In conversation with Dr Mike Lynch and Alastair Lukies, fintech entrepreneur and CEO of Pollinate

We are currently in the midst of the Fourth Industrial Revolution which, through technologies such as AI, Quantum computing and the Internet of Things, is radically transforming the way we live and work. Mike sits down with fintech entrepreneur Alastair Lukies CBE to discuss how the UK can bring about the supercharged tech sector.

Mike Lynch: "The UK has this incredible fundamental technology base, second to none, just as good as the US or China. And what we haven't done in the past is really exploited that and got that into commercial impact. We have the difficult bit; we have this incredible asset but what we've got to do is make sure the payback from that is delivered into the UK."

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Alastair Lukies, Founder and CEO of Pollinate, and Dr Mike Lynch, technology entrepreneur and founder of Invoke Capital, discuss how the UK can bring about the supercharged, sustainable tech sector.

Al: Well, despite the strange times and the constant Zooming, as you've always known with me, it's a land of opportunity. And out of the opaqueness and inertia that people are feeling, we're seeing such an acceleration of the transformation of the way we work and the way we live, and all the rest of it. And as I think about the ‘fusion industries' – people have finally realised that technology isn't an industry, it's all pervasive, it's horizontal, it's in everything we do and always we be. And they think of the verticals coming down and the incumbents fusing – for example, financial services to Fintech or medical to MedTech. With everything going on, Covid of course and Brexit, what's going to be our role in that fourth industrial revolution with fusion industries?

Mike: The first thing is people realising that we have to have a role. The fact that there's very little in the way of really advanced tech in the FTSE100 is actually a national issue and there seems to be a bit of a missed opportunity given how good our science base is and our financial services operations in the UK. We ought to be able to really capitalise on that.

To your point about it being a very special time: suddenly the world's been changed. Everything is up for grabs. Now is the opportunity to really grab that and realise that tomorrow is going to be different to yesterday. We haven't got that inertia, a lot of the business models and approaches that were dying slowly are dying fast now, so it's a great time of opportunity. And the first thing is to realise that and realise it's time to act.

Then the question is: what are the other ways of doing things? I think we have all of the fundamental things right – we've got bright people, the great science base. So, the question is how do we get some of these really big tech businesses in the UK? There are all sorts of different things but some of that is regulation. For example, in fintech, being able to take a more forward looking approach to regulation, being a bit more nimble and flexible, allows new models. It's the same in pharma – we're in a world in medical technology now where it's about the individual. In my world of AI, understanding the constraints around things like insurance and liability, so that you can actually prosper in AI. So, I think there are lots of things that can be done and its really about realising tomorrow is not going to be the same as yesterday.

Al: I absolutely agree. I want to pick up on this theme you just raised which really resonates with me. This sense of a purge and out of the ashes comes new opportunity. Of course, all of the previous industrial revolutions have shown that. In fintech, I remember – and you've always been such a great supporter of ours and a great champion of technology – in 2008, people forget when the global financial crisis happened, you couldn't score any points for being positive about banks. There was no politician that was ever going to stand up and say ‘look at our great banking sector' even though it was 19% of GDP and 37% of Europe's financial services industry. You have this huge challenge that people just didn't want to know. We had to change the narrative and that's where fintech was born – that's why you're right to pick up on the regulation because it's not just tech. That's why I talk about fusion – its fin and tech because if it didn't have the financial services, it's just tech. As I look at Silicon Valley, I think of their approach to ‘software will eat the world, and disruption, and we're going destroy that industry'. I think that misses a trick. Because in your analogy of nature, we've seen this in Covid, the stories coming from the ocean, replenishing themselves and the songbirds singing again, I think there is this opportunity to blend right touch regulation, incumbency and great education. But I want to ask you: we do that to a level, we do bring together education, tech, a bit of investment and the incumbents in corporate venturing. But we just hit a glass ceiling in terms of size – you've said it, our FTSE100 barely has any tech companies in it. Why does that happen – people say it's the domestic market but I'm not sure I buy into that. Why do you think we can't break that glass ceiling Mike?

