British Business Bank’s latest commitment to the British Design Fund (BDF) is a clear bet on a part of the UK innovation economy most private capital still sidelines: early‑stage, physical product businesses.
The state‑backed lender has committed EUR 5.7m (£5m) to BDF via its Regional Angels Programme, with around EUR 3.94m flagged as the current tranche, to be deployed into pre‑seed and seed‑stage, product‑focused startups across the UK. The move is explicitly targeted at manufacturing, engineering and design‑led ventures – the kind of hardware, industrial and circular‑economy plays that have struggled to attract equity while capital has flooded into software, fintech and AI.
A deliberate tilt back to hardware
While most UK venture capital remains skewed towards asset‑light, software‑driven models, British Business Bank (BBB) is using its public‑private mandate to lean into the opposite side of the risk spectrum. The BDF vehicle, managed by Damon Bonser’s BDF Advisors and structured with Sapphire Capital Partners LLP, focuses on physical product innovation: advanced manufacturing, industrial engineering, watertech and material science.
BDF’s existing portfolio underlines the thesis:
- NUUV Ltd – watertech solution provider (c. £150k ticket)
- Matoha – AI‑enabled material scanners for recycling and sorting
- ManholeMetrics – flood prediction and monitoring technology
- Zeus Sleep – product‑led consumer sleep brand
- Good Boost – aqua‑rehab technology for musculoskeletal conditions
These are capital‑intensive, IP‑driven businesses with longer development cycles than typical SaaS plays. Traditional VC has treated this segment as niche and illiquid. BBB’s capital effectively underwrites part of that risk, allowing BDF to back more of these companies at the smallest ticket sizes where the funding gap is most acute.
Targeted, not broad, intervention
The commitment sits within BBB’s Regional Angels Programme, which co‑invests with specialist managers to expand early‑stage equity beyond London and the South East. The BDF mandate is explicitly geographical as well as sectoral: invest nationwide and reduce disparities in access to capital for founders building physical products outside traditional tech hubs.
This is consistent with other 2025‑vintage BBB deployments, but more focused in scope:
- Through Northern Powerhouse Investment Fund II, BBB has backed advanced manufacturing players such as Atomik AM (c. EUR 713k) and Holdson (c. EUR 1.7m).
- In parallel, it has supported high‑profile software and AI growth rounds, including PolyAI’s EUR 64m raise, with around EUR 15m from BBB.
Against that broader context, the BDF cheque is small in absolute terms but highly targeted. It is designed to unlock follow‑on capital and syndicate activity in a sub‑EUR 10m deal space that commercial funds have historically deemed too complex for the ticket sizes available.
Why this matters for the mid‑market
For the European mid‑market – deals in the EUR 10m–500m range – the relevance is pipeline, not size. Hardware and manufacturing exits in that bracket depend on a much earlier layer of capital that has been chronically thin in the UK. Without pre‑seed and seed funding for physical product companies, there is nothing to grow into €50m–€200m buyouts or growth equity rounds.
BDF’s model addresses that structural weakness:
- De‑risking the earliest cheques: BBB’s public capital crowds in private angels and small funds that would otherwise avoid hardware.
- Building regional deal flow: By backing founders in under‑served regions, BDF can seed companies that later become targets for regional mid‑market private equity and strategics.
- Strengthening industrial depth: The focus on advanced engineering, manufacturing and circular economy aligns with UK industrial policy and European reshoring trends, creating future acquisition targets for industrial strategics.
If replicated or scaled, this approach starts to repair the broken part of the value chain between university labs, engineering spin‑outs and the mid‑market M&A ecosystem.
Risks and limits
The strategy is not without friction. Hardware and manufacturing startups face longer time‑to‑market, higher capex, and more complex regulatory and supply‑chain execution than software peers. That translates into:
- Longer holding periods before exit, testing patience of co‑investors;
- Higher follow‑on capital needs, requiring alignment from later‑stage funds that may still prefer software;
- Execution risk around scaling production, particularly where founders are first‑time operators.
However, the ticket sizes and stage focus mean the absolute downside per company is constrained, while the upside – in the form of defensible IP and industrial know‑how – is significant if even a small share of the portfolio scales. BBB’s broader programmes, such as the EUR 200m British Growth Partnership, also provide a potential continuum of capital for the small subset of BDF‑backed companies that break out.
An intentional counterweight to the software boom
This is not a signal that the UK is pivoting away from software; if anything, BBB’s concurrent support for AI and digital growth rounds shows the opposite. But it is a deliberate counterweight: public‑anchored capital underwriting the unfashionable but strategically important end of the innovation spectrum.
For investors scanning the UK mid‑market, the message is clear. The state is prepared to carry more of the early technical and industrial risk. Private equity and corporate buyers that want differentiated manufacturing and engineering assets in the EUR 50m–200m value range will increasingly find that the most interesting targets started life in specialist vehicles like British Design Fund – not in the mainstream venture portfolios that have dominated the last decade.