Rediscovering the UK's AI ambition

Our submission to the UK Government's AI Opportunities Action Plan

At the end of July, the UK Secretary of State for Science, Innovation and Technology commissioned Matt Clifford, Chair of the Advanced Research and Invention Agency (ARIA), to produce a roadmap on how the government can harness the benefits for AI to drive growth and productivity. As part of this work, Alex attended a roundtable at 10 Downing Street and stakeholders have been invited to share their thoughts in writing with the taskforce. 

As believers in openness as a driver of progress, we share our unvarnished views publicly, not just behind closed doors. So in that spirit, we’re sharing our submission in full. 

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Matt, 

Thank you for the opportunity to engage as part of this review. As promised, we’re sharing our follow up from the No 10 roundtable below.

We emphasize the need for a whole-of-government approach to technology policy. That means, using the different levers distributed across government departments, rather than treating AI as a single sector in need of a new funding settlement from DSIT.

While we’ve broken out the topics separately - they are, of course, all connected. For example, a better functioning spinout ecosystem will benefit from a greater number of specialist solo GPs.

The recommendations below are by no means exhaustive. We’ve left out areas where we believe others will make a more detailed contribution (e.g. building regulatory capacity) or where we believe plans are already underway (e.g. a national data library). We believe these to be crucial areas of work, but we’re keen to avoid duplicating recommendations.

Recommendations

Government as a customer, not an investor

Government’s usual lever of choice for early-stage company support is subsidy (either via VCs indirectly or via direct investment). Government is a poor direct investor and if a deep tech company at Series B needs a government vehicle as a direct shareholder, it has likely failed to find product-market fit. It should be allowed to either fail or be acquired, rather than acting as a sink for talent and capital.

• Government should cease any direct investment in start-ups beyond Series A. Pre-A investments should only be in companies with a clear tie to national security.

Instead of acting as an investor, the government should focus on procurement reform. Its spending accounts for approximately 45% of the UK’s GDP, but access to this for start-ups is conditional on deep pockets, insider networks, and luck. This is a rare combination and not a scalable formula for success.

Procurement has traditionally been challenging for start-ups for several reasons:

• Prohibitively long timelines combined with a highly labour-intensive process. Start-ups are unable to devote significant leadership, engineering, and business development resources to processes that may not arrive at an outcome for well over a year. Recent moves, such as the Ministry of Defence’s decision to lower the limit for ministerial approval for spending from £2M to £50k are retrograde steps.

• Fragmentation, forcing them to build relationships with a byzantine network of regional stakeholders, many of whom individually have limited spending power. 

• Overemphasis on paper requirements, rather than developing the best answer to a specific user need. While government bodies will know the problems they face better than any outsider, they are less likely to be well-placed to know the exact shape of the solution. 

• The process becoming an end in itself. If a company tries to hire for a role, but doesn’t find a suitable applicant,  it will usually pause the search, rethink, and try again. This philosophy is rare in procurement and often leads to subpar or inappropriate solutions produced by incumbents being chosen out of desperation. 

• Little promise of pay-off at the end, with start-ups often being limited to pitching for small grants and contracts from innovation units and accelerators that usually lack the potential to develop into larger-scale work. This means revenue is highly unpredictable, which is challenging for both hiring and fundraising. 

We have laid out more specific recommendations around defence previously, but believe that many of the same principles could be applied to other areas of public procurement. For some capabilities, this could involve:

• Testing MVPs against each other round-by-round, eliminating them one at a time and providing feedback to the survivors. 

• Compensating start-ups for participating, based on how many rounds they make it through. Companies eliminated in the first round or that have pitched an obviously unsuitable solution receive nothing.

• Ensuring a real, multi-year contract lies at the end of the process, rather than a pilot or forced partnership with a larger provider.

Harnessing innovation in our universities

The previous government’s Independent review of university spin-out companies was a valuable first step in correcting the UK’s historic poor performance in commercializing the technological breakthroughs in its universities. It confirmed the slow deal times, unfair equity takes, and lack of transparency that we exposed via Spinout.fyi and outlined a welcome set of recommendations around best practice. 

However, the final recommendations were voluntary and too generous towards universities. The review explicitly adopted the equity splits recommended by TenU - the technology transfer offices’ lobbying arm - giving universities scope to claim up to 10% equity in software start-ups and 25% equity in life sciences spinouts. These terms still risk rendering promising companies essentially uninvestable.