Mike: I think it's actually capital markets, so what happens is that we now have amazing start-ups. They become great mid-sized companies and then typically they get sold. You look at Deepmind for $400million, now the backbone of Google AI. Look at Solexa, which became the key technology for Illumina and gene sequencing. The question is why are people selling? You get this idea that it's all the VCs fault because they're too short-term, but they're actually quite rational people usually. And what it comes down to is that they get to that size and they can either sell and bank the return or, because there's no real capital market that's working for tech in the UK, they have to go all the way big enough to become NASDAQ. And that's a hell of a long stretch and a lot of risk. So, they make what is probably a rational decision to sell. So, what we've got to do is get the UK financial market ready so that these companies feel comfortable listing there and they take that $400million and they become $4billion and then $40billion, and they employ lots of people, pay lots of taxes, train lots of people and we get that ecosystem going.

And the great thing about it is a relatively small number of successes and then all the fund managers will have to become experts at tech and people get more comfortable with it. And then we get back to where we should be which is having five or six of these companies in the FTSE100. And then because you have that, that pulls stuff through the whole system so the angel investor is happy to invest because he knows there's going to be another round, and the mid-level guy is happy to invest because he knows he can float it, and then the public company investor is happy to invest because the company will carry on growing. We've done a great job in fixing where we were when you and I started. Getting a start-up done was almost impossible in the UK. And we've got these great mid-sized companies, we've just got to fix the last part now. And the interesting thing about that is when these companies are successful in the last part, that's when the country really gets the payback. That's when we get the jobs really at scale and you get large tax receipts coming back which are really helpful in dealing with the fact that a lot of the technology comes out of research that was paid for by the taxpayer. So, we've got to fix that last bit now.

Al: Let's focus on that for a second because I absolutely share your passion and of course, we've both done the hard yards. Even calling yourself an entrepreneur 20 years ago meant you got thrown out of the dinner party. As we think about next year and a post-Brexit world whatever form that takes, Britain is still a very purchasable brand, we know that you and I have been on trade missions with prime ministers. We've been around the world and we're still the 6th or 7th strongest economy in the world. Those assets that you describe - for UK PLC I think about faster payments – you think about the fact that we have the most integrated real-time payment system in the world. That we got the government to agree to let Mastercard buy that, I think that was actually a good decision because Mastercard then internationalised that asset and made commitments to keep the upside here in the UK. And so, Thailand was the first country to buy faster payments and now double the transactions of faster payments are going through their system compared to the UK. That's a great UK PLC success story. All of the amazing work you've done around Cambridge and in AI – is there something that is nationally sellable that can run in parallel to this idea of finding the unicorns and scaling up these businesses, is there something in UK PLC IP we can sell or is it really down to the companies to show the way?

Mike: This is one of the important things. The UK has this incredible fundamental technology base, second to none, just as good as the US or China. And what we haven't done in the past is really exploited that and got that into commercial impact. We have the difficult bit; we have this incredible asset but what we've got to do is make sure the payback from that is delivered into the UK. It's all very well creating world leading AI and it gets to $400million and its bought by someone and all the money gets made elsewhere, and more importantly, the control of that. Whatever you think about Brexit, there's an incredible opportunity here. There's been lots of talk about the advantages and disadvantages of it, but the real benefit comes now in grabbing the opportunity. The opportunity is that we can break free from things like European regulation and we can be far more forward looking and nimble and readjust to this new world that's coming. For example, the biggest issue with autonomous vehicles is the insurance market. Well, the reason we have airliners flying over us is because of something called the Warsaw Convention which made that work, so we can do things like change the legal framework so that the precedent is right for these sorts of things. And in Fintech there is obviously a long list of things. It's not about light touch regulation, I would say it's about enlightened regulation. So, you don't have to give up the protections that regulators are there to do. But what you're doing is realising that the benefit to the public is actually different. So, for example, if you've got a new amazing cancer drug that might only work on 500 patients a year but is one of these things that knocks out the particular gene that's causing a problem in the mutation, then testing that on a much smaller cohort is not risking anything in doing that. We have to be brave and say look ‘we've gone from a situation where we used to test drugs on vast trials, now the technology has moved on'. We've got to be very brave and say we are going to move faster, we are going be cleverer about regulation and so it's about enlightened regulation in fintech, in pharma, in AI. And if we do that, put that with our science base, our impact in things like financial services and create a regulatory framework and there is a brand out there, the UK is the place to come to do this type of technology for the next era because that's what we think about and we put everything in place that you need to do that and you need to do it here.

