Do Labour's £1.3bn tech and AI cuts matter?

Good morning there,

There was a whole lot of chatter in tech circles towards the end of last week when it emerged that the UK government had shelved £1.3bn funding for AI and tech projects. Some were angry. Others thought the news was being blown out of proportion. 

I spoke to a number of founders and investors to find out how the mood music was sounding. I dig into their responses below.

Elsewhere today: 

• 20 carbon accounting and offsets startups to watch
• Venture debt funding is on the up — and it’s paving the way for M&A
• How to set up a cofounder prenup

P.S. The cost of tickets for Sifted Summit — our big London shindig in October with 3,000+ founders, operators and investors — goes up at midnight this Friday; grab your early bird discount while you still can. 

— Kai Nicol-Schwarz, reporter

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What the UK’s £1.3bn AI and tech funding cuts mean for startups

On Friday, the BBC reported that the UK government had cut £1.3bn of funding for AI and tech projects — including £500m funding for AI computing power and £800m for a supercomputer. 

Cue: a chorus of complaints from the country’s startup community. “Cutting back on compute in 2024 is the equivalent of cutting back on railroads in the nineteenth century,” said Nathan Benaich, partner at AI-focused VC Air Street Capital. 

So, why do some in the sector think £1.3bn funding — not a huge sum in the grand scheme of things — matters so much?

A number of founders and investors told Sifted that the cuts could stop the country’s tech sector competing on a global scale, as well as potentially pushing startups to relocate to more favourable locations, like the US.

“The UK ecosystem is seriously lacking in essential compute infrastructure that can support research and innovation — not just in AI, but across many other tech areas,” said former government policy advisor Ben Johnson.  

He added: “If the UK is to be taken seriously as a global player in tech and AI, it has to take bold action to reverse the decline in its computing infrastructure.” 

There are also concerns over startup funding. “It's important to consider how this apparent shift in priorities might affect investor confidence and the UK's global competitiveness in tech and AI,” said Cien Solon, founder of LaunchLemonade, a UK startup which looks to help other startups use AI tools.

Others weren’t so down in the dumps. 

“I don’t think those projects would affect the startup scene much in the short term,” said Simon Murdoch, managing partner at Episode 1 Ventures.

“Large-scale infrastructure is expensive and can become obsolete quickly, so investment in software infrastructure, and in multiple early-stage and growth companies may be a better use of taxpayers' money."

So, what’s next?

A Department for Science, Innovation and Technology spokesperson said that the government would consider future investment in compute infrastructure following the development of the AI Opportunities Action Plan — a task force led by Entrepreneur First’s Matt Clifford.

“We are absolutely committed to building technology infrastructure that delivers growth and opportunity for people across the UK,” the spokesperson told Sifted.

What form that “commitment” takes remains to be seen, and some still want the government to put its money where its mouth is. 

“While the new government has often signalled its enthusiasm about the potential of technology, it has to decide if it’s prepared to accompany these warm sentiments with serious focus and investment,” said Benaich.

— Kai Nicol-Schwarz, reporter

👀 More details of Revolut’s employee share sale have emerged: the UK fintech giant has told staff it’s launching a sale of up to $500m worth of existing shares at a valuation of $45bn, according to the Financial Times. 

• Employees who have been with Revolut for at least a year will be eligible to sell 20% of vested share options at a price of $865.42 per share, according to people familiar with the matter, reported the FT. Former employees are ineligible to take part, those people said.
• In a statement, Revolut said: “Revolut is committed to enabling its employees to share in the company's success by becoming shareholders while also providing them with regular opportunities to sell shares. To support this commitment, we are currently undertaking a secondary share sale. As this process is ongoing, we are unable to provide further details at this time.”

🇬🇧 UK investment platform Freetrade is pulling out of the Swedish market, according to a Sky News report. CEO Viktor Nebehaj says the plan is to focus solely on its home market, where it has a quarter of a million customers, and claims Freetrade has been operating in the black so far this year. 

• “Right now, Freetrade is in its strongest financial position in its history,” he said in a statement to company shareholders today. “We were profitable across the first half of the year and saw topline revenue grow 35% compared to the same period in 2023, while realising significant additional cost savings.”

💰 Venture debt is on the up in Europe (€18.7bn of it was raised during the first half of the year, according to Sifted data) — and if figures remain at current levels it’ll be a record-breaking 2024. It also means that more M&A should be around the corner. “It’s early days for M&A — we haven’t seen as much activity as we would have expected — but, given the types of debt rounds we’re currently writing, I expect we’ll see a pick up,” Sonya Iovieno, HSBC Innovation Banking’s head of venture and growth tells Sifted in an interview. 

• At Series C and above, many companies have an M&A strategy in play, Iovieno says — and are setting up “hunting lines” for potential future acquisitions, or raising debt to make a specific acquisition. “They’re getting the prices they need [now] in order to engage in M&A activity,” she adds.
• There are bids already underway in the enterprise software sector; large corporates are looking to buy startups — so, too, are PE firms, says Iovieno.
• Some startups are also “running out of runway” — which makes them easy targets. “There are some good deals to be had on the consumer side,” says Iovieno. “A few of them are running out of capital and haven’t reached profitability.”

✍️ How to set up a cofounder prenup.

🌳 20 carbon accounting and offsets startups to watch. (Sifted Pro subscribers)

🌱 Carbon accounting and offsets: early-stage market map. (Sifted Pro subscribers)

📣 Readers, we want to hear from you. What’s the best thing on European tech you’ve read recently? Drop us a line.

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September 4 | Online. Pond-skipping: How to navigate M&A in the UK & USA with ease. M&A remains a pivotal cornerstone for founders looking to successfully build and exit their businesses — so where do you begin? In this Sifted Talks, we're weighing up the key differences between the UK and USA markets to sketch out the many paths your business can take. RSVP.

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