The British Business Bank’s much-hyped £25 million (yes, “million”) investment in Kraken is a perfect example of spin over substance.
The Business Secretary, Peter Kyle, has long been on a mission.
In January, speaking at the World Economic Forum in Davos, he promised to “bet big” and “pick winners” when taking direct government stakes in growing businesses. Now he is doubling down, with a focus on tech companies.
And on Monday, he took to X to respond to The Times’ criticism of his plans (“Labour’s ‘aggressive’ stakes in UK firms recall the follies of the 1970s”). Fair play to him for fighting back. Unfortunately, I think that he just dug a deeper hole.
His opening point was that “the real risk for the UK in this economy isn’t that it takes equity stakes. It’s that it doesn’t – while every major competitor country does.”
This was not a great start. The fact that governments in other countries often take equity stakes in private businesses does not mean that the UK should do so too. In general, if your competitors are making mistakes then it is better not to copy them!
He then cited a couple of examples which undermine his case.
First, “since 2025, the US has committed $10 billion in exchange for equity stakes in strategic companies.”
But these “strategic companies” were mainly well-established businesses, such as the chipmaker Intel, the defence contractor L3Harris, and the nuclear power operator Westinghouse. The only start-ups on the list were mostly mining companies. This looks like pure rent-seeking by the Trump administration.
Second, “the EU has announced a €5 billion scale up fund which has the European Commission as a founding investor.”
This is a sign of failure. The UK government should be asking why the European Commission feels the need to establish this fund in the first place, rather than simply replicate it. Part of the answer is that excessive EU regulation – which some here want to copy too – is encouraging European start-ups to decamp to the US at the earliest opportunity.
The Minister then wrote something sensible: “The UK has a responsibility to create the conditions that businesses need to succeed.”
That would indeed be the best ‘industrial strategy’. But that is not what this government is doing. Indeed, this comment will infuriate the many businesses who are now struggling with higher taxes, higher labour costs, higher energy prices, and more red tape.
He then made the giant leap to “that’s why we backed companies like Octopus’s Kraken, now valued at $8.6 billion.”
The state-owned British Business Bank’s much-hyped £25 million (yes, “million”) investment in Kraken is a perfect example of spin over substance.
Crucially, the business was already a ‘winner’. The UK government’s stake is also only a tiny part of a $1 billion fundraising round. This was easily covered by other investors, such as Fidelity and the Ontario Teachers’ Pension Plan.
I suspect that the UK taxpayer will make a decent profit on this one. But the new industrial strategy is supposed to be about supporting start-ups that actually need government help, not just jumping on a bandwagon for a quick buck.
Unfortunately, this government appears to be in thrall to the ideas of those – notably Mariana Mazzucato – who believe in ‘mission-oriented’ investment and the power of the ‘entrepreneurial state’.
Professor Mazzucato has argued that the state’s influence in promoting innovation, investment and productivity growth is underappreciated, citing the examples of the role of the US government in the development of internet and space exploration. In this perspective, the state is at least as effective at creating value as the private sector – and perhaps more so when a longer time horizon is needed.
This is flimsy fare. The state may perhaps have some role to play in supporting the pure science that can lead to new inventions. But when it comes to innovation (creating commercial applications), or the diffusion of these innovations, there is overwhelming evidence that markets are more effective than any form of government planning.
For example, it was private companies that developed the full potential of the internet and mobile communications. And any innovations resulting from government investment in the US space programme need to be seen in the context of the huge amount of taxpayers’ money spent on the project, which might have been better deployed elsewhere.
More generally, there is a growing body of evidence that ‘mission-oriented’ innovation policies rarely work in practice. Reasons include the self-interest of politicians and government agencies, inadequate information, rent seeking and regulatory capture, distortions to competition and incentives, and inadequate attention paid to opportunity costs.
In the UK’s case, it is very hard to see what the government is bringing to the table. It is certainly not business expertise or project management skills. Just look at defence procurement, or HS2.
Perhaps it is a “strategic partnership” which allows chosen companies to benefit from tax breaks and overcome regulatory obstacles. But that smacks of favouritism – hardly good for competition and growth.
It does not even seem to be about money – as Peter Kyle’s own example of the investment in Kraken has shown.
Worryingly, the prospect of a fast profit on Kraken may just encourage wannabe tech bros in government to take bigger, riskier bets elsewhere. This is unlikely to end well.
Plain-speaking Economics 