How will the Mansion House reforms turbocharge investment in technology and life sciences startups?

In spite of the UK economy averaging a miserly 0.6% economic growth from 2009-19, a number of individual sectors are booming. 

A CBRE report from September 2023 shows that the UK life sciences sector today employs over 268,000 people, representing growth of 10% over the last five years. This is double the rate of total employment growth, and the figure is anticipated to increase by a further 8% by 2027, compared to total employment growth rate of 3%. The sector now contributes over £94 billion to the UK economy – not to mention was responsible for producing the world’s first Covid vaccine.

This rapid incline has been reflected in investment into the sector. Bioscience Today reports that, in 2021, the number of deals for life sciences companies rose to 505, up from 270 in 2017. Meanwhile total investment value saw a fivefold increase from £1.0bn to £5.2bn over the same period. 

Like the life sciences sector, the UK tech industry has also undergone a period of significant growth. The market has grown tenfold over the last decade, employing over 1.7 million people and contributing over £150 billion to the UK economy annually. Data from HSBC Innovation Banking (formerly Silicon Valley Bank UK) and Dealroom noted that UK tech startups have a combined value of £820 billion, with investment in the sector growing from £1.2 billion in 2010 to £10 billion in 2023. 

UK risks becoming an ‘incubator economy’

But despite these impressive figures, there is some concern that the UK has not been capitalising on these opportunities. As companies scale up (usually around Series B), they are generally seeking investment internationally. According to a recent report from the UK BioIndustry Association, foreign investors participated in 40% of all UK biotech venture deals in 2023, with US firms the most prominent. 

The problem, however, is that when companies raise from overseas, they tend to end up redomiciled in those territories, posing a risk to the UK’s status as a global financial hub. As Stephen Welton, Chairman of the British Business Bank, succinctly put it in a conversation with the Financial Times: “We don’t want to be an incubator economy taking all the risk of these very, very tiny companies, and then not able to capitalise on that by following through with the scale up capital to turn some of those into true global companies.” 

Mansion House reforms set out to drive innovation and investment

In a bid to tackle this challenge, both the life sciences and the technology sector have been prioritised by the government in the ‘Mansion House reforms,’ the Chancellor’s £320 million plan to drive innovation.

Announced in July last year, the headline reform is an agreement from UK pension funds to invest up to 5% in UK unlisted companies, with a target of £50bn by 2030. Commenting on the reform, Stephen Welton said, “We need to figure out a way to get UK institutional money investing those scaleup companies in order to accrue the benefit to the UK economy and drive growth.”

So far 11 pension funds have signed up to the agreement, including Legal and General, Aviva and the Universities Superannuation Scheme (USS). But while the reform has, on the whole, been warmly received, the approach is said to represent the opportunity for gradual evolution to support growth – rather than a moment of sudden transformation. Don’t expect a “big bang” moment akin to the deregulation of the City in the 80’s, said Chris Hopkins, Head of Venture Capital at Legal & General.

A suite of wider reforms

As an initiative aimed at establishing greater UK investment into the life sciences and tech sectors, the Mansion House reforms are not alone. Other reforms introduced by the Government in recent months include:

  1. Long-term Investment for Technology and Science (Lifts): This initiative sees pension funds invest alongside the government in the above identified sectors. The hope is to secure £1 billion of total private funding
  2. Long-term Asset Funds (Ltafs): Structured as open-ended investment schemes to mirror a Venture Capital style fund
  3. Future Fund: Breakthrough: This is an extension to the existing programme with an additional £50 million to invest in high growth innovation firms. This is executed via the British Patient Capital which co-invests alongside private sector investors. This is applicable for investment rounds of over £30 millio with the Fund Funds taking a maximum investment round of 30%.

But are these reforms the right way to go? Just are there are many who welcome such reforms there are, conversely, those who argue against this type of Government action. 

For instance, Nathan Benaich of Air Street Capital suggests that the government should focus on other areas to help the technology sector. Citing data from Dealroom that indicates that UK VCs are sitting on $18bn of unspent money (double that of five years ago and suggesting that the problem is far from a lack of available funding), Benaich argues that Venture Capital is a high-risk strategy, with the experience of failure a norm. What’s more, he says, Government investment could distort the market by creating artificial demand and keeping perceived weaker companies locked in for longer.

Benaich suggests that the government should instead focus on measures including resolving structural barriers such as visa rules for talent, building the right infrastructure, and fixing various procurement issues. 

The reforms are welcome – but it’s important to take risk management into consideration

At BMS, we welcome the commitment from the Government to support the life sciences and technology sectors, although would urge caution to any start-up that is looking for a significant influx of capital without the right framework in place to effectively utilise this resource. A lack of proper governance can lead to friction from investors who are ultimately looking for a return on their capital.

The Finpro team here at BMS can provide guidance to both investors and early-stage companies on how best to transfer risk away from the balance sheet via insurance solutions. We marry technology with sector specialism and technical expertise, with direct access to senior individuals with a track record in the VC sector.

Whatever the prevailing view, the likelihood is that both sectors are set to continue to grow. With significant investment into these sectors comes an expectation of significant results. Amongst the many success stories there will inevitably be failures, and these can lead to accusations (however spurious) being made, which need to be negated. 

As these two sectors evolve, ensuring that you understand how best to manage and mitigate risk – whether as a VC or as an early-stage company – will be key.