As America’s tech giants promise to spend big in Britain following Trump’s state visit, investors share their view on the UK’s AI and tech sector and discuss the thriving start-up scene
Donald Trump’s state visit with the bosses of Nvidia and Microsoft in tow brought new attention to the UK’s tech sector last month, following a £31bn agreement to invest in Britain’s AI capabilities.
The ‘tech prosperity deal’ announced during the state visit saw Microsoft pledge a £22bn investment into Britain’s tech sector, while Nvidia CEO Jensen Huang announced the firm’s own contribution after declaring Britain “will be an AI superpower” in an interview with BBC News.
Meanwhile, a government report earlier in the month found the country’s artificial intelligence sector is experiencing record growth, but these businesses face challenges achieving scale in the UK.
With M&A in the listed arena also on the rise, Portfolio Adviser asks fund managers for their view on the UK’s AI and tech sector and what is needed to capitalise on the growing AI start-up scene.
Thriving start-up scene
According to the Department for Science, Innovation and Technology’s AI Sector Study, investment into British AI companies reached a record level last year with £2.9bn raised across the sector.
The figures show AI’s economic contribution doubled to £11.8bn, while employment in the sector now tops 86,000 across the country.
The UK tech scene has always been a global powerhouse, producing the likes of DeepMind and ARM, and the post-ChatGPT era has turbocharged its growth.
Meanwhile, the UK’s leading universities, cutting-edge AI research, progressive policy initiatives and global talent base all meld together to create “the right platform” for world-class tech companies to start and flourish in the UK, says Rohit Mathur, investment partner at Gresham House Ventures.
“Our edge comes from world-class research, a pragmatic focus on AI safety and assurance, and a rapid step-up in sovereign compute, including Isambard-AI and the AI Research Resource (AIRR), a suite of advanced supercomputers that provides AI-specialised compute capacity to researchers, academia, and industry.”
The study also shows the growth of AI companies outside of London. Compared to 2022, there are now at least double the number of AI companies in regions such as the Midlands, Wales and Yorkshire. Mathur calls this regional growth a “game changer”.
“This growth of AI companies outside London is more than symbolic – it’s essential for resilient, inclusive growth. Bringing together local universities, local infrastructure, and local demand to create several decentralised hubs of innovation across the UK can further fuel this growth. £2.9bn of investment in British tech is the starting line and more is to come.”
This position was bolstered last month by the announced investment into the UK from Nvidia and Microsoft. Microsoft’s investment will fund the build out of AI infrastructure, data centres and supercomputing, while NVIDIA also pledged up to £11bn alongside a £2bn investment into the UK startup ecosystem.
According to Mark Costar, fund manager of J O Hambro Capital Management’s UK Growth fund, the scale of Britain’s AI innovation often goes unrecognised.
“We’re clearly number three in the world in the global technology ecosystem. There are more AI start-ups in the UK than the rest of Europe,” he says. “Everyone assumes because we haven’t got these large, dominant behemoths in the UK that these technology companies don’t exist. But that’s simply not the case.”
Investment in AI has surged globally in recent years, and the UK has a strong reputation in tech startups, which has led to funding filtering through to these companies. Oliver Brown, investment director at RC Brown Investment Management, says it’s unsurprising that capital is flowing to UK AI start-ups.
“The potential rewards, if successful, are substantial,” he says. “This is also fuelled by the fact that many believe we lie at the foothills of AI transforming the way we run businesses.”
The investment appeal is further validated by the investments announced in the last few weeks by the US’s major technology companies, who are establishing significant UK operations.
“All of the major technology companies have very significant presence here, because the nerve centre of their AI is right here in London,” adds Costar.
Scale-up challenge
Despite the growing start-up scene, however, the government report highlighted issues further down the line when these firms seek to scale.
Reasons offered for the scale-up challenge include a lack of larger scale growth capital, a degree of risk aversion among existing UK investors, and a lack of experienced investors in the UK.
“It’s true that it’s harder to scale tech businesses in the UK than, say, in the US,” says Nick Shenton, co-manager of the Artemis Income fund. He notes the addressable market is only a fifth of the size of the US – a structural impediment that “must be recognised”.
Nick Shenton, co-manager, Artemis Income fund
“Another challenge is the relative lack of knowledge on how to scale. In Silicon Valley success has generated real understanding of this issue, which then gets reinvested into the next generation and creates a virtuous cycle.”
“Another challenge is the relative lack of knowledge on how to scale. In Silicon Valley success has generated real understanding of this issue, which then gets reinvested into the next generation and creates a virtuous cycle.
“Risk capital is another consideration. The US has more people prepared to take venture capital equity stakes and back ideas, knowing they need outsized winners to generate attractive returns.
“Finally – and most controversially – we might say there’s a cultural phenomenon, in so far as the UK is currently a place where success is arguably more likely to be resented than celebrated. This is unfortunate, because we have talent in abundance.”
