How Sunak became UK’S most powerful tech investor

Amid calls for the Treasury to invest in Newport Wafer Fab and Arm, James Titcomb asks if taxpayers’ funds are being well spent

One of George Osborne’s many jobs since leaving politics has been working as a tech investor at his brother Theo’s Silicon Valley firm. Some might say the current Chancellor is following in his footsteps despite remaining in Number 11.

Since Boris Johnson’s election victory and Rishi Sunak’s elevation to the front benches, the Government has become increasingly willing to spend taxpayers’ money directly on stakes in tech companies.

Sunak – a former hedge fund manager – has approved billions in public investment in start-ups and cutting-edge tech companies. The Government has granted competition regulators new powers to rein in the US tech giants. And a growing number of foreign investments in British tech companies are being vetoed on national security grounds.

The approach amounts to an increasingly interventionist position on Britain’s technology companies, or as one investor characterises it, a step towards nationalising the industry.

“It’s not a big jump to say that a chancellor that has spent lots of time in California around venture capital is quite keen to stimulate that kind of stuff going on in the UK,” says Ben Greenstone, a former government adviser who runs the tech consultancy Taso Advisory.

“Would we prefer it if that was just private sector activity and the Government created an environment for it to happen? I think the answer is probably yes. But it’s better that it happens this way than not at all.”

Taxpayer funding for start-ups is not a new idea. In 1945 The Labour government set up the Industrial and Commercial Finance Corporation, a public investment body that became 3i, with £15m. In recent years, the British Business Bank has been an active investor in British venture capital funds such as Amadeus, Passion Capital and Entrepreneur First.

But the pace and direction of public investments has increased.

In the early days of the pandemic and ensuing economic crisis, Sunak unveiled a “Future Fund” designed to support start-ups struggling to raise cash.

Under the scheme, the Treasury would loan money to loss-making companies, provided it was matched by private investors, with the loans turning into equity stakes if not repaid. By the time the fund was closed last January, more than £1.1bn had been invested in 1,190 companies.

Months later, in a rescue championed by Dominic Cummings, Johnson’s former adviser, the Government brokered a $1bn (£800m) rescue of Oneweb, the bankrupt satellite internet company that competes with Elon Musk’s Starlink. The deal with Indian telecoms company Bharti, involved £400m of taxpayer cash in a direct purchase of a 33pc stake.

Cummings also spearheaded the launch of the Advanced Research and Invention Agency, an £800m body modelled on the US defence agency Darpa. The agency is yet to get off the ground after the Government’s preferred candidate to lead it, Darpa veteran Peter Highnam, abruptly pulled out of the role weeks after being appointed.

The Government is now going beyond the initial Future Fund, launching a £375m “Breakthrough” fund designed to invest higher amounts. Rather than merely matching venture capital investments as the previous fund did, the Breakthrough fund is making active decisions on which companies to back.

Pressure is building on ministers to go further. Campaigners including Tom Tugendhat, the chairman of the Commons foreign affairs committee, have called for the Government to take a stake in the Cambridge microchip company Arm as a way of encouraging it to float in the UK and retain British influence over it. Taxpayer support could also be available for the rescue of Newport Wafer Fab, the Welsh semiconductor factory whose Chinese-backed owners may be forced to sell it under a national security review.

Lord Willetts, the former universities and science minister and a director at UK Research and Innovation, supported the Oneweb deal. He says the UK has slowly woken up to the idea that technologies are nationally important and need support.

“It’s not nationalisation. This is not trying to take over companies,” he says. “In the past, a weakness of the way we thought about technology was looking at it from a very civil framework. The Americans have always had much more state intervention.

“Rather late in the day, there’s been a recognition that some of these technologies are dual use [of military and civilian importance]. And they are of not just economic significance, but in the broadest sense, strategic.”

Willetts says failing to invest in tech would put Britain “globally in a minority of one”, while other countries are becoming increasingly active. The EU and US have both provided huge subsidies for microchip plants, while China is spending huge sums on artificial intelligence and semiconductors. He says, however, that it is probably too late to invest in Arm.

One problem with funding technology companies, unlike other strategic areas, is that investments

‘These funds are going to show returns, and they’re probably going to show more than a power plant’

‘A weakness of the way we thought about technology was looking at it from a very civil framework’

often operate on a “power law” in which a small number of bets are tremendously successful. This means that while financial returns can be exceptional, a substantial amount of taxpayer cash goes towards failures.

Dozens of Future Fund investments, such as keyboard maker Roli, have entered administration. This is a cost of doing business in venture capital, but a challenge for the Treasury, since the successes are unlikely to be seen for years.

“The reality is these funds are going to show returns, and they’re probably going to show more returns than a power plant,” says Dominic Hallas of tech group Coalition for a Digital Economy. “The reality is most venturebacked start-ups fail. It’s one of the biggest challenges for the Government getting involved in this space. You’ll have some big winners and then you’ll have a lot of losers. The economics of that will actually work very well for them; the challenge is that every company that fails is a news story, it makes them look bad.”

Greenstone, of Taso Advisory, says that a strategy of investing directly in technology companies may be difficult to reverse. “Once you’ve started saying, ‘All right, these things that we want in the UK, we’re just going to take big stakes in them.’ How do you stop doing that? How do you ever make the case to not do that every time it’s potentially important?”

He says one alternative would be to support UK tech companies by being customers: buying from them, rather than buying them.

That is, after all, how Silicon Valley started. The US government was the cornerstone customers for companies such as Lockheed Martin and Raytheon that laid the foundations for the Californian tech hub. If we are looking to replicate Silicon Valley in Britain, mimicking its origins may be a start.