When it comes to investing in tech, the north has never been recognised in the same light as London; often overlooked by the venture capital community.
While we’re not looking for pity, having invested in more than 70 'northern' businesses, I know they’re wrong, or at the very least they’re missing a trick.
The north/south divide is most evident when you look at government spending per capita.
In a report produced by the think tank IPPR North last year, people living in London received the equivalent of £12,147 of government support per person in the five years preceding the 2019/2020 financial year. The north received only £8,125 per person – 33% less.
With 22 million people living in the north of the UK across a more expansive territory, this represents a significant shortfall in funding.
Politicians and business leaders will point to these numbers and (rightly) voice their frustration at this government’s inability to put its money where its mouth is.
Make no mistake, we should fight the good fight on these fronts, but it does feel a bit like Groundhog Day. I also read the Levelling Up White Paper, all 300 pages, and while it was long on analysis, it was short on solutions.
However, as a venture capitalist, I’m bound by the forces of nature to be an eternal optimist.
We’re at the coalface of SMEs and innovation. Despite these challenges, I think there’s a much more positive spin we can put on the north, turning adversity into opportunity, and I hope other venture capitalists will see that too.
The good news is that public-sector entities like British Business Bank and Scottish National Investment Bank are doing something about this, deploying more capital in this part of the UK than ever before.
The British Business Bank is supporting new venture capital programmes through its Northern Powerhouse Investment Funds and Regional Angel Programme, and the Scottish National Investment Bank - launched in 2021 - has the mandate to deploy £200m per annum.
These will all have a profound impact on the early-stage tech sector.
This makes good commercial sense. People often forget that the north of the UK is a $1trn market. As an economic zone, it’s the equivalent of the eighth largest country in Europe and the 20th largest in the world.
Furthermore, we’re blessed with an outsized number of academic institutions which are rated as world-class for their research and innovation departments. With a rich engineering and manufacturing heritage, we’re producing a high proportion of spin-outs which have developed intellectual property.
These spin-out technologies, often utilising hardware components, are most prevalent in areas such as climatetech, enabling energy transition, healthtech, serving an ageing population set, and industrial technology which is directly helping large businesses deliver necessary efficiency and productivity gains to compete globally.
These are all areas of increasing focus and attention for venture capitalists who are revisiting the perceived capital efficiency of software-as-a-service business models in fiercely competitive marketplaces and thinking about where the next big bets might emerge from.
Venture capital is a long-term asset class. It’s about partnering with entrepreneurs and building a better business for the longer term.
That’s why we helped launch ESG_VC, a pan-European project to help SMEs improve their ESG credentials. It’s also why we recently went through the arduous B Corp accreditation process.
I was in Berlin recently for SuperVenture 2023, comparing notes with other venture capitalists from across Europe. There is a strong and growing confluence between ESG and venture capital. We all want to build great companies, so ESG_VC and B Corp provide fantastic operational toolkits to help you do that.
When it comes to venture capital in the north, we’re starting from a low base.
There are very few venture capital firms with a presence across the north of the UK, and most of those that are based here can only lead early-stage rounds. This has a profound impact on our ability to grow and scale global category leaders in this part of the UK.
The north of the UK received only 9% of the circa £23bn of venture capital funding last year, compared to London, which receives around 65% of funding. This contrasts with the brilliant work carried out by the Scale-up Institute, which demonstrates there are 50% more identified scale-ups here than in London.
There’s no denying London’s magnetism in the tech industry, but there are also benefits to being a venture capital firm focused on the north of the UK.
We certainly avoided the irrational exuberance of funding companies at expensive valuations through 2021. Nor did we get swept up with the crowds diving head-first into crypto, NFTs and Web3 without caution.
We have instead tried to focus on real companies solving real problems; how novel!
A further, interesting upshot of backing northern tech is that your money goes further. Offices and talent tend to be more affordable on a like-for-like basis and companies can keep their operating costs lower, extending the runway to the next funding round.
This is crucial in those early, loss-making years.
Remote working has also helped level the playing field as we’ve seen more tech talent move out of the capital and into the regions in search of better work-life balance.
What if we turn on the taps? What if we delivered further venture capital funding to this part of the UK to support high-growth companies and their innovative technologies?
What impact could we have on retaining and attracting top-level talent here? Could this move our tech ecosystem to a self-sustaining state, building world-class companies and creating a flywheel effect for the tech industry as talent and capital proliferate across the northern tech ecosystem?
We’ve generated top decile returns for investors through our focus in the north of the UK and our early-stage strategies. So, I look upon the challenges in the north as a tremendous opportunity for long-term value creation.
I wonder how much of a force-multiplier the venture capital industry can be if we start to get some of this right, particularly in the fields of climate tech, health tech and industrial tech.
The financial environment for the north’s startups and scale-ups will change with perception.
That’s the challenge for all of us here: to prove that the north is worth investors’ money, just as much as London... if not more.
Andrew Noble is a partner at Par Equity
