Dom Hallas Full Interview
A conversation with Dom Hallas
Thinking about the current government, do you think that their legislative initiatives have helped or hindered startups so far?
It depends how you define the current government. If you take the policy landscape in the United Kingdom over the past 14 years, under the Conservative-led administration, it's reasonable to say - though you have to whisper it quietly these days - policies have been pretty good for startups. The whole ecosystem has gone from a few people in a building in Shoreditch to a success story so good that it's the first line of every government minister's speech when they talk about the growth in the economy. The government has played a role in that - whether by incentivizing investment, supporting on talent, or in the regulatory environment.
Open banking, which came out of a regulatory intervention by the CMA, has resulted in an ecosystem and huge market investments going to the companies - a really successful intervention in the space. A range of other regulatory interventions have been less successful. That's why it's so hard to say if a thing is good or bad - because it depends on the market, on the context, and on the specific set of circumstances. Part of the reason open banking was such a success story was because the regulator chose to shape a market in favour of competition in an area where the UK startup ecosystem had a real chance of success.
Policymakers could actively kneecap foundation model developers in order to open up competition, but how likely is it that we would miraculously see 10 foundation model builders pop up in the United Kingdom? It's looking unlikely. Whereas in the fintech context, because the UK was already pretty good at this space, opening up domestic competition was a logical way of facilitating our own ecosystem development. Policymakers aren’t always very strategic in thinking about markets and shaping the regulatory environment to support those where we have a pretty good chance of succeeding.
It looks increasingly likely that we’ll see some kind of UK AI Bill - at least in the medium term. What does the government - whether this government or the next one - need to do to get this right?
AI is a huge economic opportunity for the UK - we’ve written a lot on that in [Startup Coalition’s] reports. But where will the economic value accrue to the UK? In my mind the value will be in the group of companies building on top of foundation models - the middle layer of tech firms using APIs to integrate LLMs into their products and perhaps also fine tuning AI models [by further training them on a smaller, targeted data set to suit their own specialised use cases]. It looks like a UK AI Bill would mostly focus on foundation models - that's what’s been described by Peter Kyle and roughly what has been outlined in the white paper consultation response. So then the question is, what would it look like to use regulation to build a flourishing market for that middle layer? We can learn lessons from other examples where developers are building on top of foundational tech, like app stores and the experience in the cloud market. I'm not saying that we have the right answer in any of those markets yet, but we can use them as examples.
It feels like we’re living in the age of the regulator - competition regulators in particular seem to be becoming more activist at the moment, especially when it comes to mergers and acquisitions. On top of that, the Digital Markets Competition and Consumers Bill will change the notification requirements for investments which give the Competition and Markets Authority more powers to regulate. One perhaps less discussed area of the bill is its provisions on mergers & acquisitions. How has regulators becoming more activist affected exit strategies for startups?
Sometimes in the policy world we can become obsessed with the idea that policy is the root of all evil or the route of all success, but the reality is the exit market is bad because the investment market is bad. That creates a few challenges that have occasionally been exacerbated by regulatory interventions.
Realistically, venture backed technology companies have three routes to exit: public markets, private capital; or selling to a partner of some kind. If you look at the regulatory landscape over the past few years, we've seen those routes close up in different ways.
The first route I mentioned was public markets, via an IPO. These are just difficult in general [in the UK], and have been much more difficult in recent years. The government has been doing some laudable work on this, and the progress made on listings rules in the UK is utterly remarkable in a short period of time. Five years ago, people would have died in the ditch before they allowed dual class shares on UK exchanges. Now, almost all barriers have been cleared to dual class shares and the rest of them will be cleared in due course. But IPOs are still fundamentally tricky because the public market environment in the UK is relatively hostile to technology growth companies.
On the second route - the economic environment makes raising private capital tough at the moment. On top of that, while it’s very reasonable that the government wants to retain power to monitor investments and acquisitions where they can impact national security, it’s also important to recognise that the NS&I [National Security and Investment] Act limits the capital available to buy companies.
And then the third route is acquisition, but that’s also becoming harder as the Competition and Markets Authority (CMA) is taking a more interventionist approach.
The cyclical capital that comes from companies growing, scaling, exiting and then recycling that capital into the ecosystem, creates value and spurs innovation. But if you block up those routes to exit, the market becomes constipated. You have to be able to exit and get the capital back into the system having exited. There is a fundamental problem at the moment, which is that that route isn't necessarily available and a part of that is direct regulatory interventions that we've seen.
We hear a lot, from the government, Labour, regulators and different types of companies about how to create the right environment for innovation. But cutting through all that noise, what can this government, or the next one, helpfully do to support startups?
The word "innovation" seems to have become a miraculous defensive weapon in policy conversations - a substitute for "help my company do well" or "help my particular policy perspective". Even competition regulators assume they're the guardians of innovation.
But while startup ecosystems are very diverse, there are three basic building blocks needed for them to succeed: access to talent as freely and openly as possible, at a reasonable price, access to capital to be able to build stuff, and then a regulatory environment that is as free from bureaucratic control as possible, whilst protecting the people who need to be protected. Government funding programmes can be helpful, but really effective policy interventions need to come back to those three things. When you get into stuff that's in a specific part of the economy or part of the technology economy it can have more impact but, for the most part, the building blocks of the ecosystem are pretty much set. All policy professionals need to do to make the case to the government is to be able to provide evidence on those topics, and then allow startups to tell their stories that provide colour that reflects those challenges.