77. The Rise and Risks of Sovereign Wealth Funds

Jonathan: Welcome to The Difference Engine, the show for tech founders, investors, and innovators. Paul: All right, Jono, you tell me what's coming up today. Jonathan: Yeah, we'll explore the often contradictory relationship between modern government and the international technology sector. Paul: But first, we ask a question that not too many people ask, but you need to know: Will sovereign wealth funds drive the future of technology?

Many of us, uh, who aren't inside international politics or investments have no idea what a sovereign wealth fund is. Can you help? Jonathan: What we're looking at, a sovereign wealth fund, is a state-owned investment fund that manages national assets, typically, but not exclusively, from all revenues, trade surpluses, or foreign reserves, or even general taxation, um, but to invest it for long-term public benefit. Paul: Right.

Sounds like the savings account when you don't need it day to day and you're making lots of money, let's say, back in the day from North Sea oil, um, as Norway still is, and we stupidly are not. Um, you sort of put a little bit in the piggy bank, and then you invest it in somewhat riskier ventures. What's that all got to do with tech? Oh, well, Jonathan: um, it's interesting because, um, sovereign wealth funds, and we're gonna call these SWFs, sovereign wealth funds, they've been in the news recently with Europe, and that includes the UK's investment in the biggest ever European seed fund.

Um, and the lucky winners, uh, in this were Ineffable Intelligence. Um, but closely followed, uh, by the claim that the same 500 million UK AI fund is, um, which of course was, you know, set up to back homegrown, inverted commas, technology, um, has been caught granting UK taxpayer-funded support to a startup based in Silicon Valley, of all places. Now, in this case, the Labor government's sovereign AI fund has issued credits for computing power to a firm called Odyssey ML, um, a startup developing so-called world models that can understand the physical environment.

Now, this company is incorporated in the US and headquartered in Menlo Park, which if you've been around tech for a couple of nanoseconds, you will know is in the center of Silicon Valley, um, and the home of Facebook owner Meta, um, other companies like E-Trade, and of course, the Sand Hill Road VC mob, including Kleiner Perkins and Andreessen Horowitz. Now- Well, some members of the team at Odyssey ML are based in London, for instance, Jeff Hawk, the CTO, uh, and co-founder Oliver Cameron.

Um, but Odyssey's other co-founder and chief executive is based in Palo Alto. Additionally, we, uh, fi- we found out two other startups that received the credits, um, had UK operations that were ultimately owned by holding companies incorporated in the US. Um, and the startling reality of this is there is in fact no requirement for founders who get computing funding from the Sovereign AI Fund to base themselves in Britain or even keep their companies here. Paul: I do detect some wizard words here, credits.

What do we mean by credits? I think we mean giving money to data centers. Jonathan: Yes, I think we mean, we mean giving them pocket money to, to gi- to give to the local shop, i.e.

, we're the state, we're gonna give you a load of money. Here's some, here's, here's some money to spend with data center suppliers so you've got computing power. Paul: Right. So, but the data center suppliers, J- um, you know, we're talking about Jensen et al, are themselves US-owned.

So, so what I detect here is money moving from the UK overseas quite rapidly. Isn't the idea that software, uh, that, um, SWF, sovereign wealth funds, should be there to make sure nations don't miss out on new tech categories, not to subsidize other nati- nations, um, or even, God forbid, whoever's funding it becomes a tech leader, not just subsidize the ambitions of other states? Um, it seems to be a contradiction of the basic idea, uh, when you try and put it into practice.

Jonathan: Yeah. So this is basically how not to create categories How to help other people create category Paul: leadership Absolutely. And then there's the strange case of the new boss, uh, of whi- who's very much like the old boss when we look at who's actually, uh, benefiting from all this, apart from all the money siphoning off to, um, Jensen et al. Um, let's just say when it comes to the, the profits of managing the business of sovereign wealth funds and AI funds in particular, regardless of wins or losses the taxpay- payer makes, the, um, the apple stays close to the tree when you look at the management team.

Let's have a look then at five arguments for and against using software wealth funds, um, many people do, to drive national category leadership. So the first thing is, uh, and I, uh, I use the term advisedly, is sober- sovereign wealth funds provide patient capital, uh, allegedly for frontier technologies. Now patient because you don't get your money back for a while, um, although in this case it could be a double entendre, uh, given the s- the sick person here might be, uh, Europe's innovation.

