Northern Gritstone chief executive Duncan Johnson believes creating globally significant companies requires much more than capital. He talks to PMP about clusters, talent, investment discipline, infrastructure and the opportunity presented by defence.
The UK’s ability to produce world-class research is well established – but turning that intellectual capital into businesses capable of competing globally has proved far more difficult.
For Duncan Johnson, founding chief executive of Northern Gritstone, the answer lies in creating ecosystems where research, talent and capital reinforce one another. His experience investing in deeptech and life sciences around the ‘Northern Arc’ universities of Leeds, Liverpool, Manchester and Sheffield, building a portfolio of 60 companies in four years, has convinced him that successful clusters take decades to develop and depend on much more than public funding.
That means identifying genuine areas of strength and creating the conditions in which they can flourish. Government has an important role, but so do universities, entrepreneurs, investors and employers. Ultimately, Johnson argues, businesses must be sufficiently attractive to compete for private capital on their merits.
If Britain has world-leading research, what is preventing it from producing more globally significant technology companies?
Duncan Johnson: We view this as one of the country’s key untapped assets. About 40% of our best research is going on in the Northern arc, which is part of the UK technology diamond that connects to Oxford, Cambridge and London. That is where we become super powerful.
Our technology is world beating. We have the potential to create decacorns and even trillion-dollar companies from what we’ve got here. But we’re behind the curve on commercialising that technology and creating the businesses that come out of it.
We need to focus on the conditions that allow that to happen – recruiting the best talent and building these businesses in the best way we can. There’s a lack of patience, but we also need to create the conditions where we can be globally competitive in attracting talent.
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Does that mean concentrating investment in places that are already succeeding rather than trying to spread it evenly around the country?
Johnson: The UK has followed a policy of ‘spreading the jam too thinly’. We’ve looked at innovation as effectively another name for welfare, in terms of just giving out grants around the country. That’s not innovation.
We need to be very clear. If we are investing in innovation, what return are we expecting? What are we expecting to happen?
We have to lean into developing patterns. That’s quite a venture-like approach to things, it’s quite Darwinian. But overall the country benefits from it, you have to believe that.
You can’t have everything everywhere. To have excellence, you must have non-excellence somewhere else. That’s inherent in the whole thing. Innovation investment must have a proper purpose and a very clear reason behind it.
Where does private capital fit into that process?
Johnson: Private markets are remarkably good at finding good places to invest money. That’s one of the things that has amazed me throughout my investing career. Somebody is normally already there doing something because they’ve seen the opportunity. Capital is incredibly fluid and very good at finding good things to do.
If capital is not coming to you, the market is telling you your business not good enough, for whatever reason.
Why is there not enough capital flowing into technology scale-ups? Is there a market failure that government needs to address?
Governments talk a lot about market failure. But often it is actually the market working perfectly naturally. The question is, how do you make the opportunity good enough? To me, that depends on supply-side factors – infrastructure, incentives and everything else that helps create a good place to do business.
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Can public investment intended to encourage regional growth actually make businesses less attractive to private investors?
Johnson: We’ve seen deployment-based funds in the North, and I don’t think they’re particularly helpful because they’re not focused on investing in the very best things that have the greatest chance of success.
What happens is that it perpetuates mediocrity, because you’ve lowered the bar. That stops private capital coming in. The businesses need to be of a quality that attracts capital.
You end up supporting businesses that shouldn’t exist. Of course, there will be some where everybody gets it wrong, but in the main I think geographically driven deployment distorts things and isn’t helpful in the long run.
What you want instead is the infrastructure and ecosystem around the capital that allows investment teams to lean in and help make businesses better.
What else is needed to make those ecosystems competitive internationally?
Johnson: Talent and capital are two key indicators. We can now recruit people in their twenties out of London to start or accelerate their venture capital careers in the North. That’s quite an important indicator of where this can go.
There is also a global market for talent. Eleven of the leadership teams in our portfolio companies are from the US. That is where we are looking for talent and who we’re competing with to get the best people to build our businesses.
Infrastructure matters as well. East-west connectivity across the North isn’t strong enough. If you looked at that Northern Arc belt as one conurbation, you would have about nine million people. Our Northern university partners collectively represent what I regard as the number one R&D centre in the UK.
We also need to overtly back entrepreneurs through tax incentives, rejoice in success and encourage people and investors to take risks. It’s about creating the right conditions, attitude and ambition.
We also still need strong connections to the US because, ultimately, we need US venture capital so that our businesses can grow quicker. The US is better at procuring, and their risk appetite for investing in technology is higher. This is why we are opening an office in San Francisco. It will allow our portfolio companies to access US venture capital firms with deep pockets as well as talented staff and potential customers.
Could increasing defence spending help create the next generation of British technology businesses?
Johnson: Defence spending is very interesting. I think it is a game changer. The urgency around the problems we need to address – cyber, drones and next-generation battlefield technology – is going to drive a lot of investment and activity. Some of our portfolio companies are developing technology that can be used in defence or have dual-use.
Look at Silicon Valley. It was based on Pentagon investment during the Cold War in the 1950s and 1960s. We should look at that and ask how we make sure we benefit from increased defence expenditure in the same way.
A big part of the answer is improving procurement. The current system, through the primes, can make things more expensive and take too long, so we end up with kit for the last war rather than the next one. We need to improve the speed of innovation and procurement and create a more direct line to the people who know what they need.
Are there already examples of the opportunity – and of the difficulty Britain has financing it?
Johnson: Cambridge Aerospace is an interesting example. That business was only set up two years ago. We were sending up rockets costing £1 million a pop to kill something costing £20,000. They have invented a system that costs less than the thing we’re shooting at.
It now has a 110,000 sq ft manufacturing facility, is worth about £3.5 billion and has raised hundreds of millions of pounds. We’re going to end up with a great defence business there, but the UK has not been able to produce the capital to create it. The money came from the US to do it.
I’m passionate that what we are doing is helping create an economy for the future that will give this country the living standards it needs. But if we don’t make a success of this, I’m really struggling to see how we do it.