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Innovate UK: The impact report

A deep-dive into Innovate UK activity and the impact on companies receiving funding.

Introduction

A 7x return is a big claim for any sort of investor. It would be great to see some form of calculation to justify this claimed benefit from Innovate UK.


Adam Simmonds  |  Investment Research Analyst, GovGrant

Extraordinarily Rolls-Royce PLC has received 7% of all funding, perhaps even more interesting is the fact that 4 out of 5 of the top entities are research and technology organisations (RTOs) and Catapults.


Adam Simmonds  |  Investment Research Analyst, GovGrant

Innovation is often regarded as crucial in moving humanity forward. Without innovation, we would not have many of life’s amenities that we all undoubtedly take for granted. To innovate is ‘to introduce new things, ideas or ways of doing something’ [1].

For business it becomes clear that innovation is vital. To stay ahead of competition and reap the rewards, businesses must be able to provide newer and better. Or they run the risk of being the casualties of creative destruction.

This highlights an important point, that innovation does not just happen. Many view innovation as the nice shiny thing that we get in the end, what is often forgotten is the abundance of failures that the process towards the ever-moving finish line demands. Research and development, the numerous iterations of trial and error and the brilliant ideas that shine through the struggle are what make up innovation.

Here in the UK, Innovate UK is tasked with being ‘the UK’s national innovation agency’ [2]. Arguably a big task as they work towards the UK government’s ambitions for the country to be a global hub for innovation by 2035.

While Innovate UK is not the sole source of innovation here in the UK, they are often regarded as playing a big role and as one of the best routes for the government to fuel innovation. Their mission ‘to help companies to grow through their development and commercialisation of new products, processes and services, supported by an outstanding innovation ecosystem that is agile, inclusive and easy to navigate’ [3].

GovGrant has undertaken extensive analysis of Innovate UK data and collated company accounts to assess the impact Innovate UK has through its funding activities. Although Innovate UK is touted as a great way to drive innovation and ultimately grow the UK economy, does the data show Innovate UK as having the direct impact on fuelling innovation at companies here in the UK, or could the money be better spent elsewhere?

We wanted to understand:

  1. What is Innovate UK doing to reach its goal?
  2. How successful is Innovate UK as an investor of UK taxpayer money?
  3. Where is Innovate UK’s investment having the greatest impact?
  4. How could Innovate UK improve on its investment approach?

We analysed publicly accessible Innovate UK sourced data, pertaining to funding distributed between 2004 to current date (04/01/2022). To aid in the impact analysis, we used externally sourced data from a commercial provider.

What is Innovate UK doing to reach its goal?

In July 2021, the UK government published their UK Innovation Strategy, setting out the vision to make the UK a global hub for innovation by 2035 [5]. This commitment was reaffirmed in March 2022 when the government announced plans for the largest ever R&D budget, aiding delivery of the innovation strategy and driving forward ambitions to cement the UK as a science superpower.

For reference, this budget details the increase in R&D spending, set to reach £20 billion per annum by 2024-2025, and confirms the government’s commitment for total R&D spending to reach 2.4% of GDP by 2027 [4].

Alongside this, Innovate UK is considered by the government as critical to delivering their ambitions [5]. They provide an ecosystem to support business through finding the right partners, expertise and connecting with investors, but crucially Innovate UK support directly with financial loans and grants [6].

The decision-making process in how this financial support is offered is done through competitions. Businesses that are looking for funding, apply to these competitions during their specified application window, before Innovate UK decide on who to award the funding to. The competitions can span a vast array of fields and areas of expertise. With many being very focused on certain areas, alongside more general less targeted innovation grants. Eligibility is dependent on the specific competitions, but many are open to single applicants as well as collaborations, and it is also likely that more than one applicant can receive funding from a single competition.

For some perspective, Innovate UK funding for 2020 to 2021 amounted to £885 million [7]. A considerable amount and the Government claim within their innovation strategy that ‘the programmes they [Innovate UK] deliver create £7 of economic benefit for every £1 of public investment’ [5]. A seven times/7x return is a big claim for any sort of investor. It would be great to see some form of calculation to justify this claimed benefit from Innovate UK.

Nevertheless, while this economic benefit is not specifically a return seen to the companies that they invest in, the logical hypothesis to take is that these companies will see some form of economic benefit in themselves.

Fortunately Innovate UK provides details for all projects that they have facilitated from 2004 onward.

This can be accessed through the UKRI website at the following URL: https://www.ukri.org/what-we-offer/what-we-have-funded/innovate-uk.

For the purposes of this report the data was downloaded on 04/01/2022. While the available spreadsheet relates to funded projects from 2004, it is worth mentioning that this source does contain projects associated with earlier dates.

This data will be referred to as the Innovate UK Data Set , from it we can see a total of 49,527 successful applications to 26,242 projects, from 17,698 separate entities.

