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Better post-Brexit support needed for tech start-ups says report

The UK government should be putting in place measures to support start-up companies in the technology sector more effectively, concludes a new report.06 Jun 2018

This support should include investment by the British Business Bank, encouraging start ups to be involved in public sector procurement, and use devolution to support start ups by building on regional strengths.

The Institute for Public Policy Research (IPPR) report (80 page / 928KB PDF) followed research into London’s tech start up ecosystem.

It found the majority of start-up companies were concerned by the prospect of Brexit for three main reasons: uncertainty over talent retention and recruitment; regulatory divergence; and access to finance. The IPPR said the UK government had to make stronger signals over its future support for the sector to help manage the Brexit risks.

TMT financing expert Andrew McMillan of Pinsent Masons, the law firm behind Out-Law.com, said the report had correctly identified the three key issues which were core to the technology sector’s survival in the UK, but that all were interlinked.

“Talent and financing are both key to the health of the technology ecosystem, and it’s particularly heartening to see the clear focus on talent in this report,” McMillan said.

He said the issue of talent did not just concern those already working for start ups, but those who were the talent pool of the future.

“If you’re no longer able to attract the best lecturers and technicians into your universities what will happen is that there will be a massive brain drain. There just won’t be the people with the ideas that investors will want to invest in,” McMillan said.

The report made 12 key recommendations. There should be more funding for adult skills development in the digital industry, especially outside London, to support both tech start ups and scale ups.

Related to this, the report said the government needed to make its plans for talent-related visas post-Brexit clearer and extend the current Tech Nation 'exceptional talent' visa to make it easier for start ups to access high quality staff.

As well as calling for more clarity over visas for workers in the industry, it suggested the publicly owned British Business Bank (BBB) could fill the gap left by the loss of access to the European Investment Fund (EIF), which provides finance to start ups through banks and venture capital.

However the BBB needed to strengthen its role in relation to start ups, said the IPPR. It said the bank needed to work with government to give confidence as to how it will work in the future for start ups, scale ups and venture capital funds.

Pinsent Masons’ McMillan said the lack of financing via the EIF would be “dramatic” for the UK technology sector.

“If the venture capital funds don’t have that funding coming in, they’re going to have a shortfall,” McMillan said.

“Some investors have said they would still find a way to invest in the UK themselves as the UK is too big a market for them just to walk away from, but the sector should not become complacent.”

McMillan said the report’s recommendation for the government to find ways to insure the risk incurred by a start up’s first customer was also key, especially if it became harder to find financing.

“The de-risking of the first customer is a really good initiative. Making that investment decision easier is vitally important,” McMillan said.

The report said the government’s ‘digital charter’, which was part of last year’s Queen’s Speech, should be strengthened as the basis for a new relationship between government and start ups. The IPPR suggested the charter should represent a “bridge” joining charter priorities to departmental responsibilities across government.

Although the report said there was a lot of anxiety within the sector associated with Brexit, it added that start ups were not universally gloomy and there was still “boundless enthusiasm, countless ideas, general agreement on some points and passionate disagreement on others”.

The IPPR also said cities outside London needed to have the powers and funding to make the most of their assets in this sector.

The report concluded government had to act as a partner to start ups. It said: “If government wants to accelerate the pace of change, then it has a crucial role to play in de-risking investment in tech for customers rather than investors. One of the defining stages of any tech start up is securing the first customer - but the first customer has to take on the delivery risk of working with a supplier without a proven track record. We therefore believe there is a role for government in diminishing this risk—and so enabling tech and the sectors it serves the chance to flourish.”

The IPPR research follows a recent report by the European Investment Bank into the financing of the technology sector, which called for the introduction of a European-wide database to pull together all available information on financing for technology companies.