242. Ignore the doomsayers - the UK is innovating

0:00Hello and welcome to The Rest is Money with me, Steph McGovern. I'm with me, Robert Paxton. Yes. So we are going to start the new year with some positivity, aren't we? Because we have an optimist with us in the form of Saul Klein, who is, well, it's fair to say he's big in the UK tech investment scene. He set up various venture capital firms, including Phoenix Court, which has, through its various funds like Local, Globe and Latitude, back some of the most successful startups we've had over the past decade. You've got the likes of Wise, who obviously are the currency firm, and Zoopla as well. He also set up Seedcamp, which helps early stage startups accelerate, and he's now helping build globally competitive companies in AI.

0:46The reason I wanted to have him on the podcast is he is just one of the most thoughtful people I know when it comes to analysing what we need to do as a nation to be, well, he would argue we're already at the cutting edge of setting up innovative businesses. But, you know, I need to want to talk to him about how to reinforce our competitive advantage, increase our competitive advantage. So here is our chat with Sol Klein.

1:29Sol, great to see you. We want to talk about your optimism, about what you call the innovation economy, which has broad significance for all of us. And I am just because, you know, I'd say the difference between investors is, you know, you're a great optimist. I would say journalists like Stephanie and I have to be realists. But, you know, our great team in the doldrums, the Arsenal for 20 years, six points clear. You can revive institutions that appear to be failing, can't you? There's no doubt. And actually of institutions that have failed. You know, Arsenal is probably, you know, in any version of data, a top decile performer over the last hundred years.

2:15So, you know, and I think we're going to talk about this today. it's it's you know time and context matters and 20 years may feel like a long time but you know if you've not won the championship since 1961 okay we're not going to rub salt into the room the ruins of Tottenham Hotspur supporters at this particular uh can I just add some balance by saying Middlesbrough are also doing very well at the moment so you know second in the championship So, you know, just for a bit of self-balance. One of our greatest leaders of the last few decades, Gareth Southgate, you know, cut his teeth. He did. You know, up there, I believe.

2:57So, you know, we're all one country here, one nation. And so let's get on to reasons as one nation, not only to be, you know, optimistic ahead of quite a big match against Liverpool tomorrow night, but broadly optimistic about the future. future of Britain. What is the innovation economy? So, you know, the innovation economy, at least in the way that I look at it, is an economy that is based on entrepreneurialism, on translating ideas into businesses. and you know I would argue that the UK has probably had one of the world's strongest innovation economies for 500 years or more but but nothing actually Roberts and and you know where I'm gonna start is is in two areas we we you sort of differentiated between journalists who are you know pragmatic evidence-based maybe god forbid even cynical no and people like myself who you may consider to be a professional optimist because you know my job is to sort of believe in the future and to try allocate capital towards the future but you know there is a clue in the word capitalist in terms of venture capitalists we need to ultimately be based on evidence and we need ultimately to be based on returns so i think you know can we start by removing the false premise that you act on evidence and i act on hope and by you i mean you plural just on that point though about the innovation economy just to to clarify then are we talking about the kind of startup scale-up economy is that what we're talking about well i think that's the way we've kind of popularized the terminology if we're using kind of silicon valley terminology is we talk about startups we talk about scale-ups i think the broader way of thinking about it is innovation and you know innovation happens in all kinds of ways you know greggs is an innovative business you know um so is oxford nanopool so i think you know one of the things we've done ourselves no credit and by ourselves i don't just mean britain i just mean globally is to sort of you know full hook line and sinker for the silicon valley narrative that all innovation is technology and all innovation is startups to scale up so innovation is very simply in my mind how you take ideas and you turn them into real things that impact the real world And, you know, we don't have to be a historian to understand that, you know, from Newton to Crick to Brunel and onwards, you know, Britain is literally world class at this.

6:05And the sad fact, and I know we like to indulge in sadness and pessimism, is that Britain is the third best innovation economy in the world. And I'm sorry to say that we're actually by what any metric you choose to to take any evidence base you choose to take. The amount of companies that have been venture backed doing over 25 million in revenue, 25 to 100 million. We call Colts, 100 million plus in revenue. We call thoroughbreds. There are 800 Colts and thoroughbreds in the UK. That is more than, and I know we like to be friendly to our European neighbors, and I voted remain, so I'll put that out there.