While Innovate UK is ‘the UK’s national innovation agency’ [2] a very small subset of their projects have non-UK participants. As we are only interested in this case in UK Innovation these entities need to be removed from our analysis. Therefore, we have taken the company registration numbers of all entities listed within the Innovate UK Data Set and have proceeded to run these through a Companies House search.

The resulting data is referred to as the UK Registered Data Set . It relates to 15,558 registered entities. For these entities, we can see 40,264 successful applications relating to 23,847 projects.

It is understood that a negligible number of entities have been removed from this data set as a result of their respective company registration numbers not being recognised when the search was carried out.
Delving deeper into these recognised entities we are able to see the top five regions and industries by the number of successful applications, as seen in the tables below.

Top 5 Regions by share of successful applications

Top 5 Industries by share of successful applications


Arguably to be expected, London claims the highest share of successful applications with over 7,000 entities in this region. Followed closely by the South East with close to 6,500 successful applications.

When we look at this on an industry basis, we have two standout industries, both claiming over 20% of all successful applications. The Professional, Scientific & Technical industry with entities focused on fields of work such as pharmaceuticals and chemicals, claims the largest share with over 9,000 successful applications. Manufacturing is the second largest, with over 8,500 successful applications from entities working on everything from manufacturing plastics to automobiles.

Innovate UK facilitates innovation through various different means, among others they run competitions for Collaborative R&D, Feasibility Studies, SME Support and Knowledge Transfer Partnerships. However, analysing the Innovate UK Data Set shows many successful applications are not offered an award. Not all Innovate UK competitions result in funding and even without an award there will likely be an impact on innovation here in the UK. We want to narrow down the focus to see the impact Innovate UK funding is having.

Taking our UK Registered Data Set and focusing on successful applications that have funding values attached. We end up with our All Funding Data Set , this data set relates to £9,813,514,702.47 of funding, that has gone to 14,383 entities from 35,578 successful applications.

Once again, we are able to see the top five regions and industries but this time by the total value of funding they have received, as seen in the tables below.

Top 5 Regions by share of total value of funding

Top 5 Industries by share of total value of funding


What we can see is a similar picture, with London and the South East claiming the highest share of total value of funding with £2.31 billion and £1.51 billion funding respectively.

The similarities continue within the top five industries by share of total value of funding displaying the same industries as before, however, they are in a slightly rearranged order. Nevertheless, Professional, Scientific & Technical, and Manufacturing remain at the top, claiming £3.75 billion and £2.56 billion in funding respectively.

If we look at funding through a slightly different angle and look at the average funding per application, by region and industry, we see a much more different picture.

Top 5 Regions by average funding per application

Top 5 Industries by average funding per application


London and the South East are no longer the top regions in the top five, but the southerly presence is maintained among the top 5. The North East and West Midlands now take the top two spots, with £662k and £437k in average funding per application, respectively.

There is however less change when we focus on industry. Professional, Scientific & Technical, and Manufacturing still claim the top two spots with £428k and £336k average funding per application, respectively. There is some change as, Agriculture, Forestry & Fishing, and Financial & Insurance industries have replaced Information & Communication and Admin & Support Services industries within the top five.

Exploring the data further we are able to pull out the Top 5 entities by total value of funding committed, as seen in the table below.

Top 5 Entities by total value of funding


Extraordinarily Rolls-Royce PLC claims 7% of all funding, perhaps even more interesting is the fact that 4 out of 5 of the top entities are research and technology organisations (RTOs) and Catapults. This leads us to highlight that RTOs and Catapults have a total value of funding of £2,495,756,044.04 or 25.43% committed to them.

A similar point of interest is the amount of funding that has gone towards Academic entities such as Universities, with £1,027,180,677.39 or 10.47% of all funding.

As shown, Innovate UK provides a large amount of funding to many entities, but what has also been shown is that a significant amount of funding goes to certain types of entities, those being Academic institutions, RTOs, and Catapults. While these types of entity without a doubt contribute to innovation taking place here in the UK, in fact, they are responsible for some leading global innovation.

A more interesting insight might be garnered by looking at commercially minded entities and seeing how Innovate UK is supporting innovation amongst drivers of the UK economy.

After removing the ‘non-commercial’ entities, including Charities, Academic Institutions, RTOs, Catapults, Public Sector Research Establishments, and Public Sector Organisations from the All Funding Data Set , we obtained the Commercial Data Set . This data set relates to £5,871,745,836.03 worth of funding, from 29,336 successful applications, associated to 14,043 entities.

Cycling through the same process as before we can see the top five regions and industries by the total value of funding committed, as seen in the tables below.

Top 5 Regions by share of total value of funding

Top 5 Industries by share of total value of funding


London and the South East claim the top spots again, with £1.43 billion and £1.06 billion in total funding, respectively. They have also been joined by the South West in third, with £647 million in total funding.

