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  • Ian Ritchie : Scottish Business Insider

Brexit casts huge shadow over funding of tech start-ups

NOW THAT THE Brexit negotiations are limping into action it is becoming very clear that this is going to be far from a simple process. We haven’t really started yet on major issues such as citizen’s rights, trading relationships and tariff barriers, agricultural support policies, or cooperation on cross-European academic research.

So I would be surprised if, in amongst all these issues which have a massive impact on so much of our population and economy, support for innovative high-tech start-up companies will take much of an priority - the new enterprises that we’ll need badly to build our future economy. However, I can’t imagine it’s at the forefront of David Davis mind right now.

Trouble is, technology start-ups have been, until now, very much an EU-supported area. The European Investment Fund (EIF) has provided ‘cornerstone’ funding for many UK Venture Capital (VC) funds, without which they would never have become established, and the European Structural and Investment Funds (ESIF) has made economic development grants to regions which, in the case of Scotland, have been very successfully used to underpin Scottish Enterprise’s business development and innovation support, including their Scottish Investment Bank (SIB) which has co-invested in most start-ups, the Smart awards which provide funding for innovation, and LINC Scotland, the umbrella body for Scotland’s thriving Angel investing community.

And although Brexit will not be implemented until after March 2019 at the earliest, it is already having a profound affect on these activities. The EIF which previously favoured the UK largely because our VC community was seen as more mature, effective and businesslike than others is now reported to have ‘turned off the tap’ on any new UK commitments.

Unless this funding can be replaced, quickly, presumably by UK public funds, we will see the UK VC community shrink badly, and investment in ambitious new UK companies will stall.

Meanwhile, EISF funding has been a key aspect of the EU’s policies towards economic development and has been deliberately steered towards regions which have underperformed. If these are to be replaced by UK Government Funding we would have to have some confidence that regional economic development is high on their agenda. Remember that the first action of the newly-elected Conservative-led coalition government in 2010 was to abolish the English Regional Development Agencies in order to save £2.3bn per year.

The devolved Scottish Government could potentially apply different priorities but their track record recently has also been problematic. They appear to have diverted budget from the SIB this year which has put severe pressure on those activities; the ‘co-investment fund’, which used to automatically match fund with approved investors has been scaled back and now typically invests less, and the Smart R&D award system – which supports innovative new projects within companies - has now stuttered to a halt. Smart recipients have been told that no payments will be made until at least May 2018.

It was recently revealed that a new £500m support fund for high growth businesses, which was announced with a great fanfare last September, has yet to provide any money to any companies, one year later.

Its all very well making announcements – Nicola Sturgeon made another one on August 31st promising an ‘extra’ £45m for business research as part of a package of measures aimed at boosting economic growth. But if any of this is to have any real effect on economic growth it has to turn into real support, on the ground, to our innovative start-up enterprises.

And we are not seeing that happen right now.

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