6:57That is more than France, Germany, Sweden, and the Netherlands put together. And second, third only to the Bay Area, not America. Because if you take the Bay Area, Boston, Seattle, Austin, out of America, you basically get flattened negative growth. and to the greater Bay Area, which is China. So honestly, how we can sort of look at the facts where we are bronze medal in the most important global race in the 21st century, which is innovation, and the only people that are ahead of us are the US and China and be sad about our economic prospects is just shameful. I need to pick up, though, the big point that you made in a recent paper that you sent me.

7:48which is not only are we world class in terms of our ability to innovate, whether it's new businesses or existing businesses that are innovating, but you said, and this is a very striking claim, that you believe that when it comes to this kind of innovation, the UK is in the best shape it has been since the late 19th century, which, of course, was when we weren't just a world power. We were gold medals. We were gold medals in the late 19th century. So what is it about the structure of this economy now which makes you so positive about our competitive position? Well, I mean, let's start from the fact that, you know, we are already punching ridiculously above our weights.

8:41So in terms of where do we stand on the GDP league table, you guys may know better than me, we're either sixth or seventh. That's right. And we will almost certainly go down to tenth. You know, Nigeria will be bigger than us. Indonesia will be bigger than us. Mexico will be bigger than us. Pakistan will be bigger than us by 2050 on a GDP basis. But in terms of our ability... We should also just remind people we're talking about aggregate GDP. We are not talking about GDP per head. we are not talking about living standards. On that measure, those countries will almost certainly not be richer than us.

9:22And it is important to remember that. No, and this is the key point, is this is why, in my view, the innovation economy is the league table to be top off. And starting in third place is an incredibly strong place to go because on a per capita basis, if you look at the UK on a per capita basis, obviously compared to the US or China, there's your gold medal, Robert. We're actually number one on a per capita basis. Why do I think in the next 25 years we've got a, not even a generational opportunity? I think the claim that I made in that paper is that this is the best opportunity we've had in 150 years, is that the next 25 years, which is the future, versus the last 25 or 50 years, which is the past, we can't do anything about the past.

10:16We can do something about the future. We are incredibly well positioned in terms of all of the key inputs that define the future. And the inputs are around capital, human capital, science technology engineering and innovation and i would say the more subtle points is that our value system and i know this is like an incredibly unpopular word is in my view much better suited to win in the next 25 years than the dominant value system of innovation in the last 50 years which is the american value system so so can i just come come back to you on on just that point about us being the third largest innovation economy and what makes us that and you mention and which is brilliant to hear about as you describe them the cults the thoroughbreds and you know real horses no unicorns like mythical ones yes and and and on that though as part of this paper you also talk about the the high value jobs as well and you and you say in it that there's over 100 ,000 high value jobs created across the UK.

11:28And then you mentioned there about science and engineering and everything else, and I'm sure we'll come on to universities and the success we're having there. But we do also have a skills problem, don't we? And we do have a gap and we are currently not training enough people in the skills that we need. We're not re-skilling people who are coming out of jobs and industries that are becoming redundant. When you say problem, I hear opportunity, literally. So you mean we've got hundreds of thousands or millions of people to make AI literate? Yeah. You know, we've got the opportunity across the UK through apprenticeship schemes, through, you know, the kind of work that Amazon's been doing for about a decade, taking people from the warehouse and helping turn them into data scientists.

12:19Yeah. Incredible opportunity. You're right. There is an incredible opportunity, but there's currently not enough funding in further education for, you know, providing, as you said, the apprenticeship. You mean we want the government to fix the problem? No, no, I'm not saying that. I talked to a lot of businesses as well who were doing, we did a brilliant episode a couple of episodes ago about businesses who were going into their local communities and, you know, doing these amazing initiatives around starting with kids from primary school, bringing them into their manufacturing plants and everything else.

