‘Selling the family silver’ describes the sale of assets when an organisation or country faces financial difficulties. A recent report by the Cambridge Judge Business School raises concern about how sales of UK start-ups, to overseas strategic buyers, has become the routine option as entrepreneurs struggle to scale their technology companies. It calls for a better UK innovation and industrial policy.

It also challenges the fear of successive generations of politicians to be seen to be ‘backing the winners’ (following career limiting decisions by a Labour MPs in the 1960s) and the ‘technology push’ model of innovation which continues to bias policy thinking.

The Office of National Statistics estimates that UK R&D spending was 2.9% of GDP in 2021 – compared to South Korea (4.9%), United States (3.5%), Japan (3.3%), Germany (3.1%) and Finland (3.0%)

It concludes that “the government must be much more to support entrepreneurs with the desire and ability to build a major UK business over the long term.”

Lessons from UK start-ups that became major UK-based companies

Drawing on their experiences in the Cambridge UK Cluster the authors made a number of observations:

• Soft start-up model – many successful entrepreneurs have used early revenues from consulting, bespoke technical developments or systems integration to fund the company while developing a solution that is aligned with customer needs
• Lead customers share risk and reward – co-development with a customer that is prepared to bank roll some of the development ensures innovation is commercially focussed.
• Launch on market without minimal venture capital – delaying or minimising VC funding enabled the founders to retain significant equity maintaining a strong influence on the future direction of the business. (Some of this funding came from redundancy payouts from founders previous employers).

It concludes that lead customers have a much better understanding of what a new technology can do for their business than a VC or government employee, as well as an awareness of competing technologies that exist or under development. Commercial contracts are also broken down into clear stages with results informing a go/no go decision.

These collaborations are distinct from ‘Collaborative R&D grants’ where the partners have limited ability to influence the pace, effectiveness or deliverables of other collaborators.

Recommendations from the report “Selling less of the family silver”

1. Government to improve funding for mid-career scientists, engineers and managers that have a track record in industry to create their own technology companies.  ‘Sweat equity’ – or working for nothing – does not attract R&D tax credits which currently accounts for 85% of government funding. (See a comment on this)
2. Incentivise companies to create new ventures – currently unless a new line of business can offer an additional 10-15% of revenues or profits in the short-to-medium term it is unlikely to be attractive, many acquisitions fail as the new opportunities created are too small in the medium term to justify further investment.
3. Adopt a UK version of the German Mittlestand – these mid market companies have grown through close cooperation with customers and invest on average 7.2% of revenues on R&D (average for other German companies 3.5%)
4. Harness breakthrough technologies – rather than government led grant calls for collaborative R&D, the authors recommend policies instead support the adoption of commercial technology into existing businesses and support for early stage of commercialisation of breakthrough technologies
5. Change UK Catapult model to become closer to that of the Fraunhofer Institutes – Fraunhofer aims to create intellectual property and generates income through licensing and spinouts. In 2022 Fraunhofer recorded 375 patent applications, 160mEU in license fee revenue and 18 spinout companies – this activity is lacking in the catapults.
6. Adopt a US Small Business Innovation Research (SBIR) programme – this uses public procurement to stimulate solutions to unmet needs. By acting as a ‘lead customer’ the government de-risks the innovation and provides an evidence-base for the technology.
7. Incentivise institutional investment in listed high-growth companies – at the end of 2022 UK pension plans only owned 1.6% of domestically listed equities (in the 1990s this was over 30%)
8. Increase investment research, particularly for companies with market cap of less than £1billion and for the technology sector which is under-represented on the London Stock Exchange.

What do you think?

Do you agree with the authors of the report or do you have a different perspective?

Dr Valerie Lynch, Chairman of and technology consultant for AND Technology Research supports the role of R&D Tax Credits in “Selling silver or a market opportunity? Corporate innovation and the R&D tax mode”l

Professor Carsten P Welsch argues that ambitious technology start-ups will quickly outgrow a domestic market and argues that more emphasis should be given to incentivising innovation in existing companies in this post “Digitalisation of existing companies is key to economic revival” 

Selling the family silver

Read the full report: ‘Selling Less of the Family Silver: Better UK innovation and industrial policies for economic growth’ by David Connell (Centre for Business Research, University of Cambridge) and Bobby Reddy (Professor of Corporate Law and Governance, University of Cambridge); July 2024.

The report, issued a week after the election of Sir Keir Starmer as the UK’s new Prime Minister, was subsequently subtitled ‘An independent, post-election manifesto for a better UK innovation and industrial policy.’