UK semiconductor startups are being held back by a “really big block” at the scaleup phase, says the UK’s new minister of state for science, research and innovation, Patrick Vallance, with tech companies struggling to access late-stage funding, hire the right talent and navigate regulation.
“We’re suffering on the scaleup bit today,” Vallance tells Sifted, speaking as a government-backed semiconductor incubator announces its second cohort of startups — part of a £1bn semiconductor strategy announced in 2023.
While the incubator is part of the UK’s plan to help equip the country’s early-stage chip startups with the skills they need to commercialise their tech, he says, it’s at the later stages where there’s the most work to be done.
Just weeks ago, UK chip company Graphcore announced that its sale to Japanese conglomerate SoftBank had been agreed following a turbulent period; sources told Sifted the deal was worth less money than the nearly $700m investors had pumped into the startup.
“[Graphcore] had a pretty bumpy time for the past couple of years — this comes back to the point about the need for real scaleup focus in everything we do in terms of industrial strategy relating to semiconductors,” Vallance says. “We haven’t yet got that funding at a larger scale.”
Late-stage challenges
Helping startups unlock that sort of capital is something Vallance, who became a household name as the UK’s chief scientific advisor during Covid, sees as key to his new role — which he took up shortly after the country’s Labour government won the general election in July.
“We need to look at the scaleup thing to make sure that we can get companies in the future that can scale without always getting acquired,” Vallance tells Sifted — who adds that Graphcore should be considered a UK “success story” as a company “impacting” the world.
Speaking to Sifted ahead of Graphcore’s acquisition announcement, CEO and founder Nigel Toon told Sifted that the “missing ingredient” for the company has been the “scale and level of investment” available.
The most important thing the UK government can do to address this is “give confidence to large scale funds that this is an area that the government is serious about,” says Vallance.
While the previous UK government committed £1bn to the sector by 2030, the numbers are smaller compared to other national efforts.
In the US the CHIPS and Science Act includes $52bn to support semiconductor manufacturing, the EU has its €43bn European Chips Act and China also has a $143bn chip package.
The new UK government seems keen to tap private capital to make up for funding shortfalls. Last week, it announced plans to invest £8.3bn into state-owned company GB Energy to mobilise £60bn of private capital to increase renewable energy generation.
Vallance hopes semiconductor startups will be able to get the same access to late-stage funding. “Ultimately this has to be a private sector capital investment.”
Mansion House reforms — which were announced last year and are aimed at unlocking tens of billions of pension fund capital for startups — will be a “really important part of that”, he tells Sifted.
“You can see what’s happened elsewhere in the world, what a difference that’s made where you suddenly have large amounts of capital and specialist investors who can actually understand the risk and reward profile,” he says.
Nordic pension funds invested close to $200m in European venture capital in 2020 and government intervention in France has been credited with the rise of its startup ecosystem in recent times.
While there have been notable wins for the UK’s chip sector in the past year — including Pragmatic’s £162m raise and factory opening — Graphcore’s not the only startup that’s faced challenges.
Last September, Simon Thomas, founder of chip company Paragraf, said that it had cost £1m and taken 12 months to connect its new factory to the grid. “It should be easier to do,” says Vallance. “You need to have an effective way of getting grid connection.”
Building next gen UK chip startups
Challenges at the early stages have also seen many chip startups struggle, he tells Sifted — and is where the ChipStart incubator is hoping to help.
Split across two cohorts (12 startups 2023 and 11 in 2024), the programme looks to provide early-stage chip companies with access to design tools, commercial mentorship and private capital networks. While the incubator won’t provide any equity funding, the UK government has committed £1.3m to the costs of running the two cohorts.
“It’s trying to tackle one of the things we know is a challenge,” says Vallance — namely: commercialising great scientific ideas. “You start a [chip] company, but how do you do things like get the design tools you need? How do you manage IP effectively?”
Of the 12 startups admitted on the programme in 2023, Vaire Computing has gone on to raise $4.5m and Wave Photonics £4.5m.
Startups accepted on to 2024 cohort include hormone monitoring startup POM Health and chip software companies HeronIC and Nanomation.
The image for this article was used under this licence. ©Lauren Hurley / No. 10 Downing Street.
Read the orginal article: https://sifted.eu/articles/patrick-vallance-chip-startups/