Manufacturing has also outplaced Professional, Scientific & Technical to claim top spot with respect to share of total value of funding by industry. In addition, Wholesale & Retail Trade & Repairs has made its first entry into a top five.

Again, if we look at the average funding per application, by region and industry, we see a slightly different story.

Top 5 Regions by average funding per application

Top 5 Industries by average funding per application


London no longer claims the top spot but the southerly regions have maintained their presence. With the South West now claiming the top spot with £251k in average funding per application.

Industry rankings have also seen a reshuffle, Manufacturing has maintained its top spot, but we have the new additions of Electricity, Gas, Steam & Air Conditioning, Public Administration, Defence & Social Services and Mining & Quarrying industries to the top five.

When we look at the top five entities by total value of funding received, we can see all manufacturing focused companies with a particularly strong presence of aerospace manufacturers, as seen in the table below.

Top 5 Entities by total value of funding


Rolls-Royce PLC has had its top spot remained unchanged but is now joined on the list by three other aerospace manufacturing related companies. Amongst this, it has been accompanied by two Airbus related entities. Jaguar Land Rover Limited accompanies all of them to complete the top five. There is of course the potential that whilst these businesses are the lead, they may collaborate with other SMEs who ultimately see the benefit of the funding.

Nevertheless, large businesses take home 32.39% of all funding to commercial entities whilst only making up 5.63% of companies. Showing a clear disparity among funding levels provided by 'the UK's national innovation agency' [2] and a funnelling of Innovation funding to a relatively small number of companies.

While all of the above clearly displays Innovate UK is deploying vast amounts of funding, the real question is are they doing so effectively? Do Innovate UK represent value for money for the UK taxpayer?

How successful is Innovate UK as an investor of UK taxpayer money?

It is sometimes argued that grant-awarding bodies such as Innovate UK shouldn’t be considered as investors. We believe that grant-awarding bodies are still very much to be considered as investors. Although they do not take an equity stake, they still have a direct interest in the companies performing well and are still looking for a ‘return’.

This ‘return’ does not take the traditional form of an increase in value of an equity stake, it is a ‘return’ by other means, such as increasing economic activity and tackling societal challenges: creating more jobs, increasing spending within the economy, developing the national knowledge base, and helping confront crises i.e., climate, health, etc.

That being said, a successful investor needs to have the ability to deploy capital, achieve a return on investment, and have effective risk management.

Evidently Innovate UK has an ability to deploy capital. As previously highlighted within the All Funding Data Set they have offered £9,813,541,702.47 of funding to 14,383 recognised entities. Attention, therefore, turns to how effectively are Innovate UK deploying said capital to achieve a return on their investment.

For Innovate UK, they claim that ‘Innovation is the lifeblood of business’ and ‘Innovation delivers economic growth, new jobs and better living standards’ as well as ‘Businesses that invest in innovation have higher growth, higher productivity and export more’ [8].

As previously mentioned, Innovate UK are not your typical investors, but are an investor nonetheless. As such we should be able to measure some form of return on investment on all the funding that they are awarding.

Considering this we have defined a return on investment to include having a positive impact on one of the key measures of company impact, which we believe most accurately represent the above statements and are measurable at a company level:

  • Employee count
  • Turnover
  • Net Worth
  • Taxation

We also appreciate that Innovate UK can claim other aspects to be included in their return on investment. However, these four variables should be able to display a direct impact from Innovate UK investments and thus, how effective Innovate UK are at supporting innovation.

To assess the impact on these four variables we decided to focus on the 14,043 companies recognised within the Commercial Data Set and subsequently obtained the publicly available accounts relating to the period 01/01/2011 to 31/12/2020, for all of these entities.

Inherently we are only assessing Innovate UK funding activity that took place during this period and for companies that have a sufficient period pre and post funding (two years pre and post funding), so that we are able to assess the impact to the aforementioned variables.

This left us with a final Impact Data Set  of 3,499 recognised entities, which relates to £470,494,634.52 worth of funding.

The summary figures can be found in the table below.

The table shows that on average Innovate UK has been unsuccessful at improving the trajectory of companies they have invested in, in three out of four of the key measures of company impact.

Average growth in Employee Count per year has fallen from 21% pre funding to just 4% post funding. This is suggesting that Innovate UK is falling short of the claim to bring jobs, growth, and prosperity to all parts of the UK [5].

Similarly, average growth in Turnover per year has fallen by a less severe amount from 23% pre funding to 16% post funding and companies with increasing Net Worth has fallen to a similar magnitude from 63% pre funding to 56% post funding. The only variable to show any sign of improvement is taxation, as companies with increasing tax liability has grown from 47% pre funding to 49% post funding.

