantages. Indeed, according to a Microsoft commissioned research report entitled Accelerating Competitive Advantage with AI, as of late 2019, 56% of UK businesses were utilising AI at scale and, as a result, were significantly outperforming those organisations who have not. Outperformance being measured in terms of productivity improvements, higher profitability, and better business outcomes.

To be sure, it isn’t only a handful of large incumbents being disrupted by technology, but a large part of the SME population is also being affected. Given SMEs account for 99.9% of the business population, for 60% of employment, and around half of turnover in the UK private sector,their ability to manage digital transformation is critical to the UK economy. It is clear that for those organisations which embrace transformation, they not only have the opportunity to improve their own competitiveness but ultimately the competitiveness of the UK.

Generally speaking, for any organisation or business, digital transformation is comprised of four areas of focus:

1. Engaging customers: Consumers are savvier than ever before, with access to data ensuring they are often educated on a product or service before engaging. To stand out, organisations will need to deliver a new wave of deeply contextual and personalized experiences, while balancing security and user trust. Retail stores like M&S are leveraging technology to unlock the valuable data on every surface, screen and scanner in their stores and enabling employees to act upon it. The iconic high street retailer is investing in a future where every one of their stores will be able to track, manage and replenish stock levels in real time – and deal with unexpected events.

2. Empowering employees: Even before COVID-19, the nature of work - and the workplace itself - has undergone a dramatic evolution. Organisations can empower their people and help them do their jobs better with the power of the cloud mobility, which allows employees to collaborate from anywhere, on any device, and access apps and data they need, while mitigating security risks. Organisations as wide ranging as Heathrow Airport, Auto Safety Glass and the Dept for Education have leveraged technology to advance productivity for their workforces including frontline workers. For instance, with the low-code development of 30 apps, Heathrow employees have eliminated 75,000 pages of paperwork and reduced data entry by nearly 1,000 hours, helping the airport reduce its costs.

3. Optimising operations: Technology has accelerated the ability for businesses to optimize and streamline their operations. For instance, IoT can gather data across a widely dispersed set of endpoints, drawing insights through advanced analytics and applying those learnings to introduce improvements on a continuous basis. Organisations in manufacturing, retail, and even healthcare can shift from merely reacting to events to respond in real time, or even pre-emptively anticipating and solving customer issues. By way of example, Iconic British footwear brand, Doc Martens, recognized that it needed to evolve to meet the needs of 21st century consumers by replacing legacy business applications and systems. Doc Martens invested in end-to-end technology solutions that streamlined their operations (i.e. delivering real time instructions to their warehouse; ability to buy online/return in store; leverage click & collect) as well as exposing valuable business data that had been previously locked away enabling dramatic improvement in inventory management. The end result for Doc Martens was improved business performance & increased growth.

4. Transforming products and business models: The opportunity to embed software and technology directly into products and services is evolving how organisations deliver value, enabling new business models, and disrupting established markets. Confused.com is breaking new ground in its industry to drive revenue, reduce costs and increase the lifetime values of its customers. Having migrated its data warehouse to the cloud, it is leveraging artificial intelligence capabilities to better understand its customers and offer them the right products and services to save them time and money.

Successful digital transformation also requires cultural transformation, a growth mindset, risk taking, and a fail fast approach to innovation. Research and experience indicate the biggest challenge organisations face in accelerating transformation is not necessarily around the technology itself, but the cultural change required to derive value from it. Yet only 23% of UK business and IT leaders says their organisation is undertaking a major programme to change its workplace and organisational culture.

Digital transformation is not an IT exercise, it is a people exercise. Business and organisational leaders must therefore embrace cultural transformation from the top and explore the behavioural and cultural shifts required to bring about lasting change. Whether we are talking about a global enterprise or a small business, changing human behaviour is not always easy as it often engenders a level of discomfort with stepping into the unknown. Some people thrive on it, some people can learn it, and some people feel paralysed by it, so organisations must be equipped to manage it sensitively.