12:45So no, I'm not trying to be negative, but there is an issue with, because I regularly am in these colleges and I'm regularly talking to businesses about skills, is there is a problem at the moment in terms of the short and medium term of just not enough people doing the kind of subjects we need. And also the fact that some of these training centres don't get the same funding as they used to. They're underfunded, so they haven't got the equipment and everything else. So I'm not trying to be a Debbie Downer. I'm just saying, yes, we can talk about opportunity, but we also need to be realistic. 100 % and there's no point in having an evidence-based argument if you don't deal with the facts and you know the facts are that there are a lot of challenges I'm not denying the challenges but what I am saying is that we need to start with an opportunity-based mindset and we need to start with the fact that we are really really good at this and start fixing things and start with where we are strong.

13:53So can I just, I mean, there's so much I want to ask you, but there's one other assertion you make in your analysis, which is you also say that when it comes to these Colts, thoroughbreds, growing younger businesses, Leeds and Manchester are now doing better than the Golden Triangle of Oxford and Cambridge, which I think, I mean, surprised me. So just give us your evidence. Not as much as surprised as Oxford and Cambridge. But I mean, but that is really impressive. So how has that happened? What are these businesses? Because we worry all the time on this podcast, actually about the, obviously, about the North-South, you know, growth and income divide.

14:39Although, I mean, I take the view that what Patrick Vallance is doing in trying to link Oxford and Cambridge will be good for the British economy in the round. Steph makes the point, well, what are you doing for, you know, the North East? Or Scotland or the South West. Exactly. But so just, as I say, correct what may be a slightly too negative perception of the North falling behind in this very important sense. Because as I say, you say they are doing better than Oxford and Cambridge. Today, they are. But, you know, this is almost in spite of sort of economic and innovation policy. So, you know, all of the evidence that I'm laying out and its evidence is sort of not necessarily based on how we have shaped policy.

15:33And I think this is what we really have to accept is that these 800 colts and thoroughbreds, by and large, are made by real people in real places who are just getting on with stuff. So despite government, despite government, despite academia, despite, despite, despite. And you know what? That's what innovation is about. It's about despite. and this is the spirit this is the innovative spirit actually that you know this country has in spades not just today but for centuries and this is the this is the innovative spirit and of course you know in a much bigger city than oxford or cambridge like leeds or manchester you know there are going to be more companies that have hit that scale it's in spite of imagine if we could actually, you know, take some of the capital allocation, take some of the policy interventions and, you know, have more even distribution.

16:38But again, I see that as an opportunity. And it's a huge opportunity when you point out the facts and you say to people, yes, you know, the golden triangle, isn't it brilliant? It is brilliant. You know, we've got four of the top 10 universities in the world not in europe in the world between imperial ucl oxford and cambridge of course we should be doubling down on that like patrick is doing but you know we've also got you you know the the mother cities i've just been in cape town the mother cities of the industrial revolution i mean but your point is they're doing better than people think I've just launched a new business in Newcastle this week.

17:20I've got various different things I've invested in over the years, but this week we've launched a new fitness business. And that is, as you say, in spite of the fact it's taken us ages to get through council bureaucracy. It's taken us nearly two years to deal with landlords and business rates changing and employment things changing. And we've still done it. And I think the reason why is because people want to just better themselves. It's as simple as people want to, you know, when we talk about, you know, people in areas like mine, where there's a lot of where I grew up, sorry, where there's a lot of deprivation.

17:58People don't want to be on benefits. They want to do something that betters their life. and they are entrepreneurial around it. It might necessarily result in a business, but it might be in the way that they budget or the way they live their lives. They look for ways to try and... Or support their neighbours. Yes, exactly. And I think, you know, this is the thing is that, you know, innovation is in spite of, it's not because of. Yeah, I totally agree. And that is like, you know, asking what is an innovation economy? you know innovators are in spite of if you want to look at again i just want to keep coming back to evidence and data and facts so there are um 150 000 venture-backed companies globally that are still alive only 1.3 percent of those companies ever cross the threshold of doing over 100 million in revenue, what we call thoroughbreds.

