UK chancellor Philip Hammond has unveiled an effort to generate ideas for bolstering the amount of ‘patient capital’ available to cutting-edge UK enterprises.
Defined as funding that can help ambitious start-ups to upscale their operations, patient capital is the subject of an ongoing government review – which has already identified a £4bn funding gap between US and British firms of this type.
In addition to exploring how those firms could utilise investment from pension funds, a new Treasury consultation – Financing growth in innovative firms – proposes the creation of a national investment fund dedicated to the country’s most innovative start-ups.
At the heart of the government’s review is an aim to boost UK numbers of so-called Unicorn firms: innovative, often R&D-intensive enterprises that attain valuations of $1bn or more.
While the UK leads Europe in the creation of Unicorns, it significantly lags behind the US – which accounts for 54% of such firms – and China, which accounts for 23%.
Only 4% of the world’s Unicorns are based in the UK.
The consultation explains: “Only some firms need patient capital to grow to scale. External equity finance is used by about 1% of the UK small-business population, and use by firms that fit into the standard policy definition of ‘high growth’ has been estimated to be between 4% and 14%.”
However, it points out: “External equity becomes much more important to firms with ambitious plans for growth, and those focusing on the commercialisation of technology – where revenues often lag investment significantly.
“For example, nearly half of high-growth technology firms use external equity finance, and external equity investment becomes essential for firms without existing revenues looking to commercialise R&D.
“These innovative firms have a disproportionate impact on productivity through the new ideas that they commercialise and bring to market.”
The consultation notes: “By not realising the economic benefits derived from its strengths in creating start-ups with world-leading ideas, the UK… appears to be failing to maximise its potential productivity gains.
“Consequently, the number of UK firms at the global frontier of productivity is reduced.”
In his foreword, Hammond writes: “The evidence presented in this consultation highlights the growing strengths of the UK investment community.
“But it also shows that one main barrier holding back the continued development of young, innovative firms – such as those commercialising research from our universities – continues to be access to long-term investment.
“This slows these firms’ growth, dampens their ambition and means that some firms are sold to trade buyers rather than growing to maturity in the UK.”
He adds: “Responses to this consultation will help to shape an important part of our economic and industrial strategy for the coming years… I would encourage everyone with an interest in supporting growing innovative firms to respond.”
The consultation is open until 22 September.