Blog post - Go Fund Yourself: Place-Based Funding and Innovation-Led Enterprises in the Leeds City Region
Written by Dan Whetton and Sherif Youssef
A growing chorus of voices in the policy arena and scholarly community argues that innovation-led enterprises are vital for making the UK a science superpower and accelerating future economic growth. However, small and medium-sized enterprises (SMEs) in ‘left-behind’ cities and towns are locked out of growth circuits due to significant funding gaps mirrored by the inequalities related to economic geography. Hence, designing and delivering place-based funding support for SMEs is integral for the region’s future local economic prosperity. Aiming to better understand the funding landscape of high-growth start-ups in the Leeds area, university researchers have recently collaborated with several local entrepreneurs, investors, and local incubators to investigate the funding gaps in the UK and the necessary policies to develop place-based funding support for local SMEs.
Recent academic research has uncovered that Yorkshire and Humberside, the East Midlands, West Midlands, and North-West receive much lower equity investments than warranted by the quality of potential demand in these regions. By contrast, London and the North-East receive relatively higher actual equity investments compared to their potential demand. Moreover, foreign investors primarily allocate their investments to London, the South-East, and the East of England. Conversely, investors residing outside of these regions allocate a comparatively smaller proportion of their investments in their respective home regions, again showing a preference for the South-East. Empirical evidence since the onset of COVID-19 indicates a similar trend, revealing a substantial funding gap across various regions within the UK. As a result, this has hindered SMEs from scaling up their operations, created further barriers to entering foreign markets, and contributed to the productivity conundrum facing the UK. Most UK technology unicorns are centred in the city of London, where they have a substantial entrepreneurial ecosystem positioned around vigorous private investment networks, access to Russell group university networks such as the Universities of Oxford and Cambridge, as well as the availability of skills and talent that is predominately centred in the South-East of England.
Nevertheless, ‘left-behind’ cities and towns in the Leeds city region are grappling with crucial infrastructure investment and attracting private investors to channel the necessary investment for potential ‘unicorn’ SMEs. The Khalifa Review of UK Fintech published in 2021 highlights the potential of UK fintech services and notes the abundance of fintech talent spread throughout the country. One of the main policy recommendations for maximising the potential of this sector is the need to focus on scale and supporting regional specialisms, especially the significant intellectual property being created in universities. Such opportunities can be created by supporting citizens and small businesses to access more, better, and cheaper financial services. This research emphasises the need for industry-wide coalitions on key issues such as financial inclusion, SME lending, open finance, and digital ID. This paper illustrates the growing consensus in the policy arena, contending that SME innovation, competitiveness, and growth must be interconnected across the UK.
What is being done?
Prior to Covid-19, the government had introduced several initiatives to tackle the North-South divide, including the Enterprise Investment Scheme (EIS) and ‘Northern Powerhouse’. Backed by government amendments in 2015, the EIS emerged as a successful catalyst for attracting angel and syndicate investments, notably through venture capital trusts. Despite its triumphs, a regional imbalance in funding allocation persists, especially in later-stage ventures. The Northern Powerhouse initiative gained momentum in counteracting the North/South economic divide. Articulated in various policy statements, it aspires to transform Northern growth, rebalance the national economy, and position the North as a global powerhouse.
More recently, several initiatives are being implemented to support the Leeds area. The Leeds Investment Arc is a strategic development plan by the Leeds City Council designed to stimulate economic growth and transform the landscape of the Leeds city region. This initiative focuses on enhancing infrastructure, attracting investments, and fostering sustainable development across a geographical arc stretching from the city centre to key growth areas. One such area is Nexus Leeds, a state-of-the-art innovation hub on the University of Leeds campus that serves as a vibrant community for innovators and entrepreneurs. Other components of the Leeds Investment Arc include improved transport connectivity, the development of housing and commercial spaces, and the creation of vibrant, mixed-use communities.
Furthermore, West Yorkshire is set to become a hub for innovation and economic growth with the establishment of one of the UK’s twelve investment zones. This initiative aims to propel West Yorkshire into a leading position in health tech and digital industries. The plan is expected to unlock over 2,500 jobs and attract over £220 million of investment, turning West Yorkshire into a hotbed of health tech and digital innovation.
Next project steps
This project aims to uncover the changes in the funding landscape for high-growth start-ups after the COVID pandemic and propose evidence-based solutions to build and scale up place-based funding support for such organisations in the Leeds city region. The project researchers have already organised practitioner-led workshops to answer these critical questions. There is potential to generate future research and collaborative work between the University of Leeds, Leeds City Council, and various city partners.