But then many breakthrough categories, uh, such as AI infrastructure, quantum computing, advanced semiconductors, nuclear fusion, synthetic biology, these are very long-term bets. They, uh, are highly likely not to pay off, uh, unless you're extremely patient. So unlike traditional venture capital, which is always looking to return, you know, five or 10 years in, sovereign wealth funds can tolerate things like long commercialization timelines while you get market fit. They can deal with cyclical downturns.

They can deal with infrastructure scale investment, and the fact that they c- need to return less liquidity because of the patience that we talked about means they can wait things out. And examples include, uh, Mubadala, uh, over in the Far East, investing in semi - uh, not Far East, the Middle East even, investing in semiconductors and deep tech. Temasek out of Singapore, uh, which has been investing for years on this basis, and that backs biotechs and digital infrastructure as we know.

And then the PIF, Public Investment Fund, also from the Middle East, uh, looking at EVs, gaming, and increasingly AI ecosystems. The argument is these brand-new tech categories Often fail not because the inherent technology is weak, but just because private capital markets are too impatient for a return Jonathan: And, and they can do even bigger things than that. I mean, in theory, they can catalyze entire ecosystems n-not just companies. So if you think about it, traditional VCs optimize for company-level returns, um, and SWFs often optimize for national capability creation, or at least that's how it should be in theory.

Um, so in theory, again, this allows SWFs to support a variety of systems and concepts. Universities, uh, managing talent migration, basic industrial policy, you know, um, part of which is building out of data centers, which we do believe are the engine of the AI economy. Um, energy infrastructure, well, also slightly late- related to data centers 'cause they chirp a lot of power. Uh, regulatory sandboxes, uh, and even procurement ecosystems, which is, you know, certainly how the US helped develop its own technology industry whi-whilst pretending it wasn't in any way involved in industrial policy.

Now, why does this matter? Well, it matters because category creation usually requires complementary systems. For example, an AI ecosystem needs compute Energy, search labs, startup capital, and procurement customers. Uh, an EV ecosystem needs batteries, charging networks, minerals, manufacturing, and consumer financing.

So again, in theory, SWFs can coordinate these layers in ways that fragmented market investments cannot. Paul: Unfortunately, they don't - may not produce a lot of jobs, but that's a, a side issue. Number three of the four argument for SWFs is they can accelerate strategic diversification. So commodity-dependent states, think the Middle East, uh, increasingly use SWFs to transition into post-resource economies, and tech category creation becomes therefore economic diversification and national resilience and even, uh, as we've seen recently, geopolitical positioning.

For Gulf states, a technology investment is often viewed as preparation for a lower hydrocarbon, more industrial diversified future. Makes a lot of sense, right? So the Qatar Investment Authority is investing in digital infrastructure. Uh, we've seen the, the largest sovereign wealth fund of all, bizarrely, a lot of people don't know this, is Norway's Government Pension Fund, uh, which has, uh, it globally influences sustainability and climate tech capital allocation through its active, um, investments and its active, um, shareholdings, and much of the activity of Saudi Arabia's PIF.

The positive argument here is that SWFs can absorb national surplus capital when it, when it's accreted, and then redirect it later into future-oriented productive sectors. What's not to like about that? Um, unless if like the UK, you spend the North Sea tax money providing welfare for the former workers of, um, declined industries such as coal mining, and, uh, when you look round to see where your savings are, there ain't none there. Less said about that, the better.

Jonathan: Now- Mm. Um, back onto the positive. Um, so if you're a, if if you're a country that's actually got itself together, together and actually built a significant global-sized SWF, um, there's always the issue if you are trying to manage your economy going forward, that emerging technology categories, which often end up being the crowning heights of the economy, will collapse during risk-averse economic cycles, sort of like now, uh, for some of... for some technologies.

Well, basically any, any technology that isn't AI. So if you think about the way technology cycles work, SWFs can continue investing when IPO windows close, and they've been pretty shut for the last few years. Venture markets contract. Again, that has been happening.

And of course, something else that's been happening, interest rates have been rising, right? So if you can smooth this over as an SWF, that continuity can preserve strategically important technologies You know, through difficult commercialization phases. Supporters argue that this countercyclical role is especially important for big picture stuff. Now, what do we mean by big picture stuff?

