Why the UK’s AI sector is stuck 🤖 Barney Hussey-Yeo

Welcome to a bonus episode of Millennial Masters. The UK's tech scene has world-class talent and buzzing startups, but major roadblocks are holding us back from competing globally. That's according to Barney Hosio, the founder of Cleo, which is an AI-powered assistant helping people manage their money. Barney raised more than £200 million for his startup and moved Clio from the UK to the US to continue the growth journey. That's why he didn't pull any punches in his testimony for the UK House of Lords inquiry about scaling up AI and creative tech. Here's Barney's full evidence from the inquiry, and check out the written version for highlights on the problems and the fixes he proposed. What do you think?

I'm the founder and CEO of Cleo. Cleo is an AI assistant that helps normal people manage their money. For context, we're a $150 million ARR business, we're profitable, we're growing 2x year on year. We've raised about $200 million in capital, and we operate 100% in the US. So we founded in the UK and we moved to the US. I think we've missed the boat on foundational models. So, you know, in the UK, we have no tech champions, we have no tech company lists on the LSE. Which is bigger than $10 billion in market cap. The US has, you know, $5 trillion companies. NVIDIA is bigger than the whole LSE. The US gets to build these foundational models because they have the capex, they have the talent, they have the people that can invest in it. If we were in France, I would say, hey, you've got Mistral, hey, you've got nuclear power. We could legitimately build these foundational models. There's not a chance we're going to get nuclear power going in the UK. There's not a chance that we're going to be able to build these companies out. We've missed a huge part of value creation and value capture over the last 20 years. But the UK has incredible talent. It has the incredible universities. London is the second, the second best place in the world after San Francisco to build an AI company in terms of talent density. There's more researchers here than there are in New York, anywhere else. And then two, we have an amazing early-stage venture ecosystem over the last 10 years. We have built one of the most impressive venture ecosystems in the world, and it is growing massively. The challenge we have as a country is we cannot scale these companies, we cannot list these companies, and we cannot capture the value of these tech companies. And if we don't do this, the UK will continue to stagnate for decades to come. So early-stage venture capital, London is the second-best place in the world to, to go raise capital. It's better than New York, it's better than anywhere else in outside of San Francisco. We have a huge amount of early-stage capital, great VCs, all the US VCs are plowing in here. So to get a company going, this is an amazing place to start a business. It is a terrible place to scale and list a business though. So we've done amazing work in early stage. Now we need to, you know, move on to the scale-up stage. If you take Revolut, for example, Revolut is going to be the first UK-founded $100 billion market cap company, and we'll probably get to a trillion. I think it's fair to say. Nick, the founder of Revolut, he won't list on the LSE, he will list on the NASDAQ. He's publicly said that. He has moved to Dubai, so he's not going to pay any tax to the UK. The vast majority of Revolut staff are outside of the UK now. So even though that was a great British company founded in the United Kingdom, regulation actually pushed him out of the UK. It was so hard for him to get a banking license while he got 20 others globally that it forced him to move out. And you know, he took the opportunity of moving to Dubai and he hired people elsewhere. So we have missed an opportunity there. That could have been a great British success story. That could have been our first publicly listed tech company, more than $100 billion in market cap. And the founder has left the country. The founder is not going to list this company here. So if you are looking for the next generation, there's a lot of these companies now, by the way, that could go public. They're not going to go public in the UK because there's no capital that goes into the growth stage and there's no capital that goes into the LSE. So if you compare us to the US, pension funds are investing. There's a huge amount of capital going into the growth stage. In the UK, a growth fund is about 650 million. In the US, it's 8 billion. You can barely raise any growth capital in the UK. There's anemic, the amount of growth capital here. And you would never choose to list on the LSE because there's no depth of capital. The pension funds are really risk-off. So you are going to go list on NASDAQ if you want one of the best companies in the world. Built in the UK. I think that's a sad fact that we're seeing. Arm has gone to the United States. DeepMind was acquired by Google. All of the value created by British companies is going to go to the United States and other foreign powers. And we have to capture value and we have to create more value in the United Kingdom today. I think one of the amazing things about building a company in the US and trying to scale it there is the checks and balances of regulators is incredibly effective and is incredibly thoughtful on how they constructed the country. In the UK, if the FCA says, hey, you can't do a thing, you're done and you're done in the entire nation. In the US, you have federal and you have state. And even if you have problematic regulators in any position, there is these checks and balances, and that enables companies to scale, enables them to thrive. And if we still have these regulators with all of this incredible power that they have today, and they're not risk on, if they don't have a growth mindset, if they're not supporting innovative companies, The companies are going to move to Europe or they're