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UK entrepreneurs are being failed by government

14 March 2013

MPs admit the government does not have a coherent strategy to support the commercialisation of technological innovation in the UK.

This is the stark warning of the House of Commons Select Committee on Science and Technology, whose report, Bridging the valley of death: improving the commercialisation of research, was published on March 13.

Committee chairman Andrew Miller MP, said the UK’s university and science sector is a global success, but the challenge for government is how that world class academic research can be translated into commercial activity. “Whilst we are encouraged by the work of the TSB [Technology Strategy Board] and the Catapults, British entrepreneurs are being badly let down by a lack of access to financial support and a system that often forces them to sell out to private equity investors or larger foreign companies to get ideas off the ground,” he claims.

Evidence from the report shows that there is no coherent innovation policy and the government does not have adequate mechanisms in place to leverage academic research into economic benefits. UK technology companies and entrepreneurs are effectively being forced to seek private equity investment. This means that our small companies are too often bought up by larger overseas companies before they can develop into the medium sized enterprises that would produce substantial jobs and wealth in the UK.

The report's authors say finance is a major obstacle to the commercialisation of technology in the UK. Regulation to de-risk pension funds has inadvertently closed off a patient source of capital for firms that need time to develop technologies. Moreover, government grant funding is often highly bureaucratic to apply for and only enough to 'get the idea off the ground'. And despite government schemes to encourage bank lending to business, the Committee heard that banks were often requiring entrepreneurs to provide family homes as security to obtain these loans. Andrew Miller again:

“Equity investments have a place, but too many companies are forced into over-reliance on this route because other types of funding are unavailable. Pension funds used to be a source of patient capital for firms that needed time to bridge the so-called ‘valley of death’ and get new technologies to market, but regulation has changed the way they operate and restricted this sort of finance.

“The government needs to look at how it can provide the infrastructure to support innovation by ensuring small technology firms have access to finance, facilities and advice. The new business development bank could help in this area and the Government should seek to develop the market in technology equities and ensure that the market has access to information that may change the perception of the relative risk of these equities.”

The report states that there needs to be a coherent strategy across the whole of UK industry to provide UK business with confidence in where they might expect government support for the medium and long term—whether through fiscal policies or R&D focus. It calls on the government to change the financial framework to incentivise more small companies to grow further independently, rather than to sell out. Ministers also need to make choices in terms of which sectors to prioritise when assisting R&D investment.

Public procurement — particularly in the areas of health and defence — should also be used to nurture technological innovation in the UK and support small and medium sized companies. Procurement decisions need to take into account issues other than simply cost.

Dermot Campbell, managing partner at the Enterprise Investment Scheme (EIS) provider, Kuber Ventures says that while Britain has a fine tradition of producing some of the world’s leading technology companies, it is clear that in these austere times, the lack of access to funding has caused a bottleneck that is preventing many companies from growing to their full potential.

“At seed level, technology companies receive some support for development through generous incentives," he says "However the reality is that these companies encounter considerable challenges at round two of the funding process. With options limited to them, technology companies look for alternative investments to help them sustain growth. One of the most significant incentives is due to end on April 5 2013, as the absolute saving of Capital Gains Tax on Seed Enterprise Investment Scheme (SEIS) comes to an end. 

“Thankfully, by level three funding, the bottleneck improves and programmes such as the EIS are on hand to help support future development. Technology companies currently make up a significant percentage of the small businesses in the UK involved in the scheme and it continues to prove very popular.

“With the budget approaching, this call to arms by the select committee should play into the wider issue faced by the government, namely that the lack of commercial funding is stifling the future growth of the economy and should be addressed with both commitment and urgency. We would like to see an extension of the Capital Gains Tax exemption into the 2013/14 tax year and extended to second round funding so both investors and small businesses can benefit”. 

F1 technology: go fast, but not too fast
A new study* from a team led by Dr Paolo Aversa of the Cass Business School, suggests that excessive innovation in Formula 1 technology can actually be detrimental to team performance. In the rapidly changing world of Formula 1 racing, a focus on improving existing technology, rather than trying to invent the next best thing, is shown to yield greater success, according to the research, which statistically examined all the strategic factors influencing Formula 1 competitions between the seasons 1981 and 2010.

The results seem to imply that adapting car technology to regulation changes is more beneficial than pioneering new innovative solutions. This is particularly prevalent in years when the FIA forces teams to implement major changes to their cars’ technology. Exploring new technological solutions push the (already high) level of complexity beyond the teams’ expertise, thus reducing the effectiveness and reliability of the technological innovation.

The researchers used the 2009 season to explain these dynamics. Two young and relatively inexperienced teams won first place (Brawn GP) and second place (Red Bull) in the Constructor Championship, together taking 14 of that season’s 17 races. This is because in 2009 both Brawn GP and Red Bull developed a basic, reliable, 'no-frills' F1 car, complying with the new FIA technical updates. Both avoided the kinetic energy recovery system (KERS), which was not a mandatory requirement, and which at that time was an underdeveloped and unreliable technology. 

Research team leader, Dr Paolo Aversa says the study has important implications for practitioners in times of crisis and uncertainty. "Managers often display a bias towards action, so they overwhelmingly tend to believe in an ever-increasing positive relationship between innovation and performance gains," he says. "Our theory and findings, however, point to a possible inflection in the increasing value of innovation due to shifts in the environment, after which firms may find it detrimental to their performance to improve beyond what the environment currently demands. 

In other words, experimenting is not always the most profitable choice, when the continuous turbulence in the competitive environment makes it hard to foresee future scenarios. In such cases firms should focus on the knowledge assets they already possess, and exploit their current technology to best of the possibilities, trying to make it fit to what the competitive environment requires.”

Les Hunt

*The study formed part of an international research project aimed at understanding the drivers of performance in the Formula 1 industry. In addition to Dr Aversa (a Marie Curie Fellowship award winner), the team included Dr Alessandro Marino (University of Pennsylvania), Dr Luiz Mesquita (Arizona State University) and Dr Jay Anand (Ohio State University).


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