Um, climate tech, semiconductor independence, defense adjacent innovation, and of course, advanced manufacturing- Yeah on which we all depend for wealth. Paul: And I think the defense adjacent innovation rings particularly true in, um, in an antebellum where you're, you're, you know, you feel like a war's coming, you better be ready, um, so SWFs can invest there. The, the fifth argument for SWFs to say they're amazing is that they're necessary because technology competition is already geopolitical.

China uses state-guided capital aggressively. Uh, we've seen that with Huawei and, and, and other vendors. The US deploys industrial policy through mechanisms like the US CHIPS Act, uh, and its, you know, defense pr- procurement, which is, you know, legendary and, and leads the world. Other nations need institutional capital vehicles just to remain competitive.

From this perspective then, SWFs are not market distortions or corrections, they are a strategic necessity. Jonathan: Ah, they may be, but of course, there is a case against sovereign wealth funds as a driver of technology category creation, and I'd like to kick this one off with something I think is self-evident. Um, governments, shock horror, are often poor category pickers. Now, critics, I'm not saying I'm one of these, or may or may not be, uh, they argue that technology category creation depends on experimentation, failure, and what we call decentralized discovery.

You don't slam a whole load of scientists into a room and expect to get, um, amazing things. So in reality, SWFs, because of their structure and because of who tends to run them, may overfund fashionable sectors, right? And that is because they need to be seen to be doing something. So, you know, clearly at the moment there's a danger that SWFs are overfunding AI investments, right?

So that is a form of politicization of capital allocation, i.e., they are not investing for pure economic or technological advantage, they are investing to be seen to be doing that. Um- And another sort of rather nasty aspect of this is, is that of it's really mistaking national prestige for, for market demand, right?

And because they are so big, they can create entire ghost ecosystems which appear to be alive, but they're not actually doing anything. So, um, just so that you, you, dear listener, doesn't think we're just going off on one on this, if you think historically, if you've been around for a few years, some of the over-investment waves we've seen are, for instance, smart cities were all the rage, um, metaverse infrastructure, um, some clean tech cycles, I would say, and various national champion projects.

And just have a look around at what's happening to some sovereign wealth funds, I'm not naming any names, who are cleaning house at the moment in terms of what it is they really wanna get behind. So the concern in all of this is that bureaucratic incentives reward visibility and scale. I look at my big stuff rather than the genuine product market fit. Um, top-down management by civil servants just doesn't work.

Paul: Yeah, absolutely. And, uh, the second point against sovereign wealth funds is that state capital paid for by you and I can distort innovation markets. Um, so this is where, you know, governments and markets collide. And large SWF funds can, of course, inflate valuations.

Um, they crowd out private discipline, so, you know, if you're getting lots of a spigot of government money, why would you apply that much discipline? Uh, and then they encourage capital inefficiency as a result of that and sustain weak companies longer than markets otherwise would. Thinking something close to the multiverse there. Um, when abundant sovereign capital enters immature market startups optimized for fundraising and tell stories about, uh, fundraising instead of focusing on customer value, which is death for category creators.

Critics argue that this contributes to excesses in late-stage venture markets, which could have... could and should have been creatively destructive by then. Uh, mobility of startups and, uh, has seen some AI infrastructure speculation, um, perhaps very close to home here in the UK, which will never and could never take off. Jonathan: Yes, indeed.

Um, and this is undoubtedly linked to the idea that in the wrong hands, the strategic motives behind what an SWF is supposed to do is actually in conflict with innovation efficiency. So give an example. So as a sovereign wealth fund, your political drivers may be national employment goals. So it's all about creating jobs Now that may be at odds with technology efficiency.

Um, geopolitical leverage. You know, do this because it's gonna be good for our country, but it will also help us in our relationship with another country or power group. Um, soft power, often, uh, misrepresented and misunderstood, helping other countries do things. Again, if we develop in this way, it may help somebody or some regime that we're trying to influence develop a better relationship with us.

And of course, there's just general domestic industrial policy. Um, by the way, industrial policy is usually made up by people who've never, ever been near industry. Um, so these goals are often not aligned with an idea of competitive neutrality, open innovation ecosystems, which we know have been behind some of the major innovations in patient technology in recent years. And, you know, this is a b- this is a, a bit finance, but efficient capital allocation, i.

e., are you putting your money in the right place to get the right returns? So for example, technology localization requirements can reduce global collaboration and increase fragmentation. And of course, if you're going anywhere near defense tech, that is a, a, a clear and present danger, to use the language of that sector.