In fact, 59.5% of companies in this data set recorded a decrease in at least one of the four key measures after funding.

There is, however, still the argument that Innovate UK has had a positive impact here. Average growth in employee count and turnover is positive, not negative, and greater than 50% of the companies have an increasing net worth. Evidently there is growth, just not an improved trajectory. There is also some reconciliation that just shy of 50% of the companies have an increasing tax liability. Tax payments go to the Government, and they fund Innovate UK, so there may be some payback being achieved.

There is also the argument that without the Innovate UK investment these figures could have been worse. However, the purpose of Innovate UK is not to be an investor of last resort, they are not supposed to be stopping companies from declining, they are supposed to be supporting innovation, something which should have a positive impact on the companies carrying it out. An improvement in trajectory of the key variables is the least that should be expected.

Any investment carries risk, and just like any other investor Innovate UK should consider the amount of risk that they are taking on by funding certain companies/projects.

Innovation inherently requires failure, pushing the boundaries in any field of expertise is not guaranteed to result in success. As such being an investor in innovation means that Innovate UK must take on in many cases high levels of risk.

With respect to this, attention turns to companies in which Innovate UK has invested in that have failed or are experiencing signs of distress.

If we turn our attention back to the 14,043 recognised entities within the Commercial Data Set we can get a more accurate representation of Innovate UK’s risk management. These are all companies that have committed funding from Innovate UK, similar to receiving investment from a venture capital firm.

There are 2,270 of these companies that have dissolved after  Innovate UK funding was committed, now referred to as the Dissolved Companies Data Set , that is 16.2% of the recognised commercial business entities that Innovate UK has invested or was investing in. Fortunately, they only relate to £293,296,517.19 worth of funding.

Additionally, at the time of analysis 321 companies were insolvent, that relates to a further £123,288,404.89 worth of funding.

On top of this a further 2,309 companies or 16.4% of the recognised commercial business entities are identified as being in the weakest 20% in their size category and display risk factors that might include a deteriorating financial position, sub-optimal gearing/liquidity, and/or the presence of more recent, or significant legal notices. Thus, the risk associated with these companies is elevated and means that £925,875,094.87 worth of Innovate UK funding for these companies is at risk.

Combining these insolvent and high-risk companies means that we have £1.05 billion invested in 2630 companies identified as being at high risk of dissolution. This is 18% of Innovate UK’s funding to commercial entities.

Where is Innovate UK’s investment having the greatest impact?

Nevertheless, Innovate UK claim that they do support UK innovation, and ultimately that means that they must have some positive effect on the companies in which they invest in.

If we turn out attention back to the Impact Data Set , we can begin to highlight where some of this positive impact is being felt most.

Below are four graphs, all showing the top five regions by the share of companies in that region that have experienced a positive impact from Innovate UK investment. Split out by their respective key measure of company impact.

Top 5 Regions by share of companies with a positive employee impact

Top 5 Regions by share of companies with a positive net worth impact

Top 5 Regions by share of companies with a positive turnover impact

Top 5 Regions by share of companies with a positive tax impact


There is no one region that resides in the top five for all of the key measures of company impact. However, there are three regions that come close, all being in the top five with respect to three key company variables.

The East Midlands is in the top five based on employee, net worth, and turnover impact. In fact, it records the largest share of positive impact in turnover, with 44.2% of companies experiencing a positive impact.

Yorkshire and The Humber is also in the top five based on employee, net worth, and turnover impact. It is the region that experienced the largest share of companies to see a positive impact in net worth with 53.9%.

The South East is also in the top five based on employee and turnover impact, as well as tax impact. However, the region that experienced the largest share of companies to see a positive impact in tax is Wales with 62.5%.

The North East claims top spot in respect to employee impact, with 47.1% of companies experiencing a positive impact. This is also the only key company variable in which the North East features.

It is also important to highlight that net worth and tax are the only key measures of company impact that have seen regions experience a greater than 50% share of companies seeing a positive impact following Innovate UK investment.

If we try to explain why these regions experience the largest shares of companies with positive impact, we can look at three sets of figures:

  • Average funding value per company by region
  • Average funding cost coverage by region
  • Average current over/under funding by region

The top five regions for these fields can be seen below.

Top 5 Regions by average funding per company

Top 5 Regions by average funding cost coverage

Top 5 Regions by average current over/under funding

Looking at average funding per company, we can see that all of the top five regions in this field feature in the impact tables above. Interestingly, the South East receives the highest average funding per company, and as a result features in three of the impact lists.

The average funding cost coverage fairs well with four of the top five regions in this field featuring in the impact tables above. These being Scotland, West Midlands, South West and Yorkshire, and The Humber. The North West is the region that does not feature, even with the second-highest average cost coverage.

Lastly, average current over/under funding also has all of the top five regions in this field featuring in the impact tables.

