Roula Khalaf, the Editor of the Financial Times, shares her insights and favorite stories in this weekly newsletter, highlighting a significant trend affecting UK start-ups.

Investment in UK start-ups has plummeted to its lowest level since the pandemic, compelling many emerging technology companies to contemplate relocating their headquarters to the United States in a desperate search for capital. According to recent data from the research company Dealroom, British start-ups managed to raise only 16.2 billion in 2024, marking the lowest figure seen since 2020. In stark contrast, their counterparts in Silicon Valley raised over 65 billion during the same period, representing a staggering increase of 71% compared to 2023.

In interviews with the Financial Times, several chief executives of UK start-ups disclosed that the drive to attract American investors is prompting them to incorporate in the US, despite their operational base remaining in London. Mati Staniszewski, co-founder of the AI group ElevenLabs, which was valued at $3.3 billion in January this year, noted, Recognising that most venture funding comes from the US, we set up as a Delaware corporation the preferred and familiar structure for US investors. This trend highlights a significant shift, where of the 70 UK-founded, venture-backed tech start-ups now headquartered in the US, nearly one-fifth have incorporated since 2020.

This migration of companies comes at a time when Sir Keir Starmers government is emphasizing the burgeoning AI sector as a promising avenue for economic growth. Founders and investors alike are asserting that the quality of British engineers and tech professionals competes favorably with their American counterparts. However, many fledgling companies have expressed concern that the persistent challenges in accessing capital are hindering UK businesses from effectively competing on a global scale. Historically, prominent British tech firms, such as DeepMind and Arm, have been acquired by much larger international investors, underscoring a worrying trend of talent and innovation being siphoned off.

Barney Hussey-Yeo, who leads the AI start-up Cleo based in London, revealed that he is seriously considering relocating his business to the US. Having raised $140 million since its inception in 2016, Hussey-Yeo noted that the allure of moving stateside has become stronger and stronger every year. He pointed to a more favorable investor mindset in the US, coupled with the British governments recent decision to increase capital gains tax, as factors accelerating his contemplation of relocation. You reach a certain size where there is no capital in the UK and the problem is getting worse, he lamented, adding, Honestly, the UK is kinda f***** if it doesnt address [the problem].

In a similar vein, Alex Macdonald, who has just launched his second start-up, Sequel, opted to establish Miami as its headquarters while maintaining a UK subsidiary. This strategic decision was made to avoid the necessity of a future relocation. Macdonald, who also serves as an investor, advised fellow founders that incorporating in the US can provide better access to capital while still allowing them to benefit from UK talent, which he notes is available at a much lower hiring cost. The UK is a great place to start a business, but we need to see changes, such as encouraging pension funds to invest in venture capital, to foster further start-up growth, he commented.

Historically, the UKs pension industry has displayed a notable reluctance to invest in private markets compared to its international counterparts. A report by New Financial, a think-tank, highlighted last year that UK pension schemes allocated a mere 5% of their assets to private equitysignificantly lower than their US equivalents. In a recent conversation with the Financial Times, UK pensions minister Torsten Bell conveyed his commitment to urging retirement funds to invest more in private markets. This initiative is part of broader government efforts to enhance performance and consolidate the 1.3 trillion of UK pension assets.

Two young entrepreneurs, Timon Gregg and Kylin Shaw, both in their early 20s and educated in the UK, have also chosen to incorporate their businesses in the US, citing more favorable attitudes from investors and customers. US customers and investors are quicker and more willing to try things the level of ambition is just different, explained Gregg, who established his AI insurance company, Strala, in San Francisco last year. Shaw, whose health-tech venture, Hippos Exoskeleton, also relocated to San Francisco, commented on the differing mentality, noting, People are willing to take risks.

Recent research from Dealroom revealed that last year, a remarkable 57% of global venture capital was directed towards US start-ups. This marked the first time in a decade that US start-ups surpassed the 50% threshold for global funding, with investment levels climbing by an impressive 30% since 2023. In stark contrast, UK start-ups garnered merely 4.8% of global funding, reflecting a decline of 11% during the same timeframe.

Antony Walker, the deputy chief executive of TechUK, expressed concern that the UK is at risk of losing its most promising companies to international markets unless significant measures are taken to bridge the widening investment gap with the US. Without action, many high-potential SMEs will consider relocating overseas, costing the UK jobs, tax revenue, and economic growth, he warned.

Dom Hallas, founder of the StartUp Coalition, an industry group, offered a broader perspective, suggesting that the UKs situation stems from its own partial success. Weve built a tech ecosystem that is enticing for American and other international investors to explore for founders, he stated. However, we need a comprehensive strategy to incentivize them to stay.