Paul: Whilst we're on the topic, the fourth reason against, to argue against sovereign wealth funds is that the political risks that they take, um, can undermine trust. Let's remember, technology categories rely heavily on international talent. If you look at the number of US leaders, category leaders, almost all of them founded by immigrants. Cross-border research.

This is why people get hot under the collar about things like the Erasmus situation here in the EU. It requires open capital flows, as we're seeing from China, um, and, and how that can affect category creation, and it relies on strategic partnerships. Now, it's quite possible that if you go for a software - sorry, for a sovereign wealth fund, um, led investment policy, that can introduce national security concerns Data sovereignty conflicts and regulatory scraps, as we've seen very recently, uh, with the EU and elsewhere and big tech.

And this has hap- this has become particularly visible in telecommunications back in the day, semiconductors presently, and AI right now and will be for a long time. And the problem, particularly with AI, is it moves so fast that you're just... the governments are just not able, the sovereign wealth is not able to keep up with the speed or pace of change required. And of course, obviously, it re- it applies to defense-related software.

So innovative management, which is needed for these category creators, may be operating with one hand tied behind its back in relation to more conventionally funded, uh, commercially funded competition. Jonathan: So number five in this list, you'll be glad to know, this is the tenth, but it's number five, um, reasons against SWF is that they may reinforce what we call techno-nationalism, right? So a broader criticism of, of SWFs is that they contribute to a number of things you don't really want, uh, if you're gonna move forward quickly.

The, the first is fragmented standards. Um, you know, we've seen this right down to, you know, what is the standard for the plug that you put your iPhone in? Um, competing tech blocks, i.e.

, you know, one standard is completely adopted in a third of the world. You know, that is going to stop global-level innovation. Um, you also see wastage if you don't get this right because you will inevitably see, to support this, duplication in supply chains. Um, and that also has a sort of combining effect that continually reduces globalization.

So what can happen when you've got this, you know, sometimes toxic mixture of national ambition and technology development is that you don't create globally interoperable categories, you create parallel national ecosystems. And of course, what that is gonna do is reduce innovation efficiency, it's gonna reduce scientific openness, and of course it's gonna Reduce the economies of scale that otherwise you could create Paul: Right. So quite a, quite a list there of for and against, uh, arguments for sovereign wealth funds interfering, or as some people would say, aiding tech innovation and category creation.

Let's just recap them if we can. So on the plus side, the reasons why you would think that a software- sovereign wealth fund would be useful is that they provide patient capital. Uh, when that done right, they can catalyze across entire ecosystems, and that means from a national point of view, they accelerate strategic diversification of your industries. And they can help in downturns like right now to stabilize the funding, uh, to stop people being rash and switching it off too soon.

Uh, and they compete with state-backed ecosystems to provide an alternative means for categories to get created. That's all lovely. On the, on the negative side, we all know, we see it today, governments pick categories poorly. They're not a market.

They are some ill-informed, normally non-technical people trying to pick out winners. State's capital distorts competitive markets. The fact that there's a big funder in the market inevitably distorts the market, and the motives, uh, conflict between innovation and efficiency. Lastly, the political risk undermines a lot of trust in sovereign wealth funds, um, and they become a lit...

They can become and have become recently, in our view, uh, political footballs. And this means that they reinforce techno-nationalism, and as we all know, the last thing you wanna do with a category is limit its scope for growth. Jonathan: Oh, yes, the total addressable market question. We always want a big one of those.

So what does this tell us? Well, I guess what it tells us is there is a central tension behind all of this, and the debate pro and against ultimately centers o- on one question, and that real question really is, you know, should transformative technology ecos- ecosystems be shaped primarily by markets or by states with strategic capital? Now, the strongest re- real world pro SWF argument, I think, is that some technology categories are simply too capital intensive and strategically important to leave entirely to short term or comparatively short term private markets.

The strongest real world anti-SWF argument is that governments consistently struggle to identify which technologies deserve sustained support, and political capital allocation often becomes Inefficient, right? So how do you use sovereign wealth funds in reality? The truth, as usual, lies somewhere in the middle. A balanced framework often suggests sovereign wealth funds are most effective when they, for instance, co-invest with private markets rather than replace them.

That's absolutely definite because you get the discipline there. They focus on infrastructure and ecosystem layers, i.e. they are enablers.

