Brexit: can we still invest in innovation?

Chris Middleton argues that the UK needs to be more ambitious with its investment, especially post-Brexit

One Brexit challenge is domestic investment in the UK's IT and communications sector. The UK has always been good at providing seed and angel investment, while the government has pumped funding into initiatives such as Tech City/Silicon Roundabout and Silicon Fen.

But there is precious little money at this end of the scale, and demand for it is hyper competitive.

At the other end of the scale, some of the biggest private equity funds in the world are run from London. At least, they are at present. It's doubtful whether that will still be the case in a more inward-focused market in which the UK no longer offers a bridge between the US and Europe.

Make no mistake: post-Brexit, the City's status may be under threat. The ‘EU passport' that allows London banks to operate freely across Europe may be torn up. London generates 22 per cent of UK GDP, with much of that coming from its financial services sector. Rumours of international banks quitting the UK are rife, with many of those rumours coming from senior finance professionals, not outside commentators.

For tech companies and startups seeking funds, this leaves the middle ground between angel investment and private equity: medium-sized venture capital. But this has always been the crunch point for UK technology companies seeking to grow beyond ‘three people with stock options and a great idea'.

Companies can raise £250,000 or so from seed, angel, or crowd investors in the UK, but if they want to raise a few million pounds, or tens of millions to expand internationally, then that has always been a much bigger challenge in this country. That kind of money is much easier to find in the US, where the attitude to backing high-tech ventures has always been much more supportive.

Brexit makes the UK investment challenge even more difficult: our innovation is world renowned, but our ability to invest in it has never been more in doubt.

We need to be ambitious and more like the US in portfolio investment terms. But that may not be an option: within 24 hours of the referendum result, several UK tech startups lost their VC partners, because the investments were conditional on the UK voting Remain.

However you look at it, the future of any number of joint UK/European ventures and partnerships across dozens of different fields, from the arts to science, technology, and engineering, must also be at risk, along with the UK's place and stature in pan-European research and development.

This right-of-centre Tory government must now step back from its policy of handing large parts of the state to unaccountable private enterprises - as it planned to do with our schools, and is doing by stealth with the NHS and overtly with the Land Registry - and claiming the resulting activity is the same thing as creating a thriving, diverse economy. After all, the Conservatives claim to be concerned about sovereignty.

To create a truly healthy economy, the government will need to start taking risks and shift its focus from the City towards nurturing a broader, more diverse portfolio. That means world-class investment levels in emerging technologies and sustainable development, alongside a massive investment in our youth. Rhetoric about innovation is no longer enough.

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Brexit: can we still invest in innovation?

Chris Middleton argues that the UK needs to be more ambitious with its investment, especially post-Brexit

Take robotics and automation, for example: a major growth market worldwide. The UK spent £1tr bailing out the banks, but is investing only £200m in its robotics sector between now and 2020. By contrast, Japan is investing £161bn - nearly one thousand times more.

The first problem is that the government may have no option but to sell off state functions to keep the economy ticking over, but that means replacing taxpayer value with shareholder benefit - the opposite of what Leavers believe they voted for.

The second problem is cultural, and it is hardwired into the UK's financial psyche: we know the cost of everything, but the value of little.

Most UK investors are innately conservative. Major UK investment funds see areas such as financial services, big pharma, aerospace and - incredibly - oil and tobacco as the only safe investments. They've always performed well, and so financial advisers push people towards making the same ultra-conservative investments, over and over again.

By contrast, UK investors tend to see digital, high-tech, and new media ventures as being speculative and extremely high risk - or conditional on there being a guaranteed European or US angle. As a result, potential UK success stories often never get the boost they need into the big league (unless they move to California, as many do).

Part of the challenge, then, is that the UK is fundamentally risk averse - in pure financial terms - despite our unparalleled history of innovation.

All that changed on referendum day, perhaps.

But there's a caveat: a slim majority of British people took the risk of voting Leave against the advice of most economists, investors, trade organisations, banks, and finance professionals. As Michael Gove noted, voters had grown tired of experts.

Now the people must ask those professionals and institutions to take the same risk, the same leap in the dark, and back it with cash. Or the Brexit will have been for nothing.

But where will this new money come from? From tax? From the savings we make from not contributing to Europe, perhaps? That's unlikely: we will almost certainly still be paying to trade with the continent, but with fewer of the benefits. Meanwhile, tax can only rise in the short term, but largely to make up for post-Brexit shortfalls.

The idea of plucky, world-beating Britain going it alone for centuries without the help of Europe is a myth - once you strip away our colonial and feudal pasts. Shorn of the empire it built by exploiting half of the world and its natural resources, the UK is just a small, homogeneous domestic market, a big economy on a tiny group of islands that no longer shares the same, united vision of itself.

But we have always been a country with big, world-beating ideas. Today, must start backing them with hard cash.

So to succeed in the global market post-Brexit, the UK has to do something truly radical for the average Brit: stop being risk averse and conservative with investments; start investing in youth; stop pushing our young people into debt; and ensure that we stay open and welcoming to all the best that Europe has given us.

That last point is the key, and it's bad news for Brexiters: we remain saddled with nearly all of the things that Leavers voted to reject: our financial contributions to the EU; the free movement of labour, trade, and finance; and Europe's regulatory grip. Except now we have no influence over any of them; the final, inescapable irony.

And that's why we've made a mistake. We were always a sovereign state with a large economy, but until Brexit day we were part of a huge trading community that we could, and did, influence. Today, we're still a sovereign state, but small and adrift in a sea of troubles.

Refugees, perhaps, from the grand European project.

This article was written by Chris Middleton, former editor of Computing