Despite these challenges, Costar says the problem is fixable.
“The innovation is there, the technology is there, and the thriving ecosystem is there. Sometimes the scale-up landscape isn’t quite there, but that’s a lot easier to fix than having the opposite problem – having the funding but not the technology, innovation, and ecosystem.”
Brown adds there’s a prevailing view that promising UK companies get snapped up too early by their larger US brethren, given the size and scale of the US and its economy.
“Having said that, the size of the US market is such that in a race to the top, perhaps these UK companies benefit from being bought and their growth accelerated,” he says.
The FCA has also announced reforms to the UK’s listings regime in recent years in a bid to stem the flow of companies moving out of the UK.
“We view the FCA’s listing reforms as broadly positive and hope they make London a more attractive venue for companies wanting to raise money,” Brown adds.
“We also note the LSE’s new private companies trading platform, PISCES, which may well aid private companies in scaling up whilst allowing investors limited periods of liquidity to trade shares.”
For long-term growth and for building enduring companies, focus should be on sustainable revenue models, measurable impact, and assurance and trust as the next competitive moat, according to Gresham House Ventures’ Mathur.
“Those companies that bake in ethical, explainable, compliant AI will be those that can scale into regulated and international markets. AI assurance isn’t just a regulatory checkbox – it’s a branding, risk management, and trust mechanism.
“Some great UK companies already scaling by adopting this are Eleven Labs (AI to create ultra-realistic, emotionally expressive speech in any language or accent), CuspAI (using frontier AI models to design new materials and molecules for climate, energy, and healthcare breakthroughs), Wayve (pioneering end-to-end AI for autonomous vehicles), and Tortus (voice-first AI agents that assist doctors in real time, automating documentation and unlocking hands-free workflows, and already saving the NHS millions).”
M&A
These scaling difficulties have partly contributed to a surge in merger and acquisition activity, with UK tech companies becoming attractive targets for overseas buyers at discount valuations.
In June alone, a frenzy of tech takeovers were announced in the space of 24 hours. London-listed semiconductor firm Alphawave was bought by American chipmaker Qualcomm for $2.4bn, followed by US-listed IonQ purchasing Oxford Ionics for $1.1bn.
Scientific instrument maker Spectris also agreed to a £4.2bn takeover by US private equity firm KKR.
In the last 20 years, over 150 companies have been taken out from the UK Tech sector, notes Vishal Bhatia, who runs the JOHCM UK Growth fund alongside Costar.
“One of the bids for a company in our portfolio recently was at a 169% premium, and Mark and I were still disappointed by that offer. You’re getting table-thumping premiums on day one and you’re seeing any investor bite your hand off, but we still remain disappointed and irritated by those kinds of numbers.”
Mark Costar, fund manager, UK Growth fund, JO Hambro Capital Management
“People are tripping over themselves to pay eye-watering multiples to access some of these strong secular growth themes in other global markets, but in the UK you can find those very same exposures at table-thumping discounts.”
“People are tripping over themselves to pay eye-watering multiples to access some of these strong secular growth themes in other global markets, but in the UK you can find those very same exposures at table-thumping discounts,” Costar adds.
“We had another [holding bought at a] 120% premium last year as well. These are triple-digit premiums, and in some cases still not necessarily reflecting full valuation for the assets that are involved.”
“You can find global leaders in their respective niches,” he adds on the sector. “These aren’t tin-pot businesses – they actually are the clear market leader in their particular technology niche or area of operation.”
“The thing is, there is a host of evidence that the intellectual property is here in the UK,” adds Bhatia. “International competitors are coming and taking over that IP at ridiculously cheap multiples, and we still ask the question: ‘Do we have IP in the UK?’ When there is enough evidence to conclusively determine that there is enough IP in the UK.”
Despite some of the challenges, fund managers still see significant opportunities within the UK’s tech landscape.
Brown points to successful investments like Darktrace, the cybersecurity company acquired by US private equity firm Thoma Bravo, and Raspberry Pi, which debuted on the London Stock Exchange last year with its low-cost, energy-efficient computer boards positioned to benefit from AI ecosystem growth.
Guy Feld, co-manager of IFSL Marlborough’s growth funds, acknowledges that while “the titans of AI in terms of large language model development are the US and China,” the UK can carve out niches in cybersecurity, gaming, medical technology, and fintech.
“The reality is that we haven’t really had AI-hype stocks in the UK like those seen in the US, simply because we don’t have the analogues that play into themes like large language models and AI data centres,” he says.
“But we do have UK-listed software plays on machine learning and automation – arguably less glamorous forms of earlier AI, but technologies that deliver real cost and efficiency benefits.”
Overall, the UK’s AI and tech sector will benefit from recent AI spend in the short-term. However, the challenge to build sustainable long-term growth remains.