They and the people that run them avoid micromanaging product decisions because they've been shown to be absolutely hopeless at doing that. And the people that they have put in charge to actually manage the sharp end will leave, as we've seen in the UK. They also need to use transparent governance. And by that, I mean they have to be clear about what they are doing and why they are doing it.

They must maintain commercial return discipline. As soon as they start looking like a money tree, you're lost. And they have to choose to invest across long-term horizons. The market can sort the other stuff out.

So if you think about it, in this model, sovereign wealth funds function less as central planners and more as what I call market shapers. And that's about reducing friction for categories to emerge and absolutely without fully directing them. You may say this is a bit of a cop-out. I'm sitting in the middle.

Or I think it's exactly what we should be looking to achieve. Here we are, um, as we get-getting up to the middle of 2026 in the UK, and we appear to be, um, living through, um, another government in chaos. Um, so what we wanna do is to have a look at, um, what's happened with the UK's tech ambition between the, uh, landslide victory that the current administration achieved and the current debacle. So the story of the current administration's relationship with Britain's tech economy is, at its heart, I think, a story about ambition colliding with dependence.

Paul: Uh, yeah, you could say that. Uh, when our current lot came in just a couple of years ago now, not even, uh, they inherited, uh, what they described as a pretty stagnant economy by all accounts. Productivity was weak, so was growth, and the national mood in, in the UK was that we'd missed the great platform, uh, engines of the digital age. I think it just occurred to people that, um, Meta had stolen everybody's data.

Uh, but the new administration, um, responded with almost evangelical zeal. "Let's go for artificial intelligence," they said. "Let's build our data infrastructure," they said. "Let's look at advanced computers, and let's look at these to become the engines of national renewal."

Uh, very quickly, though, um, their growth story disappeared. Uh, and there was a lot of cautious U-turning and managerialism and what we'd come to expect from, I don't know, the, um, civil service class. It was just, it seemed, all just national-building rhetoric, and at London Tech Week, uh, 2025, which we famously asked, uh, the value of, he... Uh, you know, the prime minister framed AI as the mechanism through which Britain, quote, "Would put money in your pocket."

Well, I think we know what happened to that. Uh, it was gonna rebuild public services and create opportunity in post-industrial communities. This all looks entirely ironic at this point. Jonathan: It absolutely does.

You know, a-and if you think about it, from the very beginning, the government's technological vision revealed a contradiction and a very big one. The current administration spoke of the language of sovereignty and national capability, um, but the reality was the machinery, machinery of its strategy depended heavily, if not entirely, on American hyperscalers and Silicon Valley capital the, uh, because the British state no longer possessed national computing champions, you know, compar-comparable to the, the global leaders of early industrial eras.

There, there, there was no sovereign cl-cl-cloud giant, no domestic AI infrastructure, um, no titan capable of competing with Google, Microsoft, Meta, Nvidia, or Amazon or anybody else. So Labor's growth mission Increasingly has become a cultship operation, right? So w- we, we, we w- the unedifying sight of, of, of government ministers and advisors cultivating close relationships with large technology firms, promising regulatory flexibility, planning reform, energy access, and AI growth zones, like Barnsley, in return for investment commitments, right?

So 2025 and into '26, um, critics of civil society and even parts of Labour's own coalition began arguing that the relationship had become, um, what's the word? Oh, asymmetrical or asymmetric. Um, Westminster, for those of you who are not in the UK, that means government and, um, and civil service, was no longer merely partnering with big tech, but orientating itself around the priorities of those firms. Now, the fact that the former Deputy Prime Minister, Nick Clegg, had become the mouthpiece of Meta really only served to fuel that suspicion.

Paul: Yeah. Well, I mean, it's not the, it's not the only one. Let's, uh, let's not forget Mr. Sunak, who, uh, to give him his, uh, dues, did actually kick off an AI summit for the UK, which did manage to get all the big names, uh, including Musk, et cetera, over here.

Uh, he's now the mouthpiece, if you wanna call it that, for OpenAI. So, um, you know, what goes around come, comes around. Um, and all of these public appearances with, with, um, Starmer and Jensen Huang, uh, you know, all they ended up doing was praising Silicon Valley investments. Uh, and they ce- celebrated these multi-billion pound pledges for data centers and AI infrastructure.