going to move to the US instead of building their companies here in the UK today. So we need regulators that have a growth mindset. We need regulators that have checks and balances, and we need to cooperate with the United States and Europe to have global regulation. So you're not having to, you know, understand the regulation every single geo as you kind of scale your company. You need a Manhattan Project-esque mission to be able to do this. And like maybe that is a thing that would have to happen. But if you are going to get, if you're going to build these data centers, you're going to build these foundational models in the UK, you would need one, power. We have the highest electricity costs across all Western geographies. We would have to build nuclear, renewables wouldn't do it. So that would have to happen. Two, you would either need a Mistral-esque company that is founded by, you know, backed by venture capitalists and then supported by UK government, or you would build state capacity and you would take a state department and say, Hey, this is of national importance. This is one of the most important technologies of our lifetime. We should have a Manhattan-style project, which spends billions and billions, a huge percent of GDP to compete globally with those big global tech giants there. It's outlandish though, right? Like, are we really going to get the government behind a Manhattan Project-style programme? You would— build nuclear today. You would build this project today. You would put billions and billions and billions towards it. You would hire the best people. You'd build a venture-backed company, the right CEO. You'd get at it today. If you thought this technology was going to be as transformative as we believe it's going to be, this would be such an obvious thing to do. Is the UK government going to be able to build nuclear power plants in 2, 3 years? Elon Musk built one of these AI data centers in 19 days. 19 days to build a nuclear power plant in the United Kingdom today would take you a decade, two decades. It's not going to happen. So I think France could potentially do this. I just don't think the UK could do it given our government and where we're at today. Early-stage venture works incredibly well and is well-capitalized in London. It's an incredible ecosystem, is performing. The problem is we have no LPs in the UK that will invest into venture funds. So the pension funds don't invest. There's no capital going into the growth stage. So there's the growth stage funds in the United Kingdom are tiny, like tiny, tiny. So if I want to raise 200 million plus, which will be my next round, there's no fund in the UK that can actually support that level of capital. So I have to go to the United States to raise that capital. And it's because pension funds do not invest in venture. There's LPs in the UK that aren't investing in an amazing asset class, and that's why our pension market is so poorly returning. So I really welcome the reforms that have happened with Rachel Reeves and consolidating the pension funds, but we need growth capital to scale these companies or they will all move to America. The pension funds have no incentive to put money into venture. They want to make as much fees, take as little risk as possible. So the pension funds are sitting there having a great time making money, whereas they're screwing the, you know, the youth. Sorry for my bad language. They are taking advantage of the UK population. They are the returns of the UK pension industry. It's absolutely diabolical. If you compare Canada, you compare Australia, you compare the US, they are investing in equities, they're investing in venture-backed companies. You look at all the growth of the S&P 500, it has come from technology companies. So if we cannot get a growth mindset, if we cannot get risk on as a nation, if we cannot get pension funds investing into venture, we will have another decade or two, or potentially more of stagnation. The UK has stagnated for so long because we haven't been able to build lift and scale these tech champions, which the United States has. My slightly contrarian view is it's all fraud. So everything in the British Business Bank, if you look at the returns and you look at where they've invested their money, the Future Fund, every time the government tries to direct intervention into venture, it doesn't work. Venture capital is about picking the outlier power law companies. So when the government tries to fund these companies directly, they pick the bad companies and therefore the returns are awful. If you look at the British Business Bank, The returns are negative to dismal, and that is 12 billion of capital that could have gone to fixing the NHS, to investing in infrastructure, to building supercomputers, you name it. So I think direct intervention by the government into venture is a terrible idea, is actually just fraud, and we must stop it. So I think if you're a founder, you're thinking about two things primarily. The one and the most important is how successful your business is going to be. And if I'm thinking about listing and I'll talk to Goldman Sachs or JP Morgan, they'll give me a big lecture on the depth of capital in the NASDAQ and why there's so much trading volume, why it's such a better place to list, et cetera, et cetera. So in the UK, we must get more capital into the LSE. We must get more capital into any tech company that lists there. It's a bit of a chicken and egg though. It's not very many tech companies to even put the capital in today. The second thing is the personal gain of the founder. And I think this is probably the most controversial thing to say, but they are thinking about their tax position as well. They're thinking about what they stand to gain from this. So number one, make the company as successful as possible. Two is what is the incentive for the founder to list and stay in the United Kingdom? We've just increased capital gains on founders, which is crazy. It's