From this, arguably region is important for the success of a company receiving Innovate UK funding. Both with respect to the differences in funding within these regions and the overall level of funding between them.

Continuing our focus on the Impact Data Set , we can replicate our analysis to highlight which industries are feeling the most positive impact. This will enable us to better understand what is required for Innovate UK funding to be successful or have a positive impact.

As such, below are the four tables, showing the top five industries by the share of companies in that industry that have experienced a positive impact from Innovate UK investment. Split out by their key measure of company impact.

Top 5 industries by share of companies with a positive employee impact

Top 5 industries by share of companies with a positive net worth impact

Top 5 industries by share of companies with a positive turnover impact

Top 5 industries by share of companies with a positive tax impact


Similarly to the regions, there is no one industry that resides in the top five for all of the key measures of company impact. However, there are two industries that are in the top five with respect to three key measures of company impact.

The Electricity, Gas, Steam & Air Conditioning industry is in the top five based on employee, net worth, and tax impact. It is also joint top by employee impact with Agriculture, Forestry & Fishing, with 50% of companies experiencing a positive impact for both.

The Health & Social Work industry is also in the top five based on employee and tax impact, but also turnover impact. In fact, it records the largest share of positive impact in both turnover and tax impact, with 53.85% and 100% of companies experiencing a positive impact, respectively.

The Wholesale & Retail Trade & Repairs industry experienced the largest share of companies to see a positive impact in net worth with 55.41%.

It is also important to highlight that all of the key measures of company impact experience at least two industries with a greater than or equal to 50% share of companies seeing a positive impact following Innovate UK investment.

Once again, if we try to explain why these industries experience the largest shares of companies with positive impact we can look at three sets of figures:

  • Average funding value per company by industry
  • Average funding cost coverage by industry
  • Average current over/under funding by industry

The top five regions for these fields can be seen in the tables below.

Top 5 Industries by average funding per company

Top 5 Industries by average funding cost coverage

Top 5 Industries by average current over/under funding


For average funding per company, we can see that four of the top five industries in this field feature in the impact tables above. These are Electricity, Gas, Steam & Air Conditioning, and Health & Social Work which both feature in three of the impact tables. The Transport & Storage industry features in two of the impact tables and lastly, Manufacturing which features in just one of the impact tables. The industry not featured in any of the impact tables is Professional, Scientific & Technical, even though companies in this industry receive on average £189,501.00 in funding.

The average funding cost coverage fairs similarly, with four of the top five industries in this field featuring in the impact tables above. These being Construction and Financial & Insurance which both feature in two of the impact tables, Health & Social which features in three of the impact tables, and lastly, Water, Sewerage & Waste which features in just one of the impact tables. The industry not featured in any of the impact tables is Education, even though the companies on average have 81.56% cost coverage.

Average current over/under funding seems to be of similar relevance. With once again four of the top five industries in this field featuring in the impact tables. Electricity, Gas, Steam & Air Conditioning, and Health & Social Work both feature in three of the impact tables. Transport & Storage features in two and Manufacturing features in one. Once again the only industry not to feature in any of the impact tables is Professional, Scientific, and Technical even though companies in this industry on average have £25.7k in over funding.

As such the argument can be made that industry is potentially relevant to the success of Innovate UK investment.

Whether certain regions or industries are more likely to see a positive impact from Innovate UK funding is not clear. It is likely that they play a part but is not the deciding factor. Certain regions/industries receive more funding than others, it is likely that these underlying differences in funding within regions/industries are more influential in seeing a positive impact.

With this being said, there are greater positive correlations between funding and certain regions/industries, therefore it is only logical that they are more likely to see a positive or larger impact.

If we turn our attention directly to companies receiving Innovate UK funding we can attempt to highlight any trends among them, in terms of the companies experiencing the largest positive impacts by key measures of company impact.

Important to mention here that only SMEs will be focused on, as typically Innovate UK funding is much more significant to these entities than to larger ones. This enables us to more accurately identify the impact of Innovate UK funding and removes the spurious results that would be obtained when looking at larger companies. Which may exhibit an impact, but this can be explained by the large movements in the key measures of company impact that these entities more generally observe.

The companies which have experienced the biggest positive impact in terms of employee count can be seen in the table below. The figure in the middle column is the number of percentage points the employee growth rate has increased by following Innovate UK funding.

Top 5 companies by impact on employee growth


Looking at the regions these companies reside in we can see that two of them reside in London, and one each for the South East, South West, and North West. Showing that this top five has a heavy southern focus.

Turning our attention to industry, we can see that two of the companies operate within Wholesale & Retail Trade & Repairs industry, and one each for Admin & Support Services, Information & Communication, and Manufacturing.

Traditionally Wholesale & Retail Trade & Repairs is not thought of as the most innovative of industries but this top five suggest they are seeing an impact from Innovate UK funding.