We'll, we'll recall what's recently happened with OpenAI's Sunderland data center. That got shut down, and instead of which we get a story in The Times of all places saying, uh, as a replacement, "Don't look over there, look over here, because OpenAI is gonna build some offices in St. Pancras." Uh, not the same thing at all.

Yeah. It was sort of Jonathan: sad seeing the, the government, government sort of portraying Britain as a democratic and stable gateway for global AI deployment into Europe. Well, you know, what's, what's new? The UK has been the, uh, tech- technical aircraft carrier for the rest of Europe for the entire history of IT.

Um, but you know, there, there's some other weird effects here. Now, there's for years, organizations which have taken quite a lot of state money, ironically, such as Founders forum group and Tech Nation, um, had attempted to nurture indigenous startup capacity. Um, you know, we're talking, you know, encouraging founders, encouraging accelerators, regional innovation networks, and other scale-up ecosystems that could produce British firms of strategic significance. Yet, it's quite clear that many founders- I've felt under the current administration, the center of gravity, i.

e., the attention span, was shifting from startup cultivation towards star-struck infrastructure diplomacy with foreign giants. Paul: Yeah, and this absolute demonstration of that, I was listening, uh, to a Radio 5 interview with a startup, uh, in a drone, uh, a l- a potential world category leader in drone technology who could not get a meeting with the MOD. You bet your backside, uh, if it was one of those big tech companies, they would be all over them.

And, um, I note Palantir's signed a massive deal, not just now with the Department of Defense, uh, with OR, uh, MOD, but also with the NHS. Uh, you know, it, it's hilarious that people can't understand why there's no entrepreneurial zeal when all they're doing is looking at the guys who've already proved themselves out, uh, across the pond. Jonathan: Yeah, and you know, a- again, if you speak to, um, startup and scale-up leaders o- out of this country, you know, th- they'll tell you that, you know, they've been to meetings at Number 10 and various fora, and, you know, government ministers w- go- going on about startup, scale-up, skills, uh, education, regional innovation, um, and directed taxpayer money supporting that, you know, and saying they're gonna put it in their direction.

But the reality i- is, is that the, you know, the state was favoring i- ever greater, uh, ways the big incumbents, uh, certainly from, from the West Coast. And, and, you know, government has an enormous purchasing power, yet procurement systems are still advantaging established vendors. You know, compute access remains concentrated. Trying to make the case here that, that computing access has, has remained very concentrated.

Stuff that people have been talking about for a long time to release capital, such as pension fund reform and more growth capital for, for startups, has moved incredibly slowly. I mean, but the evidence is that Britain has absolutely excelled at creating startups, whether government got involved or not, but yet again, failed repeatedly at retaining them as independent companies. Now, this frustration, um, I'm trying to do a frustrated voice here because it is frustrating because the Labor government simultaneously projected an image of a technological confident state while struggling to execute coherent digital governance internally.

And there were several controversies that fed that perception. Perhaps you'd like to take us through some of these, Paul. Paul: Uh, well, I mean, where do we start, right? Uh, yeah.

Uh, to me, it, it, it, one, one poster child here is digital ID. Can't get that through, um, and there's lots of people who think it's a, you know, it's, it's a debatable situation, and there should be public inquiries, and there's a lot of public outcry. But let's look at what's on our smartphones, guys. We've got digital ID up the yin yang, and guess who owns that?

The West Coast. You know, this, the, we have undisclosed meetings with, um, Google, Microsoft, Meta, Apple, Oracle, and Amazon about AI regulation happening, you know, behind closed doors. We talked about data centers and how they can get pulled on a whim. Uh, and the lobbying is just off the hook.

You mentioned, um, Tech Nation and others. Um, I, you know, I can think of, of, of other, uh, large, um, supposedly independent bodies, Tech UK, uh, where, you know, it's the money follows the influence and the influence follows the money. It's, um, uh, it's not a strong suit. I Jonathan: mean, there, there has clearly been a lot of extensive undisclosed lobbying meeting between senior Downing Street advisor or advisors and, as you say, the big tech guns, Google, Microsoft, Meta, Apple, Oracle, and Amazon, about things as important to, to, to national health as AI regulation, data centers, invest- in investment policy, being told what to do by West Coast companies in terms of investment policy.

Paul: Yeah. Is this gonna get any better? I'm not sure. Let's look at, let's look at the National Wealth Fund.

