UK Warns of AI Startups Leaving Due to Capital Shortfalls, Regulatory Complexity

Promising artificial intelligence (AI) startups created in the U.K. are at risk of leaving for other countries like the U.S. due to lack of adequate capital, regulatory complexity and differences in culture, according to a British government committee report.

“The U.K. risks being an ‘incubator economy’ for other nations, as innovative British technology firms pursue greater growth potential in other markets or seek acquisition by foreign companies,” the Communications and Digital Committee of the U.K.’s House of Lords’ Communications wrote in the report released Monday (Feb. 3).

One example cited by the report was DeepMind, whose CEO shared a 2024 Nobel Prize for an AI model that solved a half-century biology challenge. Instead of going solo and becoming a British powerhouse, it sold itself to Google in 2014. DeepMind developed Google’s flagship AI model, Gemini.

Today’s most advanced AI models and systems are being developed and scaled in the U.S. by OpenAI, Google, Meta, Anthropic, Amazon, Nvidia and Microsoft, among others. China has its own AI leaders in Baidu, Tencent, Alibaba and many more. France’s most prominent AI startup is Mistral.

The consequences of the U.K. falling behind are “significant,” the report stated. It could lead to “decreased global competitiveness, weaker economic prospects and a ‘brain drain’ of talented individuals” as AI advances rapidly. The report said 47% of AI-related revenues in the U.K. are generated by businesses with U.S. and other foreign owners.

Nathalie Moreno, a partner specializing in AI at Kennedys law firm in London, told PYMNTS that the report “underscores a growing gap between the U.K.’s ambition and execution in AI and tech policy. She added that “fragmented government support, limited access to capital in the U.K., risk-averse investors, and regulatory uncertainty are driving startups abroad.”

There have been attempts by the U.K. government to nurture AI startups in the form of financial reforms, tax credits, investment incentives and pro-innovation initiatives. But these disparate programs have resulted in an “overly complex spaghetti of schemes” that are delivered piecemeal and “fail to offer a coherent pathway of financial support,” the report said.

Moreno also said that the U.K.’s “sector-specific approach” to regulating AI, which it deemed as more pro-innovation than the EU’s blanket AI Act, actually creates “uncertainty” among startups. Under former Prime Minister Rushi Sunak, the U.K. tasked existing regulators in different industries to oversee AI based on a set of values with discretion on how to apply it.

Jiahao Sun, CEO of British AI startup FLock.io, told PYMNTS that regulatory “ambiguities” make it “difficult for startups to plan long-term strategies.” Navigating “complex compliance requirements” also requires “significant resources” that a startup might rather invest in innovation, he added.

Simon Barnes, professor of practice in entrepreneurship and innovation at the Warwick Business School in England, pointed to capital and cultural obstacles as well. Barnes is a former venture capitalist.

“In the U.K., we have a general cultural belief that we are very good at inventing things, but not particularly good at commercializing them,” Barnes told PYMNTS. “There’s a constant fear that in every wave of technology, we are often at the forefront of developing it, but then we hand it to other countries to make a big commercial success of it.”

The British startup mindset is also more risk averse, which Barnes said was due to having less venture capital than the U.S. In California, for instance, a “very large proportion” of the world’s venture capital is raised and invested just in that state and likely exceeds the total for Europe, he added.

“The U.S. approach is more, ‘Let’s go for it,’ or ‘[Go] big or go home,’” Barnes said. “It’s easier to take risks when you have a lot of money behind you.”

According to the report, early-stage funding of up to $15 million in the U.K. is on par with Silicon Valley. But for rounds of $15 million to $100 million for “breakout” startups, and over $100 million for scaling up startups, the U.K. is “significantly behind” Silicon Valley.

But Tom Firth, a Brit based in New York who is founder of Cotera, said the risk aversion personality broadly characterizes the population.

“Britain is a terrible place” to start a software company like an AI startup, he told PYMNTS. “I say this with sadness, but it’s true.”

Firth explained that the culture is “not optimistic,” “not ambitious,” “not confident,” “risk averse” and the U.K. itself is a “small market” so startups with grander ambitions have to go to bigger markets to thrive.

Moreno said that to prevent further brain drain and capital flight, the U.K. will need to create a clear AI and tech investment strategy to unlock domestic growth capital for scale-ups and simplify regulatory frameworks.

“The government should commit to scaling these efforts rapidly, ensuring startups have a clear, accessible pathway to regulatory compliance and innovation support,” she said.

Moreno added that the U.K. should also deliver on its recently announced AI Opportunities Action Plan, which pledges to ramp up AI adoption across the U.K. through world-class research, startup scale-up support, AI governance leadership and other actions.

“The U.K. still has all the right ingredients to be a global leader in AI and tech, but without bold reforms, it risks becoming a training ground for companies that scale elsewhere,” she said.

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