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26 April 2023

Why Rishi Sunak’s “Unicorn Kingdom” is a fantasy

If the PM wants an economy built on high-growth start-ups, it’ll take more than a fun name.

By Will Dunn

I have been informed by a colleague that if a polyamorous couple invites another person into their relationship for a ménage à trois, that person is referred to as a “unicorn”. The implication, if I understand correctly (there is a strong chance I don’t) is that such people – attractive and attracted to both partners, capable of making such a situation an uncomplicated success – may sound horny, but they are so rare that it’s doubtful whether they exist at all.

Let’s return immediately to the business parlance with which I am far more comfortable, in which a “unicorn” is a high-growth company (usually in tech) valued at over $1bn. For investors and politicians they are beautiful, magical and all too often unattainable. Neverthless, as Rishi Sunak told a “Business Connect” event on Monday, they are a key element in the government’s plan for a higher-growth economy: it hopes to breed more of them using a programme called – the Prime Minister paused on stage to double-check this with an aide – “Unicorn Kingdom”.

The UK government website for the “Unicorn Kingdom” programme lists eight of the unicorns that this country has already created. The first of these Great British success stories is the neo-bank Revolut, which was founded by the Russian-born financier Nikolay Storonsky after he’d worked as a derivatives trader for Lehman Brothers and Credit Suisse. Revolut doesn’t have a UK banking license, so it uses an EU license issued by the Bank of Lithuania. It achieved “unicorn” status after a 2018 funding round led by DST Global, a venture capital firm based in the Cayman Islands. Revolut was valued at $33bn in 2021, but this week a major investor, Schroders, slashed that valuation by 45 per cent.

Also on the government’s unicorn list is CMR Surgical, a robotics company, which reportedly laid off a third of staff this month; the payments company, which in December reduced its internal valuation to $11bn, having separately been valued by investors at $40bn; and the cryptocurrency financial services provider, which has closed its London-based asset management arm and sacked 28 per cent of staff.

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Being a unicorn is clearly not plain sailing, as some of the people who attempted the relationships described in my opening paragraph might attest. Sunak is right, however, to say that they can bring very real benefits to the economy. Revolut may not pay very much tax (£9.9m in 2021, which is less than half as much as Sting; there is no government initiative to create hundreds more Stings) but it employs thousands of people. High-growth companies are disproportionately big creators of new jobs, and if they’re tech companies these jobs are often well paid.

The problem is that while Rishi Sunak’s ministers have done a great job of travelling to Silicon Valley (perhaps they’ll start some tech businesses of their own!), they have ignored or actively sabotaged the systems that grow such companies.

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Leo Ringer, founding partner at the venture capital fund Form Ventures, says the “building blocks are there, but the ambition could be a lot greater”, especially when the US and other countries are committing much more significant fiscal support to innovation. “The elephant in the room,” Ringer says, is the question of access to Horizon, the EU’s €95bn research and innovation fund, which remains unresolved – a situation he says “continues to baffle many people in the innovation community”.

At the same time, the tax credits for research and development that supported early-stage innovation in the UK economy were cut by Jeremy Hunt in his Autumn Statement last year. Ringer says “this will take about £2bn out of UK [small and medium-sized enterprises] over the next five years, which is a very big number in the context of UK fiscal support for innovation”.

[See also: Rishi Sunak now needs Suella Braverman more than ever]

When a company like Revolut does succeed in raising large amounts from private investors, it might then seek to fund further expansion by listing on a stock market through an initial public offering (IPO). But if they do so in London, they will have to contend with the “UK discount” – the widespread undervaluing of shares in British companies.

“The UK discount effectively says that you would have to give away more of your company in the United Kingdom to raise a fixed amount of money than you would if you brought an identical company to markets in Amsterdam, Paris or New York,” explains Simon French, managing director and head of research at Panmure Gordon. French estimates the adjusted discount on UK-listed shares is 18 per cent compared with the rest of the world (he’s also written an excellent Twitter thread on the reasons for the discount). This means that a company such as Revolut might be able raise 12 times its earnings by listing on the London Stock Exchange, but 30 times its earnings in New York.

“There is now a prevailing narrative in the UK that it’s a tough place for tech firms to list,” agrees Ringer, “and whether you agree with that assessment or not, it’s almost at the point where it’s becoming self-fulfilling.”

There are a number of things a country misses out on if its unicorns head overseas to raise capital, including what French describes as a “halo effect” that leads companies to register intellectual property and employ senior staff in the country where they’re listed, as well as lower returns for domestic investors. The UK tech sector grew around companies like Arm – which is now owned by Japanese investors and will this year pursue a US-only listing. Without access to capital in the UK, new, high-growth companies are encouraged to head elsewhere, with implications for jobs, taxes and government spending.

There is considerable energy going into fixing the UK’s start-up ecosystem – at least four reviews are being conducted – but French says the underlying problem has yet to change. “Stuff is happening which suggests the government’s got the message, but has it thus far convinced anybody in terms of the outputs? No.”

[See also: PMQs today: Rishi Sunak’s non-dom comment leaves the PM exposed]

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This article appears in the 10 May 2023 issue of the New Statesman, What could go wrong?