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New UK Government Start-up Scheme will not be Sufficient to Help Tech Firms in Wales

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Written by;

Dylan Jones-Evans, Pro-Vice Chancellor, University of South Wales

 

 

 


After considerable pressure, the UK Treasury yesterday announced a package of support for “start-ups”.

This new £1.25bn coronavirus package to protect firms driving innovation in the UK includes a £500m investment Futures Fund for high-growth companies and £750m of grants and loans for SMEs focusing on research and development

Unfortunately, as this scheme’s definition of start-ups seems to be one that only describes innovative firms that have received equity funding (and which make up only 7% of all new firms in the UK) it is likely as many as 300,000 other UK firms established in 2019 and 2020 will continue to get no help as they don’t qualify for any other support schemes run by either Welsh or UK Governments

In Wales, this means that around 12,000 new Welsh firms will still not get any financial assistance.

However, the 4% of Welsh start-ups that are technology-based firms could get funding under this programme. Unfortunately, whilst the principles behind this new set of interventions are sound, it seems to be one developed by London-based policymakers for London-based tech firms which is ironic considering that the UK Government was elected on a manifesto to level up the rest of the UK.

What do I mean by this and what effect will this have on the Welsh tech scene?

Let’s examine the first intervention – namely the Future Fund – which will have £250m available to provide between £125,000 and £5m to UK-based companies with private investors at least matching this commitment.

To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years.

Unfortunately, this means that the Welsh tech sector may not benefit fully as, according to the British Venture Capital Association, Wales has one of the lowest average investment from venture capital in the UK accounting for just 3.3% of all funding over the period 2016-2018 with a total of 128 companies benefitting.

In contrast, the so-called ‘golden triangle’ of London, the South East of England and East of England has attracted 73% of all venture capital over the same period with an average investment that is four times that given to Welsh tech firms.

Similarly, the latest statistics on business angel funding via the Enterprise Investment Scheme show that Wales has only had 210 firms benefitting during the period 2015-18 equating to 1.3% of the total investment over this period. In contrast, the “golden triangle” attracted 67% of all investment with the average UK business angel investment per firm being 40 per cent higher than in Wales

In fact, it is estimated that only 60-70 Welsh firms have attracted more than £250,000 of investment since 2015.

Also, let’s examine the main source to support tech start-ups in Wales namely the Development Bank of Wales seed finance fund which provides equity investments from £50,000 to £250,000 to technology businesses. This means that unless additional equity has been attracted to these firms, then they will not get access to funding as none of the investments would meet the minimum qualification criteria for the Futures Fund.

The second part of this support package for innovative firms from the Treasury relates to grants from Innovate UK which will accelerate up to £200m of grant and loan payments for its 2,500 existing Innovate UK customers with an extra £550m being made available to increase further support to firms.

Wales again loses out as there are circa 100 Welsh businesses currently involved with live Innovate UK projects, accounting for only 1.8% of all funding with London, South East of England and the East of England receiving the majority of these grants.

Therefore, whilst this intervention from the Treasury to support innovative firms is to be welcome, it will largely benefit tech businesses in more prosperous parts of the UK rather than those in the nations and regions.

If the same pattern of investment and funding was to be replicated for this fund as for previous equity investment patterns, restrictions on eligibility and grant support, then innovative firms in Wales would get around £20m from this fund.

Therefore, to maximise the impact for Welsh firms, the Welsh Government could consider asking for the Barnett equivalent of these two funds (or £50m) to be transferred to their budget. This would more than double what we are expected to get under current arrangements and would enable a more tailored programme to be developed to reflect the characteristics of tech firms here in Wales.

Given the lack of support for new businesses so far, this additional £30m would certainly be a boost to a small but important part of the start-up community in Wales if that was to happen.

 

Business News Wales