18:58And only 1.8 % of them ever crossed the threshold of being worth a billion dollars or more, what the industry calls unicorns. So to be clear, these outliers are incredibly rare. So a unicorn is a billion dollar plus valuation. 1.3 % ever hit a hundred million revenue threshold at thoroughbred so to be clear you know when you're innovating you are innovating in spite of you know there are 150 000 uh we the the analogy that we use you know are surfers who are riding the innovation wave got to have a bit of a california theme here to keep the Americans interested. Of those 150 ,000 surfers, only 1.3 % become the unicorns.

19:52And then what we can do is when we recognize innovation, is support it. And that's where capital, policy, procurement, all of these things come in. But we shouldn't accept the fact that we can't innovate when the evidence is literally staring us in the face. So I want to come back to the capital point in a minute, but you refer repeatedly, obviously, because we think of that place as the sort of benchmark for providing risk capital to new businesses, Silicon Valley, Palo Alto. You've come up with this idea of the new Palo Alto focused on London, but then wider than that. I want to go back to a point that you made earlier, which I was really intrigued by, which is, on the one hand, obviously, with Trump, we are looking at this whole issue of what you might call new American or a certain kind of set of American values against what you might call British and European values.

20:59I would just say honest American values. They're just telling us the truth. Are you actually saying, however, that the culture that we have here in New Palo Alto, in the UK, in Europe, versus the culture of Silicon Valley, that you think that our culture today is more conducive to sustainable innovation than theirs? Are you making that point? Yes. So explain that because people will, I mean, I'm surprised by that, given how extraordinary the success of those, you know, Californian venture capitalists has been. Has the Silicon Valley mindset, you know, as Reid Hoffman would call it. A guest who's been a guest on this podcast.

21:47It was a great episode and he's an incredibly smart, brilliant person. You know, Reid, you know, sort of talked about, you know, Silicon Valley is a state of mind. It's not a place. Yeah. I can't remember when he did that, five, ten years ago. And I think, you know, that is has been the sort of the dominant innovation mindset is, you know, we've all looked at Silicon Valley. So define it for us and then compare it with our mindset. I would say it's the absolute apotheosis. It's the quintessence. It is the extreme version of capitalism where the single stakeholder wins and wins really big. And the stakeholder is the investor.

22:28Now, we often confuse the investor in these companies with third parties, VCs. The real investor in these companies are the founders. So, you know, the founders and the VCs have made extraordinary amounts of economic gains. And personal gain. The Silicon Valley version of capitalism has been perfected to the extent where a single stakeholder wins. And then the stakeholder is the investor, both the founder and the VC. And personally make billions of dollars. Hundreds of billions. So how is the mindset here different? My belief, and again, I'm going to swear and use unpopular terminology, ESG, is that multi-stakeholder capitalism is actually the only sustainable form of capitalism.

23:21And, you know, to play that game, you need to, the key's in the multi-stakeholder, you need to look at being a good neighbor. But I think the theory of inclusive innovation will happen in wards across the UK and will happen in wards and cities and towns across New Palo Alto because of the mindset. And by the way, it's not just in Europe. It's in Japan. It's in Korea. It's in Singapore. But if we look, let's say, at the extreme version of the US venture investor mindset in the shape of Elon Musk, you know, here you have an individual who is on his way to being, he hopes, you know, worth a trillion dollars personally.

24:16Right. And, you know, we're seeing as a result of the American model, these individuals like Musk acquiring so much personal capital that they then through that acquire off the charts political. And they're doing it selfishly. They're not doing it for their neighbours. And it's all, as you say, utterly selfish. No, actually, you know, it's about it's it's the sort of Trump gangsterish, you know, might is right mindset. How do we survive, you know, against that kind of astonishing power? power look i mean i i i think it having spent my first professional decades in inside that bubble for one of the better words inside the the sort of the headspace of seattle san francisco boston new york you know the the self-absorption the lack of empathy does it ever self-destruct it does and you know as as you know from an economics perspective you know i'm not an economist i'm not a scientist i'm a an english graduate you know but i've heard of schumpeter you know there's something called creative destruction and i do believe actually the The most powerful technology, which Richard Dawkins talked about in The Selfish Gene, are ideas or memes, as kids call them these days.