Um, who's heading that up? Is that a successful entrepreneur? Is that, you know, um, is that Herman from Arm or, or somebody that, uh, or, or Demis Hassabis? No, they've got better things to do.

So, uh, we've got Ollie, the former executive from the Bank of America. Um, a- and, um, obvious talk about banking failures. NatWest, weren't they bailed out? That's the CV of the chap that's heading up the twenty-eight billion so-called National Wealth Fund.

Now, I've got no personal anim- animus with Ollie. In fact, um, you know, he hails from this, a gorgeous place in West London called Barnes, which we know very well 'cause we live around the corner. But the fawning piece that we read in The Times, his profile, did sound a few alarm bells. Um- And what was in that then, Paul?

Oh, so, so let's talk about the National Wealth Fund. So the predecessor body, according to The Times here, the Green Investment Bank, and you can see what you're talking about in terms of following the trends here, uh, set up in 2012, but privatized five years later. Don't know if that made us any money. The current NWS, National Wealth Fund, traces its roots back to June 2021 when it was set up under the Conservatives as the UK Investment Bank.

Does what it says on the tin. But it was rebranded and rebooted by Rachel Reeves, of course. Why not? So you could invest in a quote-unquote wider range of projects.

Talk about drift here. Some politicians, the Times says, are already querying its future. Bear in mind, this is a $28 billion fund of taxpayers' money. Reform UK, who under the current chaos may benefit from what's going on with the government, has already floated the idea of a fund backed by local government pension pots rather than the taxpayer.

Now, isn't that what they do in the States? I think it is. More quotes and signs of concern here from the Times article. Holburn is speaking from a compact meeting room at the NWS head office in Leeds, where most of its, get this, 375 staff work.

It is, this is the National Wealth Fund we're paying for, the anchor tenant in a landmark waterfront redevelopment just minutes from the railway station. Now, we love Leeds and what's not to like about providing lots of northern jobs. But does 375 million folks sound like a lot for a £28 billion fund? I mean, I know it's a big fund.

I suppose you could say, hey, it's employment. But is that the right thing to do if you're trying to do a sovereign wealth fund that's going to create some wealth? Finally, uh, from The Times, within two months of taking over, he set out a strategic review outlining 25, 25 sectors from innovative technologies to strategic infrastructure that the National Wealth Fund will back. Jonathan: What, what's the one thing we know about success in business, Paul?

Paul: Focus, man. Jonathan: Focus, exactly. Yeah. Paul: Spray and pray do not work.

Uh, well, it, it obviously works creating 375 jobs in Leeds, but, um, you know, and, and not to have too, uh, much of a personal plot, but it- we did notice that, uh, the, the, uh, chap being paid a mere £375,000 a year, uh, has a spouse living in the tax-light Channel Islands. Um, and helpfully, The Times told us his car was called Ethel. Um, so yeah, I mean, I, I, it just looks like a very nice piece, and we love our colleagues in PR, but it just looked like puffery to me. And I calculate that, um, the salary, base salary we're talking about here of £375,000 a year is about .

13% of the entire fund. So it's not quite the two and 20 model, but you certainly can't pay 375 people at that level. Otherwise, you will be on the two and 20 model that the VC's made famous in the States. Um, and that's without expenses.

Now, we've also Jonathan: seen another flashpoint, um, between government and big tech around copyright and generative AI. The British creative industries, which are a massive wealth creator in this country, we're talking publishing, journalism, music, and design, for instance, have accused ministers of leaning too heavily towards American AI firms. And why, why would they be doing that? What would they seek?

They would be seeking broad training access to copyrighted content, right? This is a massive flashing point. Um, this, th- this criticism was, was politically dangerous because the Labour Party, uh, traditionally drew support from both left-leading, leaning creative professionals and the unions. Uh, you know, the opponents argued that the government risks sacrificing domestic cultural industries in exchange from investment headlines from Silicon Valley, right?

So get this wrong, and a major part of the UK economy could be gutted. But something else is sort of interesting about this, um, governmental tech journey. Um- A lot of the people who got, um, voted... Not voted in, given, given some very nice sinecures, and I think you're wondering about the new head of the wealth fund here, Paul.

Um, a- and, and then other names. I mean, we've seen people like Poppy Gustafsson go from the heights of tech into government and then disappear after a few months. Matt, the undoubtedly super talented Matt Clifford, um, authored the government's AI Opportunities Action Plan, uh, and it, it within six months and, um, then left for, inverted commas, "personal reasons." And a- another great talent, Dr.

