The United Kingdom is among the global innovation leaders, according to the Global Innovation Index (GII) 2020: Who Will Finance Innovation.
The report, produced by Cornell University, Insead and the World Intellectual Property Organisation, shows the country only lags Switzerland, Sweden and the United States, and is ahead of other high-income economies including the Netherlands, Denmark, Finland, Singapore, Germany and South Korea.
Global venture capital investments declined in 2020 due to the pandemic and the deals tended to have a geographical focus – primarily in emerging markets such as China and India, the report added. However, the traditionally active VC ecosystems including Hong Kong, Israel, Luxembourg, Singapore, the US and the UK will remain important regions for VCs, targeting big data, education, e-commerce, healthcare and robotics technologies.
The British universities are among the world’s most successful in terms of research, commercialisation of intellectual property and tech transfer, with University of Cambridge, University College London (UCL), University of Oxford and Imperial College London, among others, leading the science and technology fields.
The UK government announced up to £1bn ($1.25bn) in support for innovative companies affected by the covid-19 pandemic in April 2020, before putting up £40m the month after for cutting-edge startups that are developing virtual reality training platforms for surgeons, virtual farmers’ markets and other digital technologies.
Naoki Kamimaeda, a UK-based partner and Europe office representative for Global Brain (GB), a Japan-headquartered VC firm that manages multiple corporate venture capital (CVC) funds, told GCV that the firm decided to venture into the UK because of four reasons.
- First of all, the UK has a wealth of prestigious research institutions and universities, including Cambridge University, Oxford University, UCL and Imperial College London, which are producing high-quality deeptech startups. Outside of Asia, GB is focused on deeptech especially artificial intelligence (AI), cybersecurity, cleantech, fintech and insurtech. The UK ecosystem is very strong in all of these areas
- The UK ecosystem has been attracting lots of global investors and CVCs. Therefore, we can meet not only UK investors but also well-known pan-European investors, US investors and CVC arms of global corporates and co-invest with these VCs and CVCs, which help us to source great deals outside Europe as well.
- The ecosystem in the UK and Europe is very open to foreigners and emphasises on diversity across the board. Also, investors in the UK are open to co-investments and syndications. As a Japanese investor believing in diversity as the essence of great innovation and success, we enjoy working with investors here and are strategically well-positioned in the market.
- Finally, the UK has great connections to global startup hubs like Germany, the Nordic countries, Israel and the US and also has frequent flights between London and Tokyo. Therefore, being in the UK is very convenient to communicate with our Tokyo headquarters as well as other global startup ecosystems.
Bruno Vidal Sá de Moraes, a UK-based managing director for Wayra, a VC and accelerator subsidiary of Spain-listed telecommunications firm Telefónica, agreed and said: “The UK is the top European ecosystem by almost any metric we can think of. While it is smaller than the US and China, it is roughly twice the size of other European ecosystems.”
Moraes highlighted various characteristics of the UK ecosystem – with a focus on London – that create excellent conditions for the development of startups:
- Diversity – being the most global city in Europe and the heart of the UK ecosystem, London has created a very diverse ecosystem. It does not have the language barriers that exist in other European, Asian and Latin America ecosystems and it is geographically very central as well, being equidistant to the US, LatAm and Asia and extremely well-connected to all those places. Brexit may create an impact on the diversity of this ecosystem, but there is a notable effort from the UK government to keep attracting entrepreneurs. Eventually, there will be a shift from European to more global entrepreneurs, which can positively affect diversity. The UK is the only one among the top ecosystems with a specific startup visa programme.
- Talent – the UK has one of the leading education systems in the world, attracting global talent. London, in particular, is close to several of the world’s leading universities.
- Global launchpad – more than any other top ecosystems, London is very well-equipped for being a global launchpad for startups, including location, time zone and connections.
- Developed financial markets – while Silicon Valley commands more and higher investments in startups, London and New York have a much more developed financial market and attract global capital and investors.
“The recent performance of the UK ecosystem has been stellar and I believe this will continue over the years as it matures,” Moraes added. “Despite Brexit, the UK ecosystem can still play a very important role in connecting other European and global ecosystems together.”
The top UK-based deals involving corporate venturers in the past five years have included business finance provider Greensill, which raised $655m from internet and telecoms group SoftBank’s Vision Fund in October 2019, and AI-powered healthcare technology developer Babylon Health, securing $550m series C round two months before that featured investors including reinsurance provider Munich Re’s Ergo Fund and health insurance provider Centene.
Game programming technology developer Improbable received $50m from internet technology provider NetEase in 2018 at a $2bn valuation while SoftBank Vision Fund led a $440m round for digital bank OakNorth the year after, valuing it at $2.8bn.
Clean energy supplier Octopus Energy Group raised $200m in May 2020 from energy utilities Tokyo Gas and Origin Energy, which valued it at $2.1bn. Immunocore, an immunotherapy developer backed by pharmaceutical firms Eli Lilly and WuXi AppTec, closed a $75m series C round in December 2020 and announced the following month it had filed to raise up to $100m to go public.
