While we normally think of innovative new businesses being supported to grow through investments by business angels or venture capital firms, it is easy to forget the role that public sector funding can play in boosting the development of entrepreneurial businesses that are bringing new products or services to the market.
Back in 1988, I embarked on my Ph.D at Aston University to study technical entrepreneurship in the UK by examining sixty winners of SMART (Small firms Merit Award for Research and Technology) awards across the UK. This government innovation programme was directed towards the promotion of innovation within small ventures with less than 50 employees and provided vital funding for the development of new businesses at a time when there was almost no significant private sector funding for innovation in the UK.
It was the first study of its type in the UK at a time when entrepreneurs were still considered as peripheral not only in terms of their contribution to the economy but also in respect of their role in developing innovation and disruptive technologies. Certainly, the only place you would find the term unicorns back then was in children’s books or toy shops.
Fast forward thirty four years and the funding landscape has changed considerably as has the appreciation of the role of entrepreneurs in boosting economic growth.
For example, the British Venture Capital Association’s latest research suggests that £2.5bn of venture capital investment were made into UK businesses in 2021, with entrepreneurial businesses now being seen as key actors in developing new innovations.
In this funding environment, is there still a role for government to support innovative new firms and, if so, does it have any impact?
That is essentially the focus of a new report which examines how funding programmes run by two government agencies - the British Business Bank and Innovate UK (the government body which provides funding for innovative businesses) can interact to boost business performance.
The ‘Backing innovation-led businesses: the role of public investment’ is a comprehensive report that has a number of important findings, not least for those businesses that could be supported through programmes from both organisations.
The first is that there is evidence that those spin-out businesses that emerged from universities as a result of research grants then graduated to funding from both the British Business Bank’s programmes and Innovate UK. In fact, nearly one on five of those receiving equity investment via the Bank had previously received funding from Innovate UK.
That finding is not unsurprising given that you would expect venture capitalists to be investing in those businesses that are at the cutting edge of new technologies emerging from the university sector. But what about the performance of those businesses which have been in receipt of research or innovation funding?
What is fascinating here is that the report shows that those research-oriented firms receiving support from both Innovate UK and the Bank have almost double the survival rates and much stronger employment growth.
For example, those firms that have received support from both organisations are seventeen times less likely to have closed. In addition, the same firms generate four times as many jobs as similar businesses that had not received any support from either body.
These research spinouts with support from both the Bank and Innovate UK were also four times as likely to have raised external finance with 94% raising at least one round of external equity finance as compared to only 20% of those not receiving support. More importantly, the median value of equity investment raised by spinouts with funding from both the Bank and Innovate UK was £7.3m, compared to £1.6m for those without funding from either.
Whilst these equity-backed spinouts are to be found across the UK, those located in the more prosperous regions of London, the South East of England and the East of England are disproportionately more likely to get higher levels of investments. For example, whilst only 17% of the spinouts were based in London, 46% of equity deals were made in the UK capital city.
Therefore, what does report this tell us? Simply put, those spinouts that emerge from UK government funded research programmes can, with follow on funding from both Innovate UK and the British Business Bank, attract significant external investment and create a disproportionate number of new jobs.
Yet here in Wales, the research suggests there is little spinout activity compared to the rest of the UK and businesses have received proportionally fewer grants from Innovate UK than would be expected.
With the British Business Bank launching a new £130 million fund for Wales next year, perhaps one of the biggest challenges will not be the supply of funding for innovative firms but the demand for it given the current lack of entrepreneurship within our academic institutions.
Certainly, there needs to be a more concerted effort from Welsh higher education to commercialise the fruits of the millions of pounds of research funding. More importantly, there needs to be a more coherent joined up approach by key actors such as higher education and the Welsh Government to ensure that the economy in Wales benefits in the same way as other parts of the UK by supporting those innovative individuals and businesses that make a real difference.
