The U.K.’s startup sector has created more “unicorns” than any other country outside the U.S. and China, but although it’s good at nurturing startups, it’s less good at helping them scale up. The author of CNBC’s U.K. Exchange newsletter Ian King joins Squawk Box Europe on location in Canary Wharf to discuss.

London

The United Kingdom has established itself as a global leader in fostering startups, having created 188 unicorn companies—ranking third globally behind the United States and China. This success is attributed to the country's world-class universities and a robust environment for early-stage investment, with initiatives like Northern Gritstone supporting spin-offs across the nation.

Despite these achievements, the sector faces obstacles in scaling up businesses, mainly due to limited access to growth-stage funding and a risk-averse investment culture. While government tax relief schemes exist to encourage investment, their effectiveness has diminished over time due to frozen allowances. The upcoming budget is seen as a critical opportunity for the government to address these issues and further stimulate the sector.

How Britain’s startup sector is evolving

Ian, we know that all governments talk a good book on attracting the best international talent and fostering these young, brilliant companies that can maybe become unicorns. Is it any more than talking a good book in the UK at the moment? No, I think there's genuine examples of the UK being a success story. Bear in mind, we've created 188 unicorns, which is third only worldwide to the USA and China. That's amazing. How come we don't shout about it? Well, I mean, some people do. But this isn't an overnight success. I mean, this is something that's been going on for many, many years. You know, we have these fantastic universities in the UK, Oxford, Cambridge, Imperial. There are many others as well. You know, in the north of England, you've got Northern Gritstone, which is Jim O'Neill's VC firm. That has been set up to back spin-offs from the universities of Manchester, Leeds and Sheffield. So it's not just a London thing or an Oxford and Cambridge thing. Well, right around the UK, there are great start-ups being founded. They don't stay here, do they? That's the issue, is that they're looking abroad when it comes to scaling the business. So talk to me about why that is and some of the challenges that start-ups here in the UK face. Well, I think there are a number of factors. One is financing, clearly. I mean, the UK is great at providing seed capital, angel investment, call it what you will, start-up capital. We're really, really good at that. It's the scale-up capital that somehow goes missing. And I think the other factor, there is a bit of a cultural thing. Someone said to me, when you're in the US, if you sell your business, you probably go and start up another one. You get these sort of serial entrepreneurs that they'll set up one business, they'll sell it, and then they'll go to the next one. Whereas in the UK, a founder is likely to set up and then go and buy a pile in the Cotswolds and put their feet up. And there's an element of truth to that. You mentioned two things there, Ian. You mentioned funding and you also mentioned culture. I'm interested in both of those, because when we talk about the UK, we just have this investment culture that is very risk-averse. It is certainly not like what you see over in the States. And there are questions about how the UK can start to incentivise a change of that and getting more people investing. Then this is something that Rachel Reeves has said that she wants to tackle. We're looking ahead to the autumn budget. How should the government approach this? What can be done? Well, it's very interesting. There are lots of reliefs in place, tax reliefs in place to support start-ups. You've got the Enterprise Investment Scheme, you've got Venture Capital Trusts, which are a very good way of getting retail investors involved in VCTs. But the tax reliefs themselves, their annual and lifetime allowances that you can put into these sort of vehicles, they've been frozen for the best part of a decade. So obviously their value has been eroded over time. So that's something that the Chancellor could definitely do to stimulate investment activity. And in fact, earlier this week, a letter was sent to the Chancellor by the Venture Capital Trust Association, the Association of Investment Companies. I mean, that's one of the top things on their wishlist. I mean, that will go some way. But have they got the leeway? I mean, let's go back to the broader situation. I said to you off camera, and I think we're all on the same page, and it's not rocket science to say so. If Rachel Reeves gets this budget wrong and has the same kind of reception as her last budget back in October last year, the centre of the government is in big trouble. And it could mean an assault from the left, which could be even worse for those looking to raise capital and grow. Because the attitude for the backbenchers is, we want to grab more money from the city, more money from the banks, more money from venture capital, and not give them more opportunity. Yeah, exactly right. And you saw the reaction in the UK gilt market when Rachel Reeves famously appeared on the front bench in tears. Well, bless her, she looked terrible, didn't she? She had a bad day, didn't she? But I think paradoxically she emerged from that stronger because the market reaction to that, the prospect of Rachel Reeves going and being replaced by potentially someone more left-wing, I mean, it scared the bejesus out of the bond market. Yeah, it really did, didn't it? And we've still got higher gilt yields than pretty much everywhere else in Europe and indeed US to pay for it.

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