The Guardian view on venture capitalism: investor profits are no industrial strategy

Higher returns for backers do not guarantee national prosperity. Public investment should develop domestic capabilities and meet urgent social needs

Britain keeps selling its most valuable companies. The Financial Times calculates that 300 went to foreign buyers, mostly American, over the past decade. What if innovation were scaled up to serve social needs here rather than US investors’ profits? That is the provocation issued by the thinktank Common Wealth in a paper titled We Aren’t the Champions, which takes aim at the UK’s venture capital (VC) industry.

The authors say that as long as the UK is subordinated to US cash, getting startups to a heavyweight size will be a sisyphean task. Britain’s tech pioneers are often sold before they become giants. DeepMind, founded in London in 2010, went to Google just four years later. Britain’s venture capitalists might argue that they are in it for themselves, not for building up British tech.

The conventional wisdom is that if startups are struggling to grow, the problem must be that they lack capital. That is why Rachel Reeves, as chancellor, wanted pension funds to invest in UK assets. But the paper says that this risks making things worse. Putting cash into startups risks inflating eventual sale prices without securing British ownership or control.

The London School of Economics’ Nils Peters and David Kampmann expose a circular logic. The UK lacks tech giants that can acquire successful startups, but selling those startups overseas helps perpetuate that problem. The authors say US and European incumbents won big from the exit of the 38 biggest UK VC-backed tech firms between 2010 and 2023, including businesses at the forefront of AI, fintech and biotechnology.

Selling British technology companies abroad can enrich investors while thwarting ambitions to build domestic champions. The social costs also matter. A system geared towards maximising capital gains favours businesses that promise lucrative exits. The paper argues that this has encouraged surveillance technologies, from wearables to AI chatbots, and exploitative gig platforms, concentrating wealth among a few rather than delivering social benefits.

Gordon Brown is right: Britain should retain ownership of its innovations. But there is a difference between financial returns and industrial development – and improving the former doesn’t necessarily deliver the latter. Although industrial policy has returned rhetorically in the west, this has not translated into meaningful policy. The Common Wealth paper suggests that is a mistake and argues for democratic control over innovation, with investment directed towards social purposes.

The paper’s preferred capitalism is one that is historically associated with the global south: curbing extractive intermediaries, limiting foreign capital and building domestic capacity. India’s publicly funded space programme and Ethiopia’s state-owned airline show how sustained public investment can support homegrown capabilities rather than hastily readying businesses for sale.

Most daringly, Brazil linked universal healthcare for 215 million people to industrial policy, using public purchasing, laboratories and technology transfer. The payoff came during the pandemic: by August 2021, almost three-quarters of Covid vaccine doses administered had been produced at home. Brazil shows that a state can finance, research and produce a universal healthcare system that creates employment and productive capacity. It is surely a powerful idea that providing for people could be a way of sustaining output. Making the fulfilment of social needs a motor of economic development would give Labour a purpose beyond managing scarcity.