The environment for R&D claims has tightened; you only have to look at the rising HMRC enquiry rate to see it. It’s therefore little surprise that investors are stepping in, as poor R&D governance can delay growth or destabilise the runway.
But they’ve gone a lot further than just increasing their involvement in businesses’ R&D claims. Our latest whitepaper data found that 97% of UK investors are now actively shaping the R&D strategies of the companies they fund, particularly around government incentives, indicating a decisive shift in how innovation is financed and encouraged. What this tells us is that investors are key architects of the UK’s innovation economy, working with entrepreneurs and business leaders to drive the innovation that fuels success and the economy.
R&D as a strategic lever
In many cases, R&D has been treated as a necessary cost and seen as an activity taking place under the surface, rather than something that would factor into boardroom strategy. But that mindset is changing.
In fast-growth sectors like AI, clean energy and biotechnology, investors recognise that innovation is the driving force behind business performance. A key element of an effective R&D strategy is the tax relief scheme where the Government offers reimbursement for credible R&D activity. Our research found that nine in 10 (92%) investors consider this R&D tax relief essential to startup success, particularly for maintaining growth momentum and extending operational runway.
There is of course a process involved in applying for and securing R&D tax credits, something that has been subject to changes in recent years with regards to what qualifies as R&D and the rate of credits that can be received. Once R&D tax credits are secured, investors report that these funds are being used strategically. Over half (60%) say funds are reinvested into further R&D activities, while 52% use them to extend cash runway. We can take from this that the majority of businesses are treating R&D and innovation as a core business strategy and not a tick-box, one and done activity.
Building capability over concept
When investors evaluate R&D-heavy companies and assess where they want to place their bets, they’re looking beyond the product. Investors themselves declare that the most important factors now include experienced technical and leadership teams (58%), robust IP strategies (54%) and agile development processes (41%). They are looking for teams that are ambitious and apply well-thought out, commercial strategy over purely innovative products or solutions.
This further reflects a broader evolution in investment strategy in the fact that the focus is shifting from backing big ideas to backing capable systems that are shaped for sustainable, long-term growth. The key here is teams, technologies and structures that can adapt, iterate and scale.
Investors are also redefining what success looks like. While scientific breakthroughs remain important, commercial outcomes now lead the way: 62% of investors cite revenue growth and commercialisation as their top indicators of R&D success, ahead of market leadership (50%) or scientific discovery (53%).
In practice, this means innovation strategies are increasingly tied to measurable business outcomes, with investors embedding R&D accountability into portfolio governance.
Managing the risks
Despite the clear confidence that investors have in R&D tax relief and its ability to facilitate long-term growth, risk remains a central concern.
A fifth of businesses now receive an enquiry from HMRC following a claim – a number that’s risen significantly in the past few years and one that has the potential to rise again. This is a real concern for investors. As we know, enquiries can take place months after the money is released, and if HMRC ends up demanding repayment, this can create cashflow issues for the company. Not only can this hurt the business’ runway and progress towards commercial milestones, but investors are also at risk of being left out of pocket. All too often, companies put themselves at greater risk of enquiry by filing claims in-house or choosing to work with generalist accountants rather than claim specialists.
Nearly half (48%) of investors highlight regulatory uncertainty as the biggest challenge when backing R&D-led businesses, followed by scaling innovation (44%) and IP protection (43%). The R&D tax credit scheme has been subject to several changes in recent years and further changes to tax rates are expected in the near future. This goes some way to explaining the uncertainty that tops the list for investor concern. For those more further afield like in the US, it’s highly possible that they underestimate how unpredictable UK administration can be. That’s why investors are increasingly performing due diligence on how a company prepares its R&D claim, because poor compliance is now a real threat to growth.
It is these challenges that highlight the importance of compliance and oversight, particularly as R&D tax relief continues to play a central role in investment decision-making. With 88% of investors now receiving regular updates on the status of R&D tax claims, it’s clear that the scheme has become integral to portfolio management.
Aligning capital, capability and policy
The UK’s investor community is demonstrating what smart capital looks like and how strategic, informed and deeply integrated innovation strategy is central to a business that is successful in achieving sustainable growth. For this model to thrive, policy and regulation must not discourage businesses from evolving in-line with investor ambition.
If the UK is to maintain its leadership in fast growth sectors, it needs a policy environment that rewards long-term R&D investment and one that reduces administrative friction and strengthens confidence in the system.
Innovation is no longer the sole domain of founders and tech teams. It’s a shared enterprise between investors and businesses, and if alignment can be achieved, UK organisations will be well placed to bring truly innovative solutions to market and the economy will thrive as a result.
