Tech Nation’s latest report celebrates the UK tech industry’s achievements in 2020, but warns that the ecosystem risks becoming too reliant on foreign investment, too London-centric and that it is seriously lacking in research and development (R&D) investments.

Tech Nation is a government-backed organisation created to support the country’s tech entrepreneurs. Its seventh annual report highlighted that venture capitalists injected $15bn into the UK’s tech industry in 2020. The amount invested made the country the third-biggest destination for VC backing following the US and China, whose startups raised $144.3bn and $44.6bn respectively over the same period.

However, the entrepreneur-support network warned that the sector’s reliance on foreign investment could pose “potential for national security concerns”. It noted that 63%, or $9.4bn, of the VC cash invested into the UK tech ecosystem came from overseas.

On the one hand, Tech Nation cautioned that this could lead to tech startups being owned by non-UK actors and that it highlighted “a shortfall of late stage domestic investors.”

On the other, it demonstrates that Brexit doesn’t seem to have discouraged overseas investors from backing UK businesses.

Tech Nation also expressed concerns that London is increasingly becoming the go-to place for tech entrepreneurs and investors, leaving other regions in the country behind. Of the total VC investments made into the UK in 2021, 88% went into businesses based in the capital, up from 73% in 2018.

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By GlobalData

While recognising London’s importance as an innovative hotbed for entrepreneurs, Tech Nation warned that the UK’s position as a tech world leader is due to “the collective strength of its regional tech clusters”. As such, it recommended that the country invested in targeted regional investment funds “to level the funding playing field for companies outside London.”

Additionally, Tech Nation’s report warned that the UK is falling behind other nations in terms of R&D. Citing data from the Office for National Statistics, Tech Nation noted that the grand total of public and private R&D expenditure came in at just below £30bn in 2018. In the same year, the combined R&D expenditure of Amazon and Alphabet was £33bn. Comparatively, the total US R&D expenditure in 2018 reached $551bn, while China’s R&D expenditure reached $463bn.

“Bold investment is needed in R&D to boost Britain’s new deep-tech companies and ensure our global competitiveness,” said Gerard Grech, founding chief executive at Tech Nation.

Big winners

The three dangers identified by Tech Nation did take a backseat in the report, which predominantly celebrated the achievements of the sector. The researchers valued the UK tech ecosystem at $585bn, with businesses in the sector increasing their value by 120% since 2017. However, some sectors had more to celebrate than others, with fintech, transport technology and deeptech startups leading the charge.

Fintech has long been considered the crown jewel in the UK’s tech industry. Tech Nation noted that the UK managed to maintain its position as the world’s second biggest destination for VC cash in 2020, despite suffering a 23% decline over the year. It only raised $4.5bn over the period.

One potential explanation to this trend could be that more mature fintechs have shifted from equity to debt financing. Last year, that was the case for fintechs such as Molo, iwoca, and MarketFinance. Only this morning, Verdict reported that SumUp had also topped up its accounts with a debt facility.

It is also telling that Tech Nation named challenger bank Revolut as the tech startup that had attracted the most VC attention over the year, having secured $580m in total. Its co-founder and CEO Nik Storonsky was also recently named Britain’s first tech billionaire, following the neobank’s $5.5bn valuation earlier in 2020.

“At Revolut, we’re honoured to be successful among such original and entrepreneurial businesses,” Storonsky said. “But all of our successes owe much to the dynamism of the UK tech ecosystem that attracts exceptional talent and patient investment from the UK and around the world.

“In this extraordinary year, every business has faced exceptional challenges as we and our customers dealt with the global pandemic. As our customers embraced digital spending and account management, we switched to truly virtual operations, learning as we went and ending the year as a faster and more productive business than we started.”

Transport tech pulled away from the pack in the race for VC investment in 2020. Over the year, the sector secured $1.7bn in funding, representing a 160% increase from the $650m invested in 2019. Companies like Arrival, Marshmallow and Cazoo drove this increase in the mobility sector.

Deeptech VC investment also enjoyed a bump, growing by 17% to just under $4bn, representing the highest investment growth in the sector across the world with the US, China and Israel all suffering drops over the year.

A year in IPOs

The UK is gearing up to give its public listing system a complete overhaul. Announced on the same day as Rishi Sunak’s second Budget, an HM Treasury review chaired by Jonathan Hill recommended that the rules around free float requirements and dual-class share structures should be updated to make the UK a more attractive place for innovative firms to list and grow in.

Deliveroo has seemingly already taken the HM Treasury on its word, saying it plans to list on the London Stock Exchange via a dual-class share structure.

But even before these new measures have been implemented, Tech Nation celebrated that the UK saw a jump in the value of tech companies filing of an initial public offering (IPO) on the London Stock Exchange. Eight tech companies floated in London in 2020, raising a total of £3.1bn. That is double the £1.59bn raised in 2018 IPOs. It is also 43-times increase of the £70m raised in 2016.

Tech Nation highlighted that tech and consumer internet firms are increasing their share of capital raised through IPOs on the London Stock Exchange, accounting for 40% on the London Stock Exchange in 2020.

Finally, a word from our sponsor

Several tech stakeholders were quick to applaud the industry’s achievements over the year. One of them was Prime Minister Boris Johnson.

“The UK is maintaining its lead as one of the world’s premier centres for tech of all kinds,” he said. “While the real credit lies, as ever, with the engineers and designers toiling away at laptops across the country, I’m immensely proud to lead a government that is so comprehensively committed to supporting the sector.

“We’re continuing to invest in your success, and I hope that the winning combination of UK tech and this government will lead us to yet another record-breaking year in 2021.”

Read more: Budget tech roundup: Fintechs salivate over £100 contactless transactions