Al: We refer to it as ‘right touch regulation' and you're exactly right, it's somewhere in between what we had to do in fintech – for 250 years there hadn't been a new clearing bank in the UK. Four clearing banks in the UK – their headquarters were the four buildings around the Bank of England down the road from where I am now. And they had owned that monopoly so all innovation was stunted because only four banks could do the innovation and - a bit like when you go onto Virgin Airlines and British Airways at the same time, ironically the prices are the same for a flight to the US. Competition wasn't working and after the global financial crisis, we issued 23 new banking licenses in the UK in the last 10 years and you've seen neo-banks, we've seen banks growing at lightspeed. That's then called the incumbents on, so they've had to innovate to keep up. We also have the sandbox, the FCA Sandbox a project called Project Innovate which welcomes – to your brilliant analogy in that healthcare example – what they said was: if you have a fintech idea you want to get into insurance or a payday lending or money transfer, come to us as a regulator and have a conversation with us, come into the Sandbox and test it, and we'll tell you whether you will comply or not. So that compressed and saved dozens of organisations picking something and then finding out that they didn't comply with the regulation. And so, you're right, if we have this twin strategy of right touch regulation in each of these fusion industries, and in the capital markets getting excited because we have iconic companies being born and growing. Vocalink – we didn't celebrate that. Vocalink was bought for over $1billion by Mastercard. It's now being used all around the world as a payment system.

But I want to come back to that supply chain of finance that you talked about because I know you've been a very generous investor in tech and advised a lot of people – in my own small way I try and do the same, we raised a big fund so I've experienced dealing with the LPs. We're very good, as you say, at start-ups, were now getting better at getting to mid-sized, and then it's this scale up issue that's the challenge and you've talked about the fact that that's because people may sell out. But that supply chain above the capital markets, the pension funds, we don't have a sovereign wealth fund that invests internally. We follow the guidelines of state aid to the letter while other countries across Europe – e.g. I think Germany have had 56% of the notifications to Brussels about the fact that they've issued state aid during Covid. Is it fair to say that it's got to be right up to that level, that the pension funds have got to be incentivised to grow these businesses?

Mike: I don't even think we need to incentivise. Funnily enough we're back at regulation. So, at the moment if you're an insurance company or a pension fund there are very tight regulations on what you can do. And remember, although our younger colleagues who are starting start-ups always want more money, the reality is that there is a lot of money out there, but the problem is that your insurance company can't invest in these kinds of companies. So, a very small freeing up to say ‘right well if we allow another 1% of those assets to go into tech type portfolios' - which these days aren't anything like as risky as they constructed to be – then there's a lot of money available. City of London has a vast amount of money. And so it's the right touch idea that you're talking about which is realise that, these days, actually the biggest risk you can have as a pension fund if you're in the market at the moment is not to have invested in Facebook and Apple and Google because nearly all of your return, if you're on the US market, would have come from that. So, it is a question of, there is a large amount of money there, if you can realise what you've got to fund as a country going forward, you can be a little clever about how that's done and free up some of that money.

And one thing I would point out is it's very easy for people to suggest that the government should put the money up and we have things like the British Business Bank, and whilst I think there are good arguments for pump priming once in a while, and there's some special occasions we could talk about, the reality is that the amount of money the government can do here a) isn't necessary and b) is too small. So, we did Darktrace, which will probably list at the beginning of next year and will be a FTSE100 – but if it's doing a round at the moment, it's $60-70million. And the problem is if you've got a British Business Bank set up with £300million, then you're talking about three deals. Whereas insurance company assets at the moment are in the trillions. So, we have to be a bit more sophisticated.

