Funding the Founders: A Roadmap of Startup-Driven Reforms to Jumpstart UK Economic Growth

Walk into any industrial estate, university campus, or coworking space in the UK and you’ll find small businesses doing extraordinary things. Our £1.2 trillion tech ecosystem1 – the world’s third largest – proves we’re a nation of entrepreneurs and innovators.

Yet we’re often losing talent and companies to overseas competitors. Or worse, seeing startups with promising ideas and technologies fail to realise their potential. Access to finance is often a factor when companies relocate. Research recently showed2 that despite 64 per cent of startups planning to increase investment and the majority wanting to stay in the UK, 20 per cent of the fastest growing companies could leave the UK in the next three years.

ACT members recently discovered that accessing publicly funded support is about to become even harder as UK Research and Innovation (UKRI) has paused new grants while potentially narrowing future availability, as reported by the BBC3.

While the UK is widely considered a top destination for tech startups, many face an array of issues when trying to scale and grow their business. For example, for small and medium-sized enterprise (SME) tech companies, funding is prohibitively complex and time-consuming. Public money comes wrapped in arbitrary criteria and bureaucratic red tape that eats up valuable time and resources and often takes too long to approve. Private investment comes with its own drawbacks such as loss of control and freedom, pressure to achieve rapid growth, and calls to relocate or geographically split the company.

Additionally, startups grapple with the ‘black hole’ of funding. This means some are stuck in between funding options as either deemed ‘too advanced’ for the smaller grants, but not advanced enough for the VCs. This isn’t just bad for business, it’s bad for our economy, our productivity, and our future.

Small companies across the UK are tackling society’s biggest challenges: advancing healthcare with AI and wearables, democratising education, and decarbonising industry. Holding them back disadvantages everyone. It doesn’t have to be this way. After extensive consultation with ACT’s members—entrepreneurs and micro, small, and medium-sized enterprises (MSMEs) from across the UK—we’ve developed clear, achievable, and a ordable proposals to transform the funding landscape and jumpstart UK innovation.

The UK is brilliant at growing startups. Now it needs to be brilliant at keeping them.

The Problem: Access to Finance

Whether they are solo entrepreneurs with breakthrough ideas or growing companies ready to scale, ACT members all agree accessing capital is the single biggest barrier to growth. Far from supporting startups and small tech companies, the current system actively holds them back, stifling economic growth, job creation, and innovation. In a series of extensive discussions with members working across multiple sectors, ACT members have identified seven high-priority problems that if addressed will cement the UK's reputation as a home for successful tech startups and drive the economic growth we desperately need.

• Public Money: — Does the best company win?
• Bureaucracy: — Death by a thousand forms
• The Black Hole: — Where UK funding disappears
• The Eligibility Trap: — 'If we had revenue, we wouldn't need funding'
• Private Sector Funding: — The equity trap
• Personal Funding: — Punishing founders for backing themselves
• Public Procurement: — Practice what you preach

For each problem this report identifies one or more affordable reforms the Government should adopt.

The Government should create a standardised, online platform for searching and applying for public sector funding to allow MSMEs to compete on an equal footing.

The Government should apply AI technology and refine processes to ensure consistent and speedy reviews of all public funding applications and encourage private sector funders to do the same.

The Government should ensure transparency on the gender gap and commit to regular reporting and reviews while encouraging more women in tech and entrepreneurial roles. It should listen to women entrepreneurs’ experiences and calls for changes that could help close the gender gap. It should also continue to dedicate large growth funds to women tech entrepreneurs.

Government must ensure that all funding awards come with consistent performance expectations and avoid placing a greater burden on selected groups.

The SEIS/EIS scheme limit should be lifted to £1.5 million to close the funding gap that currently exists in the UK.

The UK Government should consult with small businesses about options to increase the availability of public and private sector funding for MSMEs between £350,000 and £1.5 million.

Remove recurring revenue requirements as criteria for securing public sector funding

The UK Government should provide tools, including using AI, for startups to go through the process of applying for funding from private sector investors. Providing access to things like boilerplate legal documents and template due diligence forms could reduce costs and make the process much quicker and easier for hard-pressed MSMEs.

Government should create a database of private sector funding sources and schemes as well as VCs and angel investors who are looking to invest in UK businesses, on the business.gov.uk website.

HMRC should update SEIS rules to enable both entrepreneurs and their family and friends who invest in their businesses to benefit from SEIS tax relief.

Government should reform public sector procurement rules to open up all contracts to MSMEs. Contracts should be awarded on the basis of assessed ability to deliver rather than on arbitrary criteria that preferences large companies and excludes small businesses by design.

Conclusion

The UK is a tremendous place to start a tech business evidenced by the volume of businesses launched here. ACT members want to build their ideas into successful British businesses.

Government has shown it’s keen to deliver for small businesses. The Industrial Strategy has been welcomed, as has the renewed Small Business Strategy. However, worrying steps like the pausing of UKRI grants and narrowing future access to funding will make it harder for our MSME ecosystem to flourish. Picking future unicorns is an impossible task. The best way to grow businesses is to create conditions where more startups can launch and scale.

If Britain is to remain home to world-leading tech innovation, we need a business environment where companies can thrive. Addressing MSME finance issues is critical.

In this report, we’ve highlighted significant issues our members face and made recommendations that will:

• Cost little
• Involve minimal legislation
• Deliver massively for every small UK business

We urge Government to act now to help British MSMEs deliver the economic growth and thriving domestic tech sector we all want to see.