The global AI boom rumbles on and big tech valuations continue to soar, even as the Bank of England and major finance figures like Jamie Dimon voice anxieties about a potential stock market bubble.
In the US, Silicon Valley giants battle it out for supremacy and attract trillion-dollar valuations in the process.
Meanwhile Chinese tech giants are booming on the back DeepSeek’s blockbuster launch earlier this year.
In this context, it might appear as though the UK is lagging behind when it comes to developing AI tech and businesses of the future.
But, while the UK may struggle to match the likes of China and the US when it comes to large language models like DeepSeek, OpenAI’s ChatGPT or Google’s Gemini, there are still British AI firms making the most of the technological revolution.
Of course, Britain’s biggest AI success story – DeepMind – is now the cornerstone of Google’s AI arm after the US tech giant acquired the firm in 2014.
‘DeepMind is now a gigantic part of Google and the genesis of that was a UK business that was sold relatively early in the context of the current market and the hype,’ Ken Wotton, portfolio manager of the Baronsmead venture capital trusts, said.
‘There’s a lot of activity at the start-up end, but its hard to point at large companies in the UK that are AI-focused and still independent.’
In the last year alone, British AI companies attracted some £2.9billion in investment, according to the Government, with the average deal worth £5.9million
In fact, it is away from the flashy large language models that the opportunity for Britain’s AI future likely lies, according to Wotton.
The fund manager told This is Money: ‘[These companies are] already gigantic and they’re already attracting a lot of investments and the valuations are stratospheric.
‘Where you can actually make investment returns is in companies that are trying to leverage the foundational technologies and apply them to something that requires knowledge in a particular sector.’
In the last year alone, British AI companies attracted some £2.9billion in investment, according to the Government, with the average deal worth £5.9million.
This was a new record for AI investment in the UK, and means that these firms now contribute £11.8billion to the UK economy – double what they delivered in 2023.
These companies, according to Wotton, are largely focused on data analytics and machine learning, ‘because it is much more developed [than large language models]’.
Where are the opportunities?
It is expertise within specific sectors that Wotton says allows companies to be successful in the way they utilise AI technology.
‘They’re using the power of tech that someone else has developed to scale a business or improve a customer proposition… these tools can enable people to get there faster than they could have before.’
This, Wotton says, can give them a competitive advantage against slower moving peers in the same sector.
For investors, the opportunity in AI follows a similar path.
Neil Wilson, investor strategist at Saxo UK said: ‘The UK’s proactive adoption highlights how AI is enhancing both the analytical depth of investment research and the efficiency of execution, creating competitive advantages for early movers.’
Wotton is hopeful for the UK’s AI future, but warns: ‘we’ve got the ingredients to be successful, and its ours to lose.’
Baronsmead portfolio holding Netcall is a good example of this, Wotton says.
The software-as-a-service firm focuses on providing callback features for call centres, uses AI to improve efficiency and margins and keep them ahead of the curve.
Wotton said: ‘They’re an AI-enabled business, but they aren’t trying to dramatically disrupt their industry.’
‘They are enhancing their software gradually with this additional technology, but not at the expense of the customer experience… I think that that’s the way most businesses should be thinking, rather than just about huge disruption.
‘It’s typically a gradual structural shift… legacy businesses that haven’t kept up end up failing.’
Adam Vettese, market analyst at Etoro, added: ‘Demand for [Netcall’s] Liberty platform continues to accelerate from a wide range of organisations including the NHS, banks and insurers, contributing to an increase in annual contract value and growing the company’s subscription-based revenues.
‘The shares trade at a premium reflecting investor confidence in the strategy but also heightening expectations for delivery.
‘Netcall offers a well-positioned growth story in a dynamic market, though investors should balance the appeal of recurring revenues against ongoing margin pressures and execution risks as the company scales.’
Indeed, betting on disruptors is high risk even for a venture capital trust like Baronsmead, and finding the next DeepMind can be easier said than done.
Wotton said: ‘There’s going to be a whole host of companies that try to do it and fail, and there’ll be some which emerge to be really successful.’
Is now a good time to invest?
As investment into AI ramps up in the UK, the UK could be at the tipping point of an AI boom.
Nvidia’s boss, Jensen Huang, said recently that he thinks the UK will become ‘an AI superpower’.
Wotton is similarly hopeful for the UK’s AI future, but warns: ‘We’ve got the ingredients to be successful, and its ours to lose.
‘We’ve got fantastic innovation going on at Oxford and Cambridge and [other British universities] that are leading globally in developing some of these technologies.
‘There’s a decent argument that the UK has the third biggest global ecosystem for funding and developing start-ups, what we need is the next leg of investment, not only international capital but pension funds and domestic investors.’
Bubble fears
Still, talk of an AI boom is inevitable followed by fears of a looming bust.
The Bank of England, for example, this week sounded the alarm over a potential ‘sudden correction’ in the market.
Jason Hollands, managing director at Bestinvest, said: ‘The AI rally has drawn comparisons with the Dot Com boom of 1995 to 2000, which turned out to be a classic bubble.
‘[The bubble] burst spectacularly in the spring of 2000 leading to steep losses for investors who had got swept up in the euphoria.’
Hollands says there are characteristics of a bubble in the AI sector, but ‘while valuations are high, they have yet to reach the irrational levels seen during the Dot Com bubble’.
‘Earnings growth has been real and strong, and P/E ratios have slightly moderated,’ he noted.
Neil Wilson, investor strategist at Saxo UK, said: ‘UK investors are entering the final quarter with their guard up. Political uncertainty and global instability are weighing on sentiment, but we’re seeing a highly adaptive approach to risk management.
Ben Barringer, global head of trechnology research at Quilter Cheviot says the market is not in ‘bubble territory’ yet.
He said: ‘Ultimately the picture is uncertain and for investors this means diversification is crucial. Not just from a sector perspective, but also within any tech allocations to ensure there is not overexposure to one chip vendor or one AI provider.’
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