U.K. Proposes Post-Brexit Fund to Close Technology Gap With U.S.

(Bloomberg) -- The U.K. proposed a new National Investment Fund to help close a 4 billion-pound ($5.3 billion) funding gap between American and British technology startups.

The fund would provide money and other incentives to the country's most promising startups aiming to grow the young firms into future market leaders, according to a consultation announced Tuesday by the Treasury. Authorities will look at how to spur investment into technology from pension funds, and how to commercialize research from U.K. universities.

Europe hasn't produced giant technology companies such as Google Inc., Facebook Inc., Tencent Holdings Ltd. and Alibaba Group Holding Ltd, that have thrived in the U.S. and China. European startups face several disadvantages, including language differences and geographic borders that make it harder for the companies to grow quickly. 

There's also a smaller pool of venture capital available to young companies, according to the report, which didn't provide many details on the size or structure of the proposed fund. The aim is to resolve the country's handicap by providing "patient capital" needed for startups to grow, it said.

European governments have for years tried to spur the region's technology industry. The U.K. has various tax breaks available for startup investors, while France, Germany, Portugal and other countries provide different subsidies. Yet the policies haven't produced many of the world's biggest startups. 

‘Innovation Powerhouse'

According to the U.K. Treasury report, fewer than 10 percent of firms that receive seed funding in the U.K. reach a fourth round of investment, compared to nearly a quarter in the U.S. The U.K. accounts for just 4 percent of the world's "unicorn" startups valued at more than $1 billion, compared with 54 percent in the U.S. and 23 percent in China.

A central argument for the new U.K. fund is to offset some of the potential ramifications from the U.K.'s vote to leave the European Union. Almost 40 percent of all the funding for U.K.-based venture capital firms comes from the little-known EU-backed European Investment Fund. If that funding dries up as a result of Brexit, it will have a spillover effect on the broader U.K. tech ecosystem.

“Britain is an innovation powerhouse and it's vital that we make sure our cutting-edge firms have the funding they need to meet their potential and conquer new markets," U.K. Chancellor of Exchequer Philip Hammond said in a statement.

The Treasury's proposed fund would need to considered by Parliament before it can be enacted.

To contact the reporter on this story: Adam Satariano in London at asatariano1@bloomberg.net.

To contact the editors responsible for this story: Giles Turner at gturner35@bloomberg.net, Alex Morales, Andrew Atkinson