The average cost coverage for this top five is 65.3%, whereas the average for all SMEs is 75.8%. However, the average current over funding for these companies is £66,546.92, compared to £13,640.08 for all SMEs.

The companies which have experienced the biggest positive impact in terms of net worth can be seen in the table below. The figure in the middle column is the increase in net worth following Innovate UK funding, per £1.

Top 5 companies by impact on net worth


Looking at the regions these companies reside in we can see that three of them reside in Yorkshire and The Humber, and one each for East of England and East Midlands. Interestingly no southern companies at all.

Turning our attention to industry, we can see that two of the companies operate within Manufacturing, and one each for Information & Communication, Construction, and Financial & Insurance.

Once again, the average cost coverage  for this top five is below the average for all SMEs with 72.6% compared to 75.8%, and average current over funding is significantly lower at £1,295.72, compared to £13,640.08 for all SMEs.

The companies which have experienced the biggest positive impact in terms of turnover can be seen in the table below. The figure in the middle column is the number of percentage points the turnover growth rate has increased by following Innovate UK funding.

Top 5 Companies by impact on turnover growth


Looking at the regions these companies reside in we can see that they all reside in different regions, these being Wales, West Midlands, Scotland, East of England, and South East. A much wider region split than employee or net worth impact.

Industry shows that two of the companies operate within Professional, Scientific & Technical, and the rest split between Electricity, Gas, Steam & Air Conditioning, Construction, and Admin & Support Services. Professional, Scientific & Technical is often considered one of the most innovative industries so it is good to see an impact following Innovate UK funding.

Average cost coverage for this top five is the lowest, standing at 55.6%, significantly below the average for all SMEs. But again average current over funding is higher than the SME average at £44,875.91 compared to £13,640.08.

The companies which have experienced the biggest positive impact in terms of taxation can be seen in the table below. The figure in the middle column is the increase in taxation following Innovate UK funding, per £1.

Top 5 Companies by impact on tax


The regions of these companies once again show a slight strength of southern regions, with two companies residing in the South East and another in London. There is also representation from the North East and Yorkshire and The Humber.

Industry shows the presence of Admin & Support Services with two companies operating in this industry, but they are also joined by one each from Information & Communication, Wholesale & Retail Trade & Repairs, and Construction.

Contrary to the other key variables, average cost coverage is significantly above the SME average, with 93% for this top five. Additionally, average current over funding is below the SME average of £13,640.08, with only £3,000.55 in average current over funding.

While the above suggests that Innovate UK funding does have an impact on the key measures of company impact of entities that they invest in, it is not abundantly clear through what mechanism. There is an argument that both region and industry play a part in the benefit a company will see from Innovate UK funding, but the differences in funding likely plays the biggest role. From the above, there are conflicting arguments as to whether over-funding or cost coverage is more beneficial.

Nevertheless, while there is the case to make that more funding is better, much of Innovate UK funding seemingly goes to waste. As a significant number of their investments prove to be into entities that are arguably too risky as we explore below.

How could Innovate UK improve on its investment approach?

Focusing back to the 14,043 entities within the Commercial Data Set that Innovate UK has invested in. We mentioned before that 2,270 of these make up our Dissolved Companies Data Set , a further 321 were insolvent at the time of analysis, and 2,309 are considered to have elevated risk attached to them. And while it is appreciated that some risk is required, as with the case for any investment, it is important to see any trends in where this investment is going wrong. In other words, instances where investment has proved to be too risky.

We are forced to focus on the companies within the Dissolved Companies Data Set , as this is where we can categorically say that Innovate UK funding is no longer attached to a successful applicant.

Below are the worst five regions for dissolution both by number of companies and by value of funding.

Worst 5 Regions for company dissolution (# of companies dissolved)

Worst 5 Regions for company dissolution (funding value)

London and the South East top both lists, these two regions are the most populous, and looking at respective shares of funding provides some explanation. When considering all commercial entities London receives a 24.37% share of funding and is responsible for close to 24% of all dissolved funding. There is similar story when considering the South East, with a 18.06% share of all commercial funding and a 17.39% share of all dissolved funding.

Turning our attention to industry, we encounter some challenges. As the companies have been dissolved, it is harder to identify a relevant industry, as such 855 companies have not been classified.

Below are the worst five industries for dissolution both by number of companies and by value of funding.

Worst 5 Industries for company dissolution (# of companies dissolved)

Worst 5 Industries for company dissolution (funding value)


Professional, Scientific & Technical, Manufacturing, and Information & Communication make up the worst industries for company dissolutions, once again this can be explained by these industries being the most populous in terms of the Commercial Data Set . However, we are left with a disparity of value. Professional, Scientific & Technical takes top spot with 26.45% of all dissolved funding with only 22.9% of total funding going to this industry with respect to the Commercial Data Set .