Nearly a decade ago, venture capitalist Marc Andreessen famously and prophetically coined the phrase ‘software is eating the world’ to describe, at that time, the ‘dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.’ Since then, software has been injected into almost all aspects of our lives: how we purchase goods and services of all types, arrange travel, learn, communicate with one another, find life-partners, consume entertainment, pay our taxes and more. The desirable position for the UK is to be a nation that embraces this new reality. Our aspiration should be a nation that understands and contributes to this software-fuelled world.

Desired outcome

  • Existing firms would manage this transition without shedding jobs, but instead shifting and adding new ones based on new innovative products and services;
  • New companies created in the UK should be active participants in building this new world;
  • The commitment of both old and new firms to enabling all UK citizens to participate in this new world; discrimination of any kind (gender, race, class, etc.) must have no place here.
  • a UK education system which routinely creates a generation of skilled and highly employable workforce whilst also teaching and supporting entrepreneurship.
  • The UK becomes a magnet for entrepreneurs and talented people who want to invent, build and develop new things.

Headline recommendation 6a: Expand support for SMEs

Government should identify the best upskilling programmes and invest heavily in those that work. Many regional programmes already exist, often connecting more tech-savvy early-in-career professionals with more experienced workers to offer fluency in the latest established technologies. The quality of existing programmes is mixed and marked by uneven results across various regions. Being sure to select those programmes that work and have shown tangible benefit is essential.

In addition, just as technologies and their application can often differ relative to the vertical industry or sector, so too will the needs of their respective workers in those industries. Consequently, it will be important to consider how the needs of, say, hairdressers will differ from those of a small law firm, for example. However, while sectoral and regional needs will differ, these peculiarities do not apply to writing software.

Signposting is crucial for smaller firms. Many do not know what they do not know or have other cultural or cost barriers to adopting new digital ways of thinking. Often cost concerns are overstated, particularly for very small companies, freemium or low-cost versions of software tools are available. Education and signposting are needed to make that plain.

Headline recommendation 6b: Expand support for larger organisations

Upskilling is crucial and many good programmes exist. For example, Barclays Digital Eagles is based on their internal experience of upskilling a large multi-generational workforce. Much of what they have learned maps across well to other large sized organisations. Upskilling is not just about performing tasks, but also includes creating a new culture where employees are incentivised to learn and create new opportunities.

For disruption challenges, the latest best practice thinking revolves around importing start-up thinking into the corporate space to unlock corporate innovations that let large organisations come up with their own disruptive innovations and entrepreneurial culture. It is crucial that corporations engage with current start-ups to gain this culture. It cannot be brought about by typical, established consultants.

Therefore, corporations need to change the innovation culture to let in a new way of thinking. Many formats are possible here, and controlled experimentation should be encouraged. One option to explore could be running an accelerator programme, divided into accessible topics and tailored to specific sectors. Another potential solution which may be appropriate for large corporations is to build venture teams and engage with start-ups as investors or partners via CVCs (Corporate Venture Capital). Whatever the form, this upskilling education should be carried out by current practitioners.

7. Driving the commercialisation of innovation

The successful commercialisation of cutting-edge technology is essential to creating the jobs and markets of the future. We support R&D funding for fundamental research, led by UKRI’s research councils, but applied R&D funding managed by Innovate UK and directed at innovative start-ups and scale-ups is essential for turning ideas into commercial products and services.

As the panel consulted with start-up founders across the UK, it was continually noted how important the Innovate UK programmes were to the success of their businesses. Independent studies also showed that Innovate UK funding helps recipient firms leverage additional finance to move their products to market. Return on investment across Innovate UK programmes is an impressive 7:1[footnote 6].

We did not find that the ecosystem lacks innovators or cutting-edge ideas. Rather, the challenge these innovators face is securing finance to fund early stage product development and subsequently to ‘ramp onto’ VC investment. Private investors are reluctant to invest where commercial opportunity is less clear and longer term.

