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The UK should not be aiming to become the “next Silicon Valley” and should instead “play to our strengths” and give more support to deep tech companies, according to a fund manager at Octopus Ventures, one of the country’s most active tech investors.

Chancellor Jeremy Hunt has said on several occasions that he wants to drive UK tech sector growth and emulate the size and scale of the US, home to tech giants like Google and Facebook.

Despite the chancellor winning praise from the tech sector for his role in rescuing Silicon Valley Bank UK from collapse, he has also faced criticism for making cuts to the country’s R&D tax credit scheme.

Zoë Reich, deep tech fund manager at Octopus Ventures, told UKTN that it was “really unfortunate” to see changes to the R&D tax credit allowance, announced by Hunt during the Autumn Statement. It’s a move that has been heavily criticised by the tech ecosystem, with industry body Coadec warning it will cost startups an average of £100,000.

Unless there is a reversal in today’s Spring Statement, from the 1 April startups developing new technologies will be able to claim less tax relief, while larger businesses will receive more R&D support.

It’s a move that could particularly hit deep tech companies, which are often more research-intensive.

“At the burn rate that we often see in our companies, it could be two to three months’  worth of cash,” explained Reich.

She added that these tax credit cuts would particularly hit deep tech startups working on solutions to climate change.

“If you’re taking challenges such as sustainable planet and the 1.5-degree target, only deep tech solutions are going to get you there,” Reich said.

Jeremy Hunt first laid out plans to make the country more like Silicon Valley in the Autumn Statement. The government has since appointed five advisors to oversee key areas and said it wants to make the UK a “science and technology superpower”.

Deep tech support

Supporting the deep tech sector will be key to meeting Hunt’s dual objectives of making the UK the next Silicon Valley and a science and tech superpower, Reich said.

Reich said there is a “lack of scale-up funding” when it comes to deep tech startups looking to scale not only in the UK but in wider Europe as well.

Investors are happy to deploy capital at B2B SaaS scaleups, Reich said, giving the example of a typical Series B investment criteria of £10m in annual recurring revenues.

“The number of funders that can feel happy going into a round at that stage, have the technical ability to underwrite and say they’ve done very well, these are the remaining challenges that are there for adoption, is quite low,” said Reich.

Another issue the fund manager has with UK deep tech funding is despite them attracting large tens of millions round you “often have a lead that’s putting in a relatively small ticket size”.

There is a need for more lead investors with “specialist knowledge”, “who are happy to put in a meaningful amount of capital” and treat pre-seed as a “serious asset class”.

Back in October, Octopus Ventures demonstrated commitment to the sector by adding a further five people to its deep tech team.

“One of the beauties of the field is you never quite know what’s going to come out next,” said Reich. “You’ve got this blue skies research that suddenly comes down to a nugget of commercial potential that’s protected and then spun out.”

Reich is particularly excited about two startups in the coming year, ORCA Computing and Phlux Technology.

ORCA Computing last year raised £11.9m at Series A and received an order from the UK’s Ministry of Defence for one of its quantum computers.

“Something that gets me so excited about that company is the balance of technical and commercial in terms of Richard Murray as the CEO, he’s just got this wealth of experience from quantum within UKRI and Innovate UK.”

The UK is set to receive a £2.5bn boost to its quantum computing sector, with the government revealing the funding ahead of today’s Spring Statement.