25:56So to be clear, Saul, you think our soil is more fertile than theirs? Because on a per capita basis, we're more innovative than all of them. And we've got 500 years worth of soil, Robert. And Japan's got a thousand and Korea's got a thousand. But we're up against these superpowers of China. But anyway, look, I'm going to focus on the positive. I really hope you're right. Stop obsessing about America. I really hope you're right. Seriously, forget about them. I'm not going to forget about them, sadly. Oh, Sol, this is absolutely fascinating. There's loads more we want to ask. So sit tight for a couple of minutes while we go to a break.

26:57I often use the North as the example because that is where I'm from. There is innovation happening, but it's happening, as we've already talked about. I go back to the in spite of, because I think, you know, and you made the point before, it's happening. But not enough. It's happening already. So then the question is, what can we add? Yeah. You know, how can we connect? You know, what are the things that we can do to nurture? But, you know, to start from the premise that it's not happening, it happens in different ways in different neighborhoods. There's a really interesting organization called Looking for Growth, you know.

27:36And to me, the most interesting thing about looking for growth is not the event that they had at the O2, but it's the litter cleanups that are happening in Stoke. You know, it's people basically taking agency and saying, I can improve my neighbourhood. But you chose to locate your business in Somerstown, right? Now, Somerstown is not some rural area. It's in the centre of London. yeah there isn't the same intellectual capital yeah and also infrastructure access to things that are free like public like the public library and things like that it's not the same in the north 100 a person in the north in the same deprivation as someone in the south it will live less they won't live as long so they so same in scotland yeah so it's even worse so how do you and if you haven't got the infrastructure and you haven't got the access to public services and things like that, like you do where you are.

28:38How do you generate that? And I'm not, again, trying to be negative because I want to know how we do this because I would love to be part of doing that. But it's really hard. Look, I think some of the things that matter here is just being long term. And I know everyone wants an immediate answer. But that's why, you know, for me, we have to sort of look forward and we have to say, like, how do we you know change and and make a positive change moving forward but we have to accept is a long-term road and then the second thing is you know you have to start with the mindset of actually what does it mean to be a good long-term neighbor and that recognizes the fact that everyone in a neighborhood regardless of their status you know is a neighbor but it's getting the neighbor in the first place though isn't it okay but but that's recognizing the fact that a business is part of a neighborhood and a business has a neighborhood responsibility you know most businesses when they think about you know in in over the last few decades there's been csr there's been esg there's been community engagement that's super abstract you know how many businesses are actually like walking outside their front door and saying you know what can i do with the the small business owner that's like 20 yards away from me versus you know giving money to you know oxfam for example so i think you know a neighborhood mentality you know is a different type of mindset but the other thing and this is why i keep going back to the evidence you know So I've spoken to a lot of leaders of councils, vice chancellors of universities, policymakers in Whitehall, etc.

30:33And they are all really surprised when you say to them, for example, there are more Colts and thoroughbreds in Leeds than there are in Oxford. And so I think we also have to start with looking at the evidence base and making the evidence base more visible, because then you can say if you're. So in our New Year episode, I started to rant at the end. And it's because actually fundamentally, I completely agree with you that I think the opportunity for the UK at the moment is absolutely enormous. I think we have all sorts of structural advantages when it comes to global competitiveness. And one of the things that's frustrating to me is I don't believe that this government is currently doing enough to take advantage of those structural advantages.

31:16I do think this should be our decade. Right. And I think one of the things I suppose I was mildly critical of in your paper is I think you do slightly gloss over some of the missed opportunities. So one of the things you talk about is you say the capital is there. Well, up to a point. So the government did this, I thought, slightly dishonest thing. They announced what they were putting into R &D over the next few years and they announced an aggregate number. But actually, when you unpick the aggregate number over a few years, it was clear that there was no real growth in the money that they are putting into research and development and innovation in the UK.