A consistent narrative we heard was that the grants programme was excessively competitive, disincentivising high-quality applicants from applying; the application process was opaque and bureaucratic; and the selection process could be improved to target companies with the best chance of success. Our consultation and research also uncovered a regional disparity and bias in the funding ecosystem with VC and private investors focused on the ‘Golden Triangle’ between London, Oxford and Cambridge and a marked lack of diversity in the makeup of founder teams receiving finance, making Innovate UK all the more important for innovators outside of those networks.

Why this is important

To fully leverage the business growth opportunities associated with the UK’s innovation leadership, we recommend that a substantial proportion of the government’s commitment to 2.4% of R&D by 2027 be dedicated to the commercialisation of R&D by start-ups and specifically that the Innovate UK offer be scaled up and enhanced.

Desired outcome

  • Accelerate innovation and its commercialisation across the UK;
  • Existing Innovate UK programmes are leveraged to better meet the needs of digital tech firms and extend their reach and impact;
  • Ecosystems of support for entrepreneurs are strengthened and commercial skills for innovators improved.

Headline recommendation 7: Ensuring Innovate UK programmes meet needs of tech sector

The panel makes four recommendations to ensure that Innovate UK’s programmes extend their reach and impact and better meet the needs of digital tech firms.

Firstly, the Smart programme should be scaled up to meet the demand of qualified applicants. We understand that evaluation shows there are many more high-quality applicants worthy of funding than can be accommodated within the currently available budget. We support Lord Willett’s call for a £400m annual budget for Smart, which would allow about half of the high-quality projects to be funded alongside following the below principles:

  • Reviewing the company selection criteria to help improve the identification of fundable projects. Introduce a more data driven approach and to the extent possible automated (to reduce human bias) selection while customising the questions asked to the sector as tech driven projects will look different from others.
  • We believe a portion of the Smart budget should be ring fenced to target the areas of difficulty we have identified: firms with less than £1m revenue, regions outside of the Golden Triangle, and founding teams from underrepresented backgrounds.

Second, we recommend that the Innovation Loans and Investor Partnership programmes should be fully rolled out with a level of funding that will meet the demand of highly qualified, suitable applicants. Both pilot programmes have undergone independent evaluations that demonstrate their value in leveraging finance and return on investment but are not funded beyond pilot stage. We recommend doing so while ensuring that the right metrics are in place to track the success of the programs in the midterm as the pilots are too early yet to demonstrate the ROI of the investments.

Third, we recommend reviewing the application process for Smart Grants. The widely held view of stakeholders is that the application process feels too bureaucratic and time consuming for resource-strapped start-ups. We would like to see Innovate UK work with private sector experts to identify ways to improve their processes – including the application and feedback process – in a way that aligns with the prudent use of taxpayer funds.

Finally, we recommend that support for leadership and commercial skills should be bolstered. Recipients of Innovate UK funding often lack the requisite commercial skills to develop and promote their product and leverage VC investment, hindering scale up opportunities. Examples of programmes that could be replicated or expanded already exist such as Innovate2Succeed, ICURe, and the Scaleup pilot.

8. Fill the gaps in access to finance

The overall picture on venture capital investment in UK tech continues to be extremely positive. 2019 was a record year, with total VC investment exceeding £10 billion for the first time. We are the third in the world for tech investment behind the US and China and raised more than Germany and France combined. With 77 companies valued at over $1 billion, the UK is third in the world in the total number of Unicorns created.

While this picture is positive, our European competitors are closing the gap. Germany and France saw respectively a growth of 40% and 37% in tech investments in 2019. The success of the UK tech sector has been built hand-in-hand with the growth of the UK VC sector – and it is vital that this continues. To avoid any sense of complacency, the panel has taken expert views on the VC system and have sought to understand areas of relative weakness or pressure.

Some of the more significant issues identified by the panel are:

  • increasing challenges for start-ups with revenue of less than £1m to access investment;
  • continued concerns about the lack of diversity among both founding teams and investors;
  • substantial regional disparities with VC and private investors centred on the London/Cambridge/Oxford Golden Triangle, with seed funds in particular tending to be London based;
  • the continuation of trends throughout the last decade towards fewer, larger and later stage deals
  • a marked reduction in the number of seed capital deals below £1m – a key issue that could affect the future health of the tech sector.

