UK startups react with scepticism to government’s new innovation department

The creation of the new Department for Science, Innovation and Technology (DSIT) may not spell good news for smaller startups, according to leading entrepreneurs. Some remain concerned that emerging small businesses will struggle without access to vital startup funding.

Rishi Sunak’s government announced the creation of the DSIT last week, in a bid to deliver improved public services, create new, better-paid jobs, and grow the economy.

The development means there will be a single department entrusted with bolstering innovation in the UK economy. However, the reception has not been unanimously welcoming among entrepreneurs.

Lukewarm reception to DSIT

Mike Dean, Managing Director of WhisperClaims – which helps UK businesses claim research and development tax credits – told Startups his scepticism stems from the context of the change.

In the autumn statement, alterations on the R&D Tax Relief system left many in the startups community with a bittersweet taste, as SME additional deduction rates were cut from 130% to 86%.

Dean said, “I think there’s a contradiction in the announcements that they’ve been making at the moment between, on the one hand, making supportive headline noises about investments in science and technology and encouraging growth in those areas, but at the same time, limiting the available tax relief for small companies for doing R&D.

“My worry is that what the government means by that focus is actually a focus on large businesses and multinational companies, and not on startups and SMEs.”

In an economy heading for a recession, SMEs are particularly vulnerable and in need of government support. SMEs account for 99.9% of the business population, employ 61% of the labour force, and turn over an estimated £2.1 trillion annually.

The withdrawal of government funding from TechNation adds further concerning context for emerging startups. The growth network, responsible for bolstering the success of the likes of Monzo and Revolut, had to announce its premature closure, as the Digital Growth Grant was given to Barclays Bank instead.

Startup funding support lacking

Government funding support for startups has gradually reduced. According to a report by TechNation, the proportion of funding for earliest-stage tech companies fell from 15% of the overall investment in the UK technology sector in 2011, to 4.8% in 2021.

While investment in British tech startups has hit a record £32.6 billion last year, an ever-larger proportion has been destined for later-stage companies who pose less of a risk for investors than early stage startups.

Factors like Brexit and the cost of living crisis in the UK have given pause to potential investors who have gradually become more risk-averse. However, this gap hasn’t yet been addressed by the government.

Dean notes that the startup funding environment hasn’t always looked like this. Prior to the recent announcements and policy changes, there was a stronger R&D scheme to support startups and SMEs, with big funding and business support parts stemming from the EU. “Now obviously with Brexit as well, all that kind of funded support for early stage businesses has really gone by the wayside,” Dean says. “And then, you see contracts being given to less proven providers, even with the scant resources that are left.”

Other startup owners have similarly voiced the need to have more substantive support, albeit whilst welcoming the creation of the DSIT. Kostas Koukoravas, CEO at Intelistyle, said, “There have been significant labour market shortages in the Technology sector since Brexit, and we’d love to see moves that can help startups address the skills gap.”

Echoing what Dean mentioned, Koukoravas added that, “access to innovation funding has become increasingly more difficult over the last few years.”

Building a foundation of support

Nikola Mrkšić, CEO of PolyAI, also stresses that for the DSIT to be accepted as a positive change for startups, certain policy agendas need to be prioritised.

“The UK Government must identify and find a long-term solution to the problem of leading UK-owned and listed tech firms not growing into global multi-billion organisations or being acquired before they fully mature,” said Mrkšić. “DSIT must prioritise how they solve this wider issue with higher education, investors and the City to make the UK a more fertile place for companies, such as PolyAI, to grow.”

The startups community needs the DSIT to prioritise funding at all stages of the startup journey. Laura-Jane Silverman, Head of LSE Generate – the university’s entrepreneurship incubator – said, “by offering support throughout the pre-launch stages, launch states, growth stages, etc, the department can ensure that scientific and technological innovations are transformed into creative and applicable new solutions.”

With the closure of TechNation and the uncertain state of the Global Talent Visa Programme, access to global talent is also at the top of the priority list for the likes of SIlverman. “Immigration policies that encourage the movement of skilled workers and exceptional talent are essential for startups and as a highly international university, LSE feels this strongly.”

Without the necessary foundation to support SMEs, the DSIT won’t necessarily make the ripples through the startups world in the way it’s intended to nor position the UK in the place it needs to be in to become the next Silicon Valley.

As Dean argued, “Why is Silicon Valley what it is? It’s because of access to capital. It’s actually access to funding that makes Silicon Valley the place that it is.”