If we look at the companies in terms of size, it is clear that the vast majority of the entities are SMEs, and only a very small amount can be classified as large companies, with 2,251 and 19 companies respectively. Indicating that these are smaller more risky investments and suggesting that they are more likely to be moon shots.

When we also consider this in terms of average funding per company, we can see that the Dissolved Company Data Set  received on average £129,205.51 compared to all commercial entities with £418,126.17 in average funding.

Looking deeper into this, we can see that the average cost coverage among dissolved entities is 70.1% compared to 68.68% for all commercial entities. As well as the average current over funding among dissolved entities £19,720.92 being significantly below the full commercial entities average with £88,908.77.

Suggesting that Innovate UK recognised the risk associated with these now dissolved companies, providing them with smaller amounts of funding, although guaranteeing a slightly higher percentage of this funding, but were less likely to over fund applications.

This all reinforces the argument that these now dissolved entities were more likely to be higher risk moon shots companies and as such Innovate UK took appropriate measures to limit the risk. It is unclear if these technologies won on the basis of a high risk moon shot but it begs the question on is there a better way to fund these ideas and is the Advanced Research & Invention Agency the answer.

An area that should be explored for improvement would be the concentration of large amounts funding to a select small number of companies. Case and point lies with the example of Rolls-Royce PLC which claims 7% of all funding or 11.73% of all funding to commercial business entities.

To further highlight this area of concern, one only has to look at the other top funded commercial entities: Airbus Operations Limited, GKN Aerospace Services Limited, Jaguar Land Rover Limited, and Airbus UK Limited with 2.76%, 1.94%, 1.28%, and 0.83% of all funding to commercial business entities. Meaning that these top five commercial entities claim 18.54% of all funding to commercial business entities.

This potential favouritism and inherent preference towards large businesses is only exaggerated further when considering that 32.39% of all funding to commercial entities is going to these large businesses, a disproportionate figure when taking into account they make up just 5.63% of companies.

While the argument can be appreciated that these entities are some of the best in the country and will undoubtedly carry out world leading innovation, it is hard to see how this much concentration of investment fits with being ‘the UK’s national innovation agency’ [2] and far from an inclusive innovation ecosystem that Innovate UK promote as part of their raison d’être.

It is fully understood that in terms of funding value, it is not a case that every company, region or industry should receive the same amount, this simply would not work. That and different projects demand different investments. But this level of funding going towards so few entities surely does not embrace all the potential innovation that the UK has to offer.

It is best to explain firstly why an over funding figure exists. This relates to the way in which Innovate UK funding is distributed.

When an applicant wins funding through an Innovate UK competition, the project in which they are participating is costed and an award is offered. The full amount of this award is in most cases not given up front. It is periodically released in tranches, often it is objective based and in some cases, it is claimed in arrears on a quarterly basis.

This, therefore, creates a potential issue of transparency between what is committed funding and what is delivered funding.

While the above analysis displays potential benefits of over funding, it is our understanding that over and underfunding, in the long run, should be attempted to be kept to a minimum. But at the time of data being sourced this overfunding to commercial business entities is to the tune of £1,248,545,790.89. This is either money yet to be spent i.e. not being utilised or is an amount that is potentially no longer going to be invested into innovation.

To get some insight into where this overspend number might end up we considered all applications in the Commercial Data Set where the project had the status Closed or Fully realised. The total over funding value was £206,570,903 compared to a total award offered value of £3,206,573,843. That is 6.44% of the total award offered remaining unpaid.

However, in terms of the number of applications, there are 12,447 applications that remain in an over funding position at their close compared to a total of 21,882 applications. This means that 56.88% of closed applications remain overfunded.

The Innovate UK model will always carry an overspend, it is good governance that the money isn’t all paid upfront. It is sometimes unclear in the published headlines from Innovate UK how much is awarded and how much is actually paid out.

Conclusion

Innovate UK is the UK’s national innovation agency. It is responsible for significant amounts of investment but in the grand scheme of R&D spending it only makes up a small percentage.

Nevertheless, Innovate UK claim to support UK innovation and by looking at their data this seems to be true. The real question revolves around how well they do this.

By our analysis they are unsuccessful at positively impacting companies that they invest in, in three out of four of the key measures of company impact that we determined should display some form of impact: Employee Count, Turnover, Net Worth, and Tax Liability.

When attempting to see trends of success, we can see that the differences in funding respective to both region and industry are likely to have an impact, as can be seen through the data on average funding, cost coverage and current over/under funding , which provide some explanation to the impacts seen.

Objectively, in terms of areas of improvement, there are a considerable number of companies that Innovate UK has invested in that have dissolved, this is the primary concern. With respect to this, there are certain regions and industries that contribute to this, but it should also be said that risk management can be inferred as being deployed primarily through smaller amounts of funding into these moon shots.