Now there are cases where a little bit of money does make a very big difference and it's those special places where the market can't be left to it. And this is the other interesting thing is that again it's about this right touch sophistication idea. If you look at most tech deals, it's great that there's a free market and at the end of the day, if someone comes along and they want to buy the company that's great. But occasionally, there are things that are so important that they're sovereign. And that's a word we've heard a lot about over the last few years. And you know the Americas they have this CFIUS model for that where they'll look at something – for example this Arm debate is really interesting. Arm is in everything, whoever controls Arm is in an incredibly strong strategic position. Moreover, you put Arm and Nvidia together and you probably control hardware for everything. Now in the UK, we have Arm at the moment and we also have something called Graphcore. Put those two together and as a UK asset, that's strategic. Now, our natural reaction in the UK in the past has been very black and white about it – a bit like your banking licenses – and we say, ‘we must not touch any of this stuff'. But then you look across the Atlantic and the Americans have a whole mechanism to make sure an asset like that can't be used against America. And we have to be cleverer here. The next century isn't going to be about gunboats. It's going to be about the fact that you can turn off the communication system or you can stop someone getting access to the chips. And this is all about understanding how important this technology ecosystem is to the country. It's economically important, but also strategically and politically important. And so that's why it all comes back to this opportunity we have to think differently. To think in a much more nimble way. If we want to use state aid, we can do it now. And as long as were using it occasionally in the right places, it's an incredible asset for us post-Brexit.

Al: I think it's a brilliant point Mike – we don't have to win in everything. We're never going to be as good as India in offshoring, Israel is amazing at security. But I want to put you on the spot a bit – I'm so passionate about this idea of fusion of right touch regulation, take the incumbency, blend it into technology. Change the engine in might-flight and evolve the industry. We are doing that in Fintech and there's a big review being done by Ron Kalifa at the moment called the Kalifa Review on Fintech and trying to use that as a cut and paste example into other industries. If we think of it in terms of a trivial pursuit counter – you've got pharma, there's Agri-tech, there's infrastructure tech, our creative industry is incredible in the UK. If we could be globally playing seriously at the top table in six industries, what do you think are the ones that we can win in?

Mike: It's what were really good at. So, were second to none in AI research and we've probably produced some of the key technology companies in that area which are now part of other companies. Pharma – again, amazing pharma industry in the UK. Perhaps not as entrepreneurial because of regulations. So, I think we could let a lot more smaller plants grow on that one. Fintech – we're coming from a situation where we're world leaders in financial services and we both have to defend that by understanding that it has to change and taking the opportunity of that. I think that those are the very obvious key ones.

We were just talking about chip design with Arm – absolutely up there. What an embarrassment of riches – we could carry on. We've got other things coming along for example the quantum stuff. The problem is not the tech or the assets that we have. The thing we have to do is really understand that it is an incredible opportunity to take that and be at the top table. And if we miss that opportunity, we will be relegated to being irrelevant. And we have those assets, we just need to get them up to that level where they're sitting in the UK and they're 40/50billion dollar businesses and they're plugging that ecosystem which will really make us a powerhouse for the next century. It's an amazing time, it's a bit like a digital version of watching Brunel see a steam train go past him. That's the moment of opportunity we're in now.

Al: That's awesomely exciting and inspiring. So, were going to finish up but be an open nation, be open to trade, we can be more nimble – we're not tied. Create right touch regulation with the right balance – still protect people but help things evolve and if the incumbents aren't evolving themselves then use a bit of stick as well as a bit of carrot to get them to evolve. And by doing that you open up new aqueducts of capital that can then flow into these businesses. And what I'm hearing from you, which I completely support, is let's be bold in this fourth industrial revolution and let's just get two or three home runs and then others will follow.

Mike: Yes, now is the time to be bold. And we only have to prime the pump once and it will run by itself.