We found that the reasons for this are complex and reflect to some degree the maturation of a healthy ecosystem, but they need to be understood in more detail.

Why this is important

Whilst 2019 was a record-breaking year for VC investment, we must not be complacent, as a significant proportion of this funding went into larger, later-stage deals. This is positive from the perspective that there is the capital to support companies that truly scale but we also need to ensure that we support access to finance for early stage companies on a national basis in order to support the growth of ecosystems outside of the traditional tech clusters.

As referenced in our recommendations to improve Regional Ecosystems, it is critical that we continue to support a pipeline of early stage firms (pan-UK) so that they develop into scaling and ultimately scale businesses that will create jobs and GVA.

The health of the VC system and the health of the tech system are critically interlinked as only VC models of investment can offer the growth finance for IP-rich, pre-revenue start-ups with unproven propositions.

This interdependency and resulting trends are complex and go beyond issues of supply and demand for growth finance. Our work has underlined the degree to which data and intelligence on VC investment can provide insight into the health of the wider tech ecosystem system.

Desired outcome

  • Increase availability of seed funding to ensure pipeline of early stage tech start-ups is capitalised which will be critical to the UKs medium to long term competitive outlook;
  • Improve accessibility to venture and growth finance, including the support that is offered alongside the funding to create sustainable growth;
  • Increase regional ecosystems access to investment that in turn enables clustering of expertise and talent, which in turn attracts a fairer distribution of investment capital away from London.

Headline recommendation 8: Address funding gaps to support a pipeline of early stage firms

The panel recommended action to address the marked decrease in availability of funding for start-ups with less than £1m in revenues. We suggest exploring pushing aggregated capital firms (such as pension funds) to create pre-seed investment funds. Pension funds in Sweden and Denmark are more active in early investment than their British counterparts, suggesting there is room for improvement here. Other measures to increase investment should also be considered - such as tax relief measures for firms which invest in pre-seed companies. There may be a role here for the British Business Bank to help close the gap for these start-ups.

Access to customers is one of the key enablers to access funding to continue to grow. In looking at public sector procurement, we recommend making it easier for start-ups and scale-ups to sell to government departments. To make it easier for start-ups to access private sector customers, we also recommend the government create incentives (such as tax relief) for larger corporates to buy more from start-ups and scale-ups. A change to R& D tax law could help incentivise corporates to work more closely with ecosystems through trusted hubs.

Finally, we recommend further work by government with founders, investors and other sector experts to build better understanding of the dynamics of the VC system; and to improve the evidence base for policy making in this area.

9. Refresh the high-level expertise available to government

Disruptive technology (which creates new products and new markets) and sustaining technology (which enhances existing products and markets) are affecting every aspect of life in the United Kingdom.

The pace of global tech innovation presents an enormous opportunity for the UK economy. Tech will be one of the biggest drivers of economic growth in the UK in the next decade and the government should take steps to ensure we are maximising this growth opportunity. But this opportunity to make the UK more competitive can only be realised if there is the knowledge and capacity at all levels of the sector and government, and the ability to act quickly.  If the sector is to compete and thrive in this fast-changing environment, government must have a strategic and joined-up approach. 

Why this is important

Our engagement with the sector revealed a disconnect between existing government tech initiatives. We heard that government activities intended to support the sector often overlap, duplicate, or are otherwise fragmented and fail to collaborate. There was a feeling that policy was often made based on lagging indicators and that government needs to be more proactive. We should be anticipating the next big thing rather than chasing the last. The speed of change in the industry outstrips the current capability at a strategic level in government.

Building a responsive and resilient UK tech ecosystem will help to attract increased international talent, investment and trade. The UK currently enjoys a good reputation for tech, but we cannot be complacent as other countries are in our rear-view mirrors. The risk for the UK isn’t just inaction, or choosing the wrong interventions, it is acting too slowly as technology advances at an ever-increasing rate. 

