2021 is already looking like a big year for Initial Public Offerings (IPOs) in the UK, with £5.6bn already raised in the first quarter of 2021 – the biggest sum since before the financial crisis in 2008. During an IPO, companies ​‘go public’ by selling their shares on the stock exchange. This means they can raise money by selling new shares to the public. IPOs are also an opportunity for founders and early investors to cash in by selling some or all of their stake in the company.

Most IPOs happen without capturing the public’s attention. The recent Deliveroo IPO, however, was accompanied by worker strikes, investor boycotts and one of the worst first-day performances in London’s IPO history. Later on this year, another big British tech start-up, Oxford Nanopore, will be going public and listing on the London stock exchange. Given that it doesn’t have a publicly recognised brand or problems with workers, few will be tracking its IPO. But this IPO is unusual, as one early investor – the UK government – will not be getting anything.

Back in 2009, Innovate UK, a public body, granted £199,000 to Oxford Nanopore. At the time, the company was worth just £56m. Over a decade later, the government provided more support to the company by contracting them without a competitive tender process, to provide tests to analyse Covid genetic sequences – a deal worth up to £144m. When private investors put money into a company, they generally get ownership of a portion of the company in return. But because Innovate UK is a public body, this didn’t happen. Had Innovate UK taken an equity stake in Oxford Nanopore back in 2009, that £199,000 investment would now be worth almost £14.5m. This could have provided 72 more £200,000 grants to other innovative companies, without the government spending any more public money.

“When private investors put money into a company, they generally get ownership of a portion of the company in return. But because Innovate UK is a public body, this didn’t happen.”

The UK public sector spends over £14.4bn every year, directly and indirectly, funding research and development (R&D) to address some of the major challenges we face. The government does not get anything direct in return for its investment – neither an equity stake in the company nor ownership of any intellectual property (IP). Instead, where IP does arise, it is typically owned by the company and any private investors. What this leads to is a system where companies and innovations have been partially funded by public money, but the public gets nothing directly in return, despite taking on the risk of investment. Meanwhile private sector investment gets you a direct stake in the company or IP as standard.

The conventional logic is that government grants can foster breakthroughs in high-risk areas where the private sector is reluctant to invest due to, say, uncertainty around the likelihood of success or the length of time before they can expect a financial return. Innovation as a result of government investment will, in turn, generate goods and services, jobs, and increased taxes from the growing businesses and employment, thereby returning benefits to the government and the general public. However, what historically may have been true is today highly contested. Many companies are very good at minimising their local tax bills by creatively structuring their businesses, while the innovative new companies, especially the tech-based ones, do not generally create mass employment opportunities.

However, there is a growing movement, spearheaded by key thinkers like Mariana Mazzucato, to change the way that the government invests. In this proposal, the state would invest in companies in exchange for shares in that company, ownership of IP, royalties from IP licensing, or a levy on sales. This would mean that, while the government takes on the financial risk of investment, it also takes on any financial rewards. This would better reflect the role of the state in the innovation process and generate income that the government can put into investing in other companies, without spending additional money. The head of Innovate UK has openly questioned whether taking equity stakes might be the future for the organisation, acknowledging that ​“political winds are changing”.

“… companies and innovations have been partially funded by public money, but the public gets nothing directly in return, despite taking on the risk of investment.”

Building on the excellent proposal, here are two promising models for changing the way the government invests:

First, the government could create a ​‘public IP commons’. This would mean that the public (in the form of the state) would retain whole or part ownership of any IP that results from publicly-funded R&D – depending on the level of government funding put into the research. All the public IP would be available for everyone to use – but people and companies wanting to use it commercially would be charged to be able to access it.

Unlike our existing system of government investment, this proposal acknowledges the significance of public investment into R&D and ensures that any resulting IP is owned collectively. Because the IP will be more widely accessible, it would also mean that it can be used to maximise potential innovation.

That’s one option for managing the issue. The second is to create a publicly-funded and ‑owned venture capital firm, which would actively invest in companies in exchange for an ownership stake. The level of ownership would depend on the level of investment. Any profits that the publicly-funded and ‑owned venture capital firm makes, through the management and sale of its stake in companies, would be used for further R&D investment – and any additional profits could be invested in public services or distributed equally to the public as an ​‘innovation dividend.’

A new public R&D investment model would make sure that we get a more direct return on our investment, boost innovation by opening up access to IP, and take a more entrepreneurial approach to raising public money for investment. This would make sure that when companies like Oxford Nanopore achieve major success after being supported by public money, the public and the wider economy can also benefit.

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