now better to go to Texas and to Austin and list on the NASDAQ than it is to stay in London. So there's no incentive for founders to stay in the United Kingdom and list their companies here. So you have to get way more capital, and that's a hard problem to do, get it into the LSE. But two, you have to build a competitive system-level environment for founders to want to be here. Otherwise, you're going to go to Dubai. Otherwise, you're going to go to the US. Like, patriotism alone isn't going to keep people in this country. We have to build the systems, the structure, and get the capital into the LSE to keep people here. Europe has the same problem, right? Europe has the exact same problems having the same debate about scaling companies and trying to take them public. The reality is though, there's no growth funds big enough in the UK because pension funds aren't investing and aren't building growth funds. If they were growth funds, like there's early-stage venture funds, UK founders would take capital from growth funds in the UK. The biggest criminal thing that's happening is all the LPs into all the British venture funds are the, you know, the Canadian pension fund, their endowments in the US. So our universities are, you know, our pension funds, just normal individuals aren't in equity markets like they are in the United States. We have to change this country's risk mindset. Pension funds get investing, normal people have to get investing. The US dominates because they get all of that capital into their public markets. So if you did build growth funds here, I think you would see founders raising from their growth funds. If you built an environment where it was more competitive as a founder to list on the LSE than NASDAQ, it would work. And it's not all capital, you know, you have to give a little bit of value capture to gain value capture over time. So if you made it very economically viable for the founder, for the UK listed company to stay in the UK, they're obviously going to stay in the UK. But in the United States, you're going to spend 38% on capital gains if you're in New York or San Francisco. It's a huge amount. That's why British founders don't all move to the United States today. So I was very vocal when we were closing that gap of 20% to 38% because it would've killed the venture ecosystem. It would've moved all of these founders out there. So we have the ability to, as a systems level, change what is going on. We have the ability to make it more attractive for founders to stay here. And we also have a huge amount of capital sitting on the sidelines. We have $300 billion in cash ISAs. The government is incentivizing people to keep cash savings instead of putting into equities and high-growth funds. It is crazy and criminal what we are doing with the capital sitting on the sidelines that's not going into growth. And if we just change that, it would make a massive difference to staying in the UK, scaling the companies and listing. If you think about the incentives of a regulator, they are not to take risk. They have no desire or want or need to take risk. And if you have 100% authority and 100% control, And you have no incentive to take risk, then you're going to kill all the innovation that is there. So there needs to be an incentive structure for regulators to take risk. I'm thinking very much the FCA. So if they had an incentive or a reason to take risk, that's a huge thing. And two, there should be some sort of checks and balances on the regulator. There should be some discourse when the FCA makes a decision. There should be checks and balances on this. And today they have a huge amount of authority and power, as does government in the United Kingdom. And that we've, yeah, we hire lots of international people into the business. If you look post-Brexit though, this has declined. Like we have the second biggest AI density in talent because of the universities. If you look since Brexit though, less people, less skilled migrants are coming to the United Kingdom. It's become harder to get people into the United Kingdom. People are choosing Paris, they're choosing Berlin, they're choosing London. And that trend is not a good trend. If we can't buck that trend and get people coming back to London, get them coming back to want to work here, Paris is going to— France is going to be the dominant AI company of Europe, and we're going to play second fiddle, which I think we are doing a little bit. If I'm really honest, one is there's an incredible amount of talent here. So we do have talent, and because of the stagnation of wages, it's so cheap to hire amazing AI researchers from Cambridge, from Oxford, from you name it. They are 3 times cheaper than hiring someone in San Francisco. So I'm here for the talent, for the incredible cheap talent that we have in the UK. And I think that's a great thing and we've got a big advantage there. The second thing, and very candidly, is the UK has a better tax regime than the United States. We have 24% capital gains now versus 38% in the US. So I spend 4 months of the year in the US not to hit capital gains in the US. And then there was just one little point I wanted to pull up on, which is the US is 10 times bigger as an economy. They have 10 times more capital. We're never going to be able to compete with them. It's kind of missing the point of how venture works as a business. Venture is very much a neighborhood local business. So if you have those local venture funds, growth funds in the United Kingdom, then they, people would take them. That's, you know, you build relationships with people over time, you trust them, and then they preempt you into your round. So just because the US has more capital doesn't mean that if there wasn't growth capital in the United Kingdom, founders wouldn't take it. I think it's really important that we do get pension funds and we do get capital going into that growth stage. Yeah.

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