Desired outcome

  • Government is proactive, informed by experts and policy is designed based on forward looking metrics;
  • Unified approach across departments with regards to policy touching tech competitiveness.

Headline recommendation 9: Establish UK Tech Competitiveness Council  

We recommend establishing a UK Tech Competitiveness Council to provide ongoing guidance to Ministers on strategic measures for improving tech competitiveness. This would refresh the current strategic guidance offered to government and ensure that the expertise available to ministers is current, focused and relevant.

The council would work to identify opportunities for:

  • The best use of government funding to proactively improve tech competitiveness;
  • Building on existing beneficial activities in the sector and determining ways for government to enable or amplify successes;
  • Joining up initiatives and building network effects;
  • Greater internationalisation, partnerships and collaboration.

10. Greater diversity in tech

A diverse and inclusive workforce is essential to ensure a successful and globally competitive digital economy. Although the fourth industrial revolution is expected to deliver enormous economic benefits to the UK, it is critical that no one is left behind in fully realising the social and economic benefits the digital economy creates.

The UK tech industry currently needs over 500,000 more workers. However, just 17% tech/ICT workers are female. It will be impossible to meet the labour needs of the sector unless all groups within society, females, BAME, LGBT+, Disabled and neuro-diverse alike can enter the workforce in large numbers.

The employer-led Tech Talent Charter (launched in 2017) is a non-profit organisation dedicated to increasing diversity in the UK tech sector, with government support. It has made best-in-class strides forward in gender diversity, but more needs to be done.

Why this is important

More diversity in the digital economy creates a richer pool of talent to innovate and start new businesses and will also help to meet the demand from the tech sector for more skilled workers. In addition, stronger diversity at envisioning and development stages of tech creates better technology that has a greater chance of being fully accessible to all users.

A great example of this is the Xbox Adaptive Controller, which was designed to meet the needs of gamers with limited mobility. It features large programmable buttons and connects to external switches, buttons, mounts and joysticks to help make gaming more accessible and was developed in partnership with organisations around the world, including The AbleGamers Charity, The Cerebral Palsy Foundation, Craig Hospital, Special Effect, and Warfighter Engaged. Adaptive technology is a game changer for people with disabilities and was born out the efforts of a diverse workforce.

Desired outcome

The tech sector as a whole makes significant progress on the Tech Talent Charter’s goal of enabling signatories to work together to increase the diversity of the technology workforce in the UK by committing to pursue a diversity and inclusion agenda in their recruitment and retention of tech talent. Ultimately, the desired outcome should be for the diversity of the sector to reflect the diversity of the general population.

Headline recommendation 10: Renew the Tech Talent Charter

Increase government support to enable the Tech Talent Charter to continue efforts to increase recruitment and retention of female, BAME, LGBT+, disabled and neuro-diverse workers, as well as continuing to deepen the charter’s regional activity outside London and the South East.

The key performance indicators in the Tech Talent Charter’s annual reports should be expanded to include % of technical roles held by underrepresented groups, the % of companies with a target for diversity in interview shortlists, and tracking founder diversity.

The entirety of government should champion the Tech Talent Charter as industry best-practice across the economy and encourage all UK employers to join. All government departments should be signatories of the charter, and a cross-departmental working group should be convened to share best practice across government.

Government and the Tech Talent Charter should convene and co-chair a Digital Skills Inclusion Board to include all major industry players to ensure effective collaboration, sharing of best practice and building of scalable interventions.

  1. UKCES Report. p72-3. ↩

  2. Tech City UK, 2016: ‘Tech Nation 2016, Growth between 2011-2014 (unofficial estimates) ↩

  3. CBI (2018). Employment Survey ↩

  4. Bespoke report based on Dealroom 2020 dataset ↩

  5. The Road to 2.4 per cent, Transforming Britain’s R&D performance, The Policy Institute, King’s College London, p15 ↩

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