Time to stop bailing out banks and start backing the UK’s next growth sectors - such as IT and bio-tech.
Nesta’s Jonathan Kestenbaum argues that a mix of public and private capital is crucial
Technology and the creative industries will be key to pulling the UK out of recession, says Jonathan Kestenbaum, the chief executive of the National Endowment for Science, Technology and the Arts (Nesta).
He believes sectors such as healthcare, clean-tech, bio-tech and IT will drive the economy over the next few years, doing what the financial sector has over the past decade.
“They will have to,” says Mr Kestenbaum, 47. “There will be no choice because that’s where the demand is going.
“The economy has been disproportionately weighted towards financial services. We [at Nesta] are pushing very hard for investment in a broader range of sectors to give the economy a greater balance.”
A recent report by Nesta states that the environmental and healthcare sectors could have a combined market size of £93 billion. It identifies the creative industries — responsible for films, music, fashion, TV and video games production — as contributing £85 billion to GDP and employing 1.3 million people by 2013, likely to be more than the financial sector.
Founded in 1998, Nesta invests in early-stage companies across a number of technology sectors; IT, biotechnology, medical devices, environmental/clean-technologies and the creative industries.
As Mr Kestenbaum puts it, the firm is a bit of a Dragons’ Den at large. The largest backer of such businesses in the country, Nesta is two years in to a five-year £50 million funding plan to invest £10 million a year.
“We consider around 300 proposals a year,” says Mr Kestenbaum, who joined Nesta in 2005. The organisation recently moved to new state-of-the art offices in central London.
“Out of those 300, we invest in eight to ten, and out of these, three or four will be successful.”
There are currently 46 companies in the Nesta portfolio. Among them are marine biotech firm AquaPharm BioDiscovery Ltd, which specialises in anti-infection drugs harvested from natural marine products; Light Blue Optics, which is developing a compact projection unit that can be attached or inserted into MP3 players, mobile phones and laptops; and AXAR media, the only household wireless HD video product.
“The opportunities that we see are coming out of the world of science, technology and the creative industries. I feel very confident about our prospects.”
Citing healthcare as an example, he explains: “The ageing population combined with the high number of Brits suffering from chronic, long-term illnesses, will result in a huge demand for new types of healthcare provision.
“It was only 100 years ago that people in this country died from flu, which led to the development of antibiotics. And it was the commercialisation of those drugs — making them cheap and accessible — that changed the picture of health in this country. That process is going to happen again.”
As for environmental technologies, he notes that as the regulatory frameworks make greater demands on firms, there will be huge demand for new forms of environmental technology. Mr Kestenbaum is one of the country’s most accomplished businessmen, having worked in both the public and private sector.
Before Nesta, he was chief of staff to Sir Ronald Cohen, head of the private equity firm Apax Partners. He had previously built a large family commodity trading business, which was successfully sold.
He then moved to public service, becoming chief executive of the office of the Chief Rabbi.
Raised in Japan, Mr Kestenbaum moved to the UK and went on to study at the LSE and Cambridge. He also holds an MA in education and an MBA from the Cass Business School.
Mr Kestenbaum is calling for the government to support new growth sectors of the economy where demand is strong, as opposed to continually bailing out industries. “If we fail to do so, we will be paying the price for many more years to come.
“I can’t help but have very mixed feelings about considerable public investment going into sectors from which the demand will be scaled back.
“Recessionary times force you to make decisions. This is a time to make very clear decisions on where the next growth sectors in the British economy are going to be, based on a combination of demand, Britain’s competitive advantage and the opportunity for public money to make a considerable difference.
“It is hard to admit the way you do things is finished and then to say: ‘let’s do it differently now’. But now is the time to make that call.”
He identifies the need for a mix of capital pools. “There is a myth that if the market can’t absorb an idea then the idea is no good, and that public and government money should get out of the way. This is nonsense. The great innovation economies in the world have all demonstrated the power of public-private investment at very early stages. You cannot leave early-stage investment solely to the market.
“Traditional sources of capital — banks, private equity houses and insurance firms — find it very difficult to absorb that type of risk over that type of time horizon. That’s why you need public money. If there is one thing we have learnt in the past six months, it’s that you need a blend of capital pools, creating different types of investment and, most importantly, with a different risk appetite.”
Even the recession is not enough to dampen Mr Kestenbaum’s passion. “People are, without a shadow of a doubt, more innovative in a recession. They have to be.” He reels off examples. “The First World War stimulated the development of motorised transport, the Cold War produced the internet via the requirements for espionage, and the downturn in the late 1990s and early 2000s led Apple’s production of the iPod. “It is at difficult times that you find real breakthroughs.”
Former chief executive of UJIA, Mr Kestenbaum is a board member of the Design Council, the UK’s Technology Strategy Board and the Royal Shakespeare Company. He has been an adviser to BAE Systems and is manager of Great Britain’s Maccabiah Team.