Jean Inniss, who was head of the Turing AI Institute, stepped down after government told, in this case, the charity, but have a look at where the charity gets its funds from, to focus on defense research. So, uh, that sort of instability across the wider administration and, and quangos somewhat reinforced the sense of a government struggling to reconcile their sort of avowed technocratic ambition with actual institutional discipline. Now, you know, it didn't stop there because not all the departures were technology related.

They had the great early resignation with the new chief of staff, Sue Gray, um, and then Morgan McSweeney, the political fixture, and a load of other labor, labor strategists. And this just contributes to an atmosphere of managerial volatility, and that's frankly not where you want to invest, nor do you want to build your business in that sort of environment. Paul: Yeah. Uh, it's, it, uh...

It's, it's pretty... We talked a great game. Um, we held some amazing AI summits, uh, and there was some sexy investment memoranda, some strategic frameworks. But actually, if you net all this down, uh, the tension between the, the, the Starmer era and technology's politics was just too much for the dear man.

Um, the government viewed big tech as essential to economic recovery, so they told us. And the companies rolled in. They offered investment, jobs, infrastructure, prestige, geopolitical relevance, and dare I say it, as you said, nice cushty jobs once the politicking was done. Um, which is not in our interest, I would argue.

Um, we needed some growth stories after Brexit, and AI provided one, albeit one that lasted not very long. Um, and so is there a world in which the alignment of tech innovation and politics here in Europe come together? Could a British government meaningfully regulate companies which it depends on for cloud infrastructure, public sector AI deployment, and in in- investment, inward investment? Could ministers ever challenge this monopolistic behavior while simultaneously- Courting those firms, same firms at Downing Street in receptions and at investment summers- summits.

Could Britain ever, uh, claim technological sovereignty? And I notice it has got a sovereign cloud now, uh, mentioned. We mentioned that in a previous episode. When the AI future of this country and all countries, in fact, rely largely on imported compute, imported models, and imported capitals.

So yeah, you got me. I, I... You know, it's, it's been a, it's been a troubled time. Jonathan: Yeah.

So cri- critics, you know, have increasingly argued that, that the government's industrial policy amounted to managed dependency at best. Bhami, a- a- add... Yeah, absolutely. Add managed dependency to manage decline, then you've got a pretty toxic cocktail.

Um, a- another phrase which has been bandied about is digital colonization. Uh, and given the, the policy choices of this particular government, um, we're talking about digital colo- colonization at its worst. You know, Britain would hold the, you know, host the data centers, provide the talent, subsidize the energy infrastructure, um, and absorb the societal disruption, which we haven't even touched on, while the economic rents accumulated elsewhere, along with any hope of category dominance.

So supporters of, of Labor's strategy would counter that, that this criticism ignored reality. You know, Britain just lacked the fiscal capacity to create national champions and category leaders from s- scratch, you know, in a, in a global AI arms race dominated by the US and China, attracting firms like Google, Microsoft, Nvidia, the usual crew, and even allowing Palantir into the center of the state was not surrender but pragmatism. You know, the state's role in this view was to leverage external capital whilst maximizing domestic spillover, jobs, university partnerships, startup ecosystems, and infrastructure upgrades.

But that debate remains totally unsolved. Paul: Well, I don't want us to sound all doomster-ish here. There is... You know, there will be some changes at the top.

Um, we've seen on this very pod some amazing British entrepreneurs, and we'll be bringing you some more of them soon. Um, so it's all to fight for. But I guess what we've learned here is that the, the current government, um, has sort of let the side down. Um, it's probably the first British administration that, that was shaping its politics in the light of platform capitalism, and that was driven by AI infrastructure.

Earlier governments, you could say they got away with it. They encouraged and regulated technology, but this one seems to have increasingly governed through technology, and one would argue it's been the victim- of being outplayed by smarter, often US, certainly big tech category leaders. Yeah. Jonathan: So the labor story on technology, I think, is not simply about action or inaction.

It's about the transformation of the British state itself. Make no bones about it, this is a transformation from regulator of industrial power to negotiator with digital empires. Thank you for listening. If you want to learn more about category design, head to becategorical.

com. If you need help designing and dominating your category, then get in touch. Contact details are in the show notes.