UK universities’ role in the spinout process should be more akin to that of their US counterparts - in-house TTOs whose role is confined to quickly turning around legal documents. The UK model, where universities act as a cross between a lawyer, a VC, and a venture-builder, results in universities that provide an expensive service badly. Universities should focus on building alumni ecosystems that make successful graduates want to give back to their alma mater, rather than trying to use founders as a substitute for an endowment. 

• TTOs should uniformly adopt a Simple Agreement to Spinout (SAS) that sets a transparent standard specifically for spinouts. The SAS gives TTOs the option to select either i) 1-5% common equity or ii) in the case of clearly identified IP over a drug molecule or medical device, 1% royalty on net sales (direct or sub-licensing based), or iii) 1% of the exit consideration upon M&A or IPO, in addition to a one-off £20,000 per patent that the spinout in-licenses. If the spinout does not use licensed IP for 24 months, it must return it to the University for recycling. No other fees are levied.

• Compliance should be mandatory, with universities that don’t adhere being subject to meaningful funding allocation penalties. They should also consider penalizing universities that restrict access about academic work to their chosen partner investors, giving them an unfair advantage.

• The government should reject any proposals from universities for additional subsidy for spinouts, beyond the proof of concept funds outlined in the review to help spinouts make a go/no go decision. Given the volumes of early-stage capital on offer in the UK, anything beyond this is unnecessary. Founders that are serious about creating global winners normally prefer to raise money from outside firms with a track record, not universities. 

Target support at emerging managers, not incumbents

Government financing vehicles played a role in creating the UK’s VC ecosystem, most recently under the banner of the British Business Bank (BBB). But many of these schemes’ origins date back over a decade and a half to a time when the financial crash was hitting and the UK’s VC scene was an international backwater. This is no longer the case. The UK does not have a funding gap and the BBB should not be promoting this narrative.

Once a manager has established a track record over one or two funds, they should not require government support. Instead, they should be able to raise from university endowments, non-profit institutions, entrepreneurs’ family offices, funds of funds, sovereign wealth, and corporates. 

Instead, government should focus on the real bottlenecks in the ecosystem: 

• Focus on emerging funds, or solo general partners and start-up operators turned investors. These are precisely the specialist investors a reformed spinout ecosystem needs. At the moment, solo GPs are not eligible for BBB funding. An emerging manager programme should have looser requirements on the team, while moving significantly faster. It should take no more than six months to secure 20% of a fund.

• Create a follow-on fund to support managers who can’t afford to exercise their pro-rata rights. The government could create a follow-on fund which invests in UK companies that had their A or B round led by a Tier 1 US VC firm. The government would invest via a special purpose vehicle, with the manager selling their pro-rata rights in the round in exchange for carry. The VC fund would manage the SPV and the government wouldn’t talk to the company or run additional due diligence.

• Remove unnecessary regulatory requirements. Consider adopting an SEC-style exemption for VC, to remove reporting and compliance requirements that were often designed to protect retail investors investing in public markets. For smaller funds, the £100k a year on compliance (vs $30k in the US) they need to spend on compliance consumes a substantial portion of their management fee. An FCA sandbox for emerging managers, which maintained AML and KYC requirements while losing other unnecessary overheads, could act as a draw for talented managers from other European countries that also maintain these requirements.

Infrastructure fit for the 21st century

The government’s Independent Review of The Future of Compute laid bare the poor state of the UK’s compute infrastructure, including our lack of supercomputing capabilities and the low number of GPUs available to researchers.

• The government’s decision to scrap investment in a national supercomputing facility was short-sighted and wrong. It should be reversed.

Assuming the government does decide to build out capacity after all, the next stage will be in getting the access model right. Making this worthwhile will require a degree of both risk-taking and speed, while avoiding turning into subsidy for incumbents. 

Any future access model should consider:

• Allowing access to industry (pre-Series B only) as well as academia;

• As short an application process as possible. One of the main gaps in the market is ‘bursts’ (e.g. testing if scaling laws in a domain work before committing to a larger training run) - a months-long application process would defeat the objective;

• Using external yardsticks of quality (e.g. publishing track record of the team, submissions to major conferences etc.) to judge applicants, rather than the government attempting to run its assessment process.

• The government should also consider whether it is best placed to operate the cluster day-to-day, or whether an external firm (e.g. CoreWeave or Crusoe) could provide a better standard of service more quickly.