31:59And that's a tremendous disappointment, because when you start with our competitive advantages, my own view is this is, you know, the return that you make for the increment, in my view, is for the whole of the UK, you know, potentially very significant. And then the second point I'd make is, you know, recently we had I think you've invested in his rather impressive business. We had Chad Edwards here who runs Cuspey. I'm really impressive young business. He has raised most you put some money in. But almost all of his money has come from America and Singapore. Sure. Actually, you know, I want, you know, British pools of capital, you know, to be investing in these businesses, boosting the value of our pension savings, making sure that over the medium term, you know, as the jobs are created, they will stay here because you won't have the pressure to domicile somewhere else over the medium term because that's where the pools of capital.

32:56You know, we are in violent agreement here. And, you know, one of the values of a liberal democracy is that, you know, papers that are submitted to the government by independent advisory groups, of which I'm one on the Prime Minister's Council for Science and Technology for the last five or six years, which has been what, four prime ministers, six chancellors. In 2021, you know, along with a colleague at MIT, Fiona Murray, we wrote a paper on this very topic. And when I was explaining the challenge to the prime minister at the time, you know, the analogy that I used is like, we are absolutely brilliant at inventing in this country.

33:41You know, we can invent an engine. Think Rolls Royce. We can put that engine on an airplane. We can take that airplane onto the runway. But when it's time for that airplane to fly around the world, i.e. create significant economic value, scale up, whatever you want to call it, take off, we're only prepared to pay for 15 % of the fuel. So who benefits with the 85 % is the Singapore metro system, a nurse in Denmark, a teacher in Ontario and the Saudi royal family. so you know if you are focused on economic security and i think you know the chancellor when she was in opposition used the term securonomics we need more domestic capital how do you get that how do you get it so to to be fair to the last two chancellors both Jeremy Hunt and Rachel Reeves have taken you know the city aka the mansion house group which has six trillion pounds of our money that they invest on our behalf and they have said Jeremy Hunt got them to say five percent Rachel Reeves has got them to say ten percent they're saying it they're Okay.

35:00Okay. But, you know, when I talk about the plumbing being in place, the plumbing on capital. Is getting there. It's more than getting there. The Chancellor has allocated through arm's length bodies, the British Business Bank, the National Wealth Fund, NSIFT, sovereign AI units, plus the commitments from Manchin House. I would conservatively estimate£100 billion, I'll say it again,£100 billion of flow that has been committed and allocated in the life of this parliament. The key question... Hang on, but my point is some of that is not incremental flow. Some of that was already there. No, that is incremental flow.

35:47What you're talking about is R &D. I'm not just talking about R &D, I'm talking about all of it, because that£100 billion, not all of that is additional. And secondly, I would also argue, we had a conversation with the British Business Bank about this. Stephen, Welton and Co. Yes. I don't think that their risk mandate is appropriate. I do not believe they take enough risk when it comes to supporting. But here's, and I will, you know, maybe, again, at the risk of being unpopular, defend the British Business Bank and Treasury, is that it's very hard to change a culture, you know, that has established itself over decades and then sort of focus on being a sort of a proactive investor.

36:35Most, I'd say not just most, if you are a state bank, you know, the EIB in Europe, BBB in the UK, etc., what you are normally set up to do is to fix market failure. And that's what culturally these organizations have been set up to do. You know, there's not enough capital regionally. There's not enough capital going to diverse investors. So it's defensive rather than proactive. It's not just defensive. It's more than defensive. It's to fix failure. When you're then saying to people, look at the 800 Colts and thoroughbreds, why aren't you guys like first in line to invest? You're literally asking people to change their mindset overnight.

37:21I am utterly convinced, and I'm at the coalface, Robert, that the leadership in Treasury, not just this Treasury, but the previous Treasury, and at the British Business Bank, is absolutely committed to now investing with a different mindset. But it's not going to change in one quarter. Well, it needs to change fast, in my view, but anyway. So Sol, you know, mindset comes out as a really strong thing that you, you know, back as we need to talk ourselves up more. You know, you keep talking about the road ahead, not the road behind. All of the narrative from the government so far, and particularly from Rachel Reeves of the Treasury, has been defensive policy.