Cazoo, an online marketplace for used vehicles, received $308m in an October 2020 round featuring DMG Ventures, the corporate venturing arm of media group Daily Mail and General Trust, which valued it at more than $2.5bn.
TransferWise, a cross-border financial transfer service which is backed by conglomerates Mitsui and Virgin, increased its valuation to $5bn through a $319m secondary transaction in July 2020.
Mobile financial services platform Atom Bank picked up $62m in a July 2019 round from investors including financial services firm BBVA, increasing its valuation to roughly $660m.
Energy company BP agreed in 2017 to invest $200m over a three-year period in solar power project developer Lightsource, which eventually made it a BP subsidiary and renamed as Lightsource BP.
GB’s Kamimaeda said since he helped the firm set up a UK subsidiary in late 2015, the ecosystem has been improving and attracting more global investors, and has also produced many unicorns. “Compared with the US, of course, there is still room for improvement. However, many global investors started realising the potential that the European market has and most of those investors decided to come to the UK. The ecosystem is getting even stronger and stronger over the years, despite Brexit. Certainly, this trend has a big impact on our investment strategy and we are more willing to invest in the UK and European startups.”
Above: Naoki Kamimaeda
GB co-runs CVC funds including KDDI Open Innovation Fund and 31Ventures, with telecoms firm KDDI and real estate developer Mitsui Fudosan respectively. The three have all backed GeoSpock, a UK-based data analytics technology developer that also counts mobile network operator NTT Docomo as a shareholder. 31Ventures, along with GB, also backed UK-headquartered mobility management software provider Immense Simulations in May 2019.
Wayra’s Moraes added that the UK ecosystem has indeed become more mature over the years, and later-stage VC investment is growing at a much higher rate than their earlier-stage counterparts. “While in 2015 pre-seed, seed and series A accounted for 37% of the UK’s VC investment, in 2020 [the figure went down to] 22%.
Above: Bruno Vidal Sá de Moraes
“The UK also takes the European leadership position in producing unicorns. In general, Europe lags other US and Asian ecosystems in unicorn development. While Europe has 36% of VC-backed companies that raised funding, it has only 14% of global unicorns. However, the UK has more unicorns than the next three European and Israeli ecosystems combined, bringing it more in line with the US and Asian success rates.
“Another notable trend of the UK ecosystem is an increased emphasis on specialisation. The UK is the second global ecosystem in fintech, and the growth of fintech investments in 2019 accounted for 60% of the total investment growth in the UK.
“We at Wayra have adapted and changed our investment thesis and maturity stage. We believe our unique selling proposition for high-growth startups is the business development opportunities we can offer by connecting them to Telefónica and its network of more than 350 million clients and accesses.
“These opportunities can be better leveraged by more mature startups, for this reason, we moved away from seed-stage that characterised us before to a focus on series A. This has proven good results in 2020 where most of our investments could quickly connect to Telefónica and are either already generating revenues or on a very good path for revenue generation.
“Another notable change in 2020 was our scouting and programmes approach. We used to have a flagship London programme for our portfolio companies. Moving away from early-stage, a one-size-fits-all approach and annual cohorts are no longer the best way to deliver value. We currently have a continuous scouting model, where startups can join at any point and they receive bespoke support focused on business development and revenue generation with Telefónica.”
As GB has chosen strategically not to lead deals in the UK yet, collaboration with other VCs and CVCs is key to its investments, according to Kamimaeda, who said: “We always keep looking for new relationships and maintaining and strengthening existing relationships and partnerships. Also, for deal sourcing and meeting with new investors, collaborating with incubators, accelerators, universities and government organisations is crucial for us.
“Therefore, we help, support and collaborate with them as much as possible. Luckily, so far, those players have been giving us warm welcomes overall. Surely, there are lots more things to do to increase our presence here. We will try to tackle and overcome challenges ahead and will enjoy these challenges at the same time.”
Wayra is among the largest open innovation hubs in the world with a strong presence in the European and Latin American ecosystems, said Moraes.
“London is one of our main hubs, reflecting the size and development of the local ecosystem. Being one of the early players in this ecosystem, we have developed relationships with most of our peers and we work closely together with many of them.
“With CVC peers and other VCs, the main aspect is sharing dealflow – both ways depending on their stage. We recently launched a VC portfolio review programme, where we systematically review, together with a partner VC or CVC, their portfolio, looking for opportunities for their companies in developing business with Telefónica. We believe we have the best setup, in the UK, for any leading scale-up that can benefit from working with a telco and we want to attract the best to work with us.
“We also have multiple partnerships in place with both corporates and the public sector, mainly around a vertical programme for startups. Consistent with our general approach, we focus all our programmes on business development and revenue generation for the startups.”
