For startups that face high patent and business costs, the Treasury’s recently announced exploration of tax breaks for innovative early-stage businesses to boost productivity is a welcome relief. However, it only addresses one piece of a much wider puzzle.

Beyond financial pressure, innovative startups are contending with a nationwide talent shortage, persistent funding gaps, and limited access to the business and regulatory expertise that’s required for turning ideas into thriving enterprises.

To truly unlock the UK’s innovation potential and drive long-term productivity and growth, financial incentives must be matched by investment and development of regional ecosystems that offer startups infrastructure and support systems that fuel long-term success.

Why is UK growth stalling?

A big challenge Rachel Reeves will be looking to address within the Budget is the £20 million deficit – and how better growth can address this. It’s promising to see the government considering tax relief for entrepreneurs as a solution, through reducing costs for patents, expanding incentives for startups that offer shares to employees, and re-evaluating the criteria for the Enterprise Management Incentive.

While these changes would be welcome, they don’t address other significant barriers to growth for early-stage businesses. Access to finance remains a persistent challenge, with over half of UK businesses relying on self-funding to drive R&D efforts. The ScaleUp Institute’s 2024 survey also found that 54% of growing businesses cite access to talent and leadership as an obstacle to growth plans.

These aren’t new issues. For over a decade, startups have struggled with limited infrastructure, regulatory complexity and difficulty accessing new markets – just to name a few challenges. If we want to move the needle on productivity, we need to take a holistic approach to startup support that addresses these challenges, and regional ecosystems play a key role here.

The innovation economy is built on startups

Unlocking growth opportunities for startups isn’t just beneficial for wider economic growth – it’s essential to laying the foundations to deliver the UK’s ambitious innovation agenda. Whether it’s advancing tech sovereignty through the development of AI or discovering alternative energy solutions to meet net zero goals, startups are building the solutions that will help the biggest challenges we face as a society. Take the greentech sector, for example, an industry vital to our energy transition and it's made up of a third of small businesses, 70% of which are still in the seed or venture stages.

To supercharge innovation, these startups need the right environment to succeed. Regional ecosystems provide early stage businesses with space, technical expertise, access to leading research, R&D facilities, business and regulation experts as well as investors and fresh talent. These hubs exist all around the country, and offer unique specialisms – whether it’s biomedicine in Edinburgh, advanced materials in Manchester or robotics in Birmingham – bringing together world class academic institutions and industry to drive innovation.

For startups, being embedded within these ecosystems means having access to the latest research and fresh talent, as well as a network of peers for knowledge-sharing and cross-sector collaboration to overcome shared challenges and turn ideas into successful ventures.

Diversity is a key ingredient of innovation

The potential tax cuts being explored rightly acknowledge that innovative early stage businesses are a core driver of growth in the UK. However, beyond finance, having access to diverse talent, ideas and experiences is the lifeblood of any innovation economy.

Creating an inclusive startup ecosystem ensures early-stage businesses can fully benefit from government support, and can access the tools they need to grow and compete. For instance, even though female-founded startups make up 15% of all high growth enterprises in the UK, 70% report finding it difficult to secure funding, and receive significantly less venture capital than male peers.

The growth and innovation unlocked by supporting more female founders in accessing pathways to funding would be significant. That’s why inclusion must be at the core of entrepreneurial ecosystems, creating environments where diverse perspectives thrive and bold ideas can take root. It’s this richness of experience and background that fuels breakthrough thinking and drives global innovation leadership.

Conclusion

As the UK seeks to boost growth and cement its position as a global innovation leader, supporting startups should be a central pillar of economic strategy. Potential tax relief is a welcome and necessary step, but this alone won’t boost productivity.

Unlocking the full potential of our early-stage businesses requires more than capital - these businesses need inclusive ecosystems and networks that grant access to funding, talent and counsel.

The future of long-term growth lies with our most innovative early-stage businesses and to significantly boost productivity, we must go beyond short-term fixes and tackle the persistent barriers that have held them back for too long.

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