This should however not dissuade concern from the considerable amount of investment that is going into a small number of entities, and arguably the systemic overfunding that is taking place.

Finally, Innovate UK need to provide much better data and make their progress clear and transparent. When considering if they are a good investor or not, it should be very clear what their scorecard is.

At the end of the day, ‘Innovation is the lifeblood of business’ [8] and perhaps Innovate UK should turn to it to reimagine their operations because currently, it is hard to see where the ‘£7 of economic benefit for every £1 of public investment’ [5] is coming from.

It should also be considered that given that Innovate UK is publicly funded that they should provide greater detail as to how their investments are performing

 

Data sources

https://www.ukri.org/publications/innovate-uk-funded-projects-since-2004/

Downloaded Innovate UK data set on 04/01/2022.

https://www.redflagalert.com/

Externally sourced data from Red Flag Alert downloaded on 11/04/2022.

Data set definitions

1. Innovate UK Data Set
Innovate UK sourced data, pertaining to entities that have been involved in one or more projects recorded by Innovate UK between 2004 and date of data pull (04/01/2022).

2. UK Registered Data Set
From the Innovate UK Data Set, remaining entities with a recognised company registration number after a companies house search has been carried out.

3. All Funding Data Set
From the UK Registered Data Set, entities that have at least one application with a funding value attached.

4. Commercial Data Set
From the All Funding Data Set, remaining entities after the removal of ‘non-commercial’ entities based on the Innovate UK categories: Academic, Catapults, Charity, Public Sector Organisations, Public Sector Research Establishments, Research and Technology Organisations.

4b. Dissolved Companies Data Set
From the Commercial Data Set, all entities that have a health status of Dissolved as provided by Red Flag Alert, through monitoring of company statuses on companies house.

5. Impact Data Set
From the Commercial Data Set, all companies that have financial accounts available for the period 01/01/2011to 31/12/2020 and a sufficient period pre and post funding (two years pre and post, not including the year in which funding/s was received), to assess at least one key measure of company impact (Employee Count, Turnover, Net Worth, Taxation).

Technical definitions

Funding Cost Coverage
Is the percentage given by dividing the [Innovate UK] award offered by the [Estimated] total costs, as provided by Innovate UK for each application. This figure exists owing to the fact that costs for many Innovate UK funded projects are unlikely to be covered in full.

Current Over/Under Funding
Is the difference between the [Innovate UK] award offered and the [recorded] total actual spend to date, as provided by Innovate UK for each application.

Important to highlight ‘to date’ relates to the date of data pull, 04/01/2022. This figure exists owing to the fact that Innovate UK offer awards at the very beginning of projects, whereas costs accumulate over the course of the projects.

About Adam Simmonds | Investment Research Analyst
With a First-Class Bachelor of Science (BSc) in Economics and Finance, Adam’s role with GovGrant is to offer insight to the venture capital and private equity community. He brings fresh perspective, through the lens of IP, to identify value, risk and opportunity that is unlikely to have been considered by others. View profile

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Current Over/Under Funding

Is the difference between the [Innovate UK] award offered and the [recorded] total actual spend to date, as provided by Innovate UK for each application.

Important to highlight ‘to date’ relates to the date of data pull, 04/01/2022. This figure exists owing to the fact that Innovate UK offer awards at the very beginning of projects, whereas costs accumulate over the course of the projects.

Funding Cost Coverage

Is the percentage given by dividing the [Innovate UK] award offered by the [Estimated] total costs, as provided by Innovate UK for each application. This figure exists owing to the fact that costs for many Innovate UK funded projects are unlikely to be covered in full.

Impact Data Set

From the Commercial Data Set, all companies that have financial accounts available for the period 01/01/2011to 31/12/2020 and a sufficient period pre and post funding (two years pre and post, not including the year in which funding/s was received), to assess at least one key measure of company impact (Employee Count, Turnover, Net Worth, Taxation).

Dissolved Companies Data Set

From the Commercial Data Set, all entities that have a health status of Dissolved as provided by Red Flag Alert, through monitoring of company statuses on companies house.

Commercial Data Set

From the All Funding Data Set, remaining entities after the removal of ‘non-commercial’ entities based on the Innovate UK categories: Academic, Catapults, Charity, Public Sector Organisations, Public Sector Research Establishments, Research and Technology Organisations.

 

UK Registered Data Set

From the Innovate UK Data Set, remaining entities with a recognised company registration number after a companies house search has been carried out.

Innovate UK Data Set

Innovate UK sourced data, pertaining to entities that have been involved in one or more projects recorded by Innovate UK between 2004 and date of data pull (04/01/2022).

All Funding Data Set

From the UK Registered Data Set, entities that have at least one application with a funding value attached.