Back in December last year the UK government announced it would back the creation of a “£1bn venture fund” to invest in startups. At the time it sounded rather far-fetched. However, yesterday it was confirmed that this would indeed be going ahead, along the lines proposed by the NESTA, the National Endowment for Society, Technology and the arts.
The fund is broadly aimed at startups, but it’s likely to concentrate around science and technology, since its specifically aiming at “innovative, fast-growth companies” – and these don’t tend to be companies created to sell socks online. Thus, the fund is expected to focus on clean technology, bioscience, digital technology and advanced manufacturing. According to government figures there are 1,093 venture capital backed tech companies in the UK employing more than 40,000 highly skilled workers. That’s relatively small, however venture capital backed companies significantly out perform other companies and and 69% of these venture backed companies introduced entirely new products or services into the market.
The UK Innovation Investment Fund, as it’s called – announced by by Lord Mandelson, First Secretary of State at the London Stock Exchange yesterday – will invest £150m, to be matched by private sector backers. Prime Minister Gordon Brown has suggested that the fund could be higher, up to £1bn, if enough private investment is forthcoming – I think we can safely say that’s very much up for debate in this current climate. This notional £1 billion figure comes from a 10 year window for the fund.
Lord Drayson said £100 million of the £150 million will come from the Department of Business, Innovation and Skills, with the remainder being put up by the Department of Health and the Department of Energy and Climate Change. The fund will invest on an equal basis in a process known as known as “pari-passu”. The fund will be regulated by the Financial Services Authority (FSA).
A government-appointed manager will run this “fund of funds” and – according to the statement – hopes to make its first investment by the end of the year – so they had better get cracking.
Part of this initial £150 million will come from £750 million strategic investment fund the government announced in April to provide financial support to high-tech companies. That announcement sparked a wave of debate on TechCrunch Europe, with an open letter from Angel investor Robin Klein and two further responses.
Accordingly, this latest move was broadly welcomed by the private equity and venture capital industry which, largely in the form of the British Private Equity and Venture Capital Association, has been lobbying the government over this issue for the last two years, along with the European Investment Fund and others.
The government says say this “Fund of Funds” structure turned out to be most attractive to institutional investors because it creates a portfolio approach that spreads the investment risk across a number of different technology fund management teams and enables the Government to back private sector innovation without distorting or competing with existing fund managers. It’s also designed to complement existing public sector interventions such as Enterprise Capital Funds, RDA European Development VC Funds as well as tax measures (though I don’t see much new initiatives on the latter of these).
However, this initiative really isn’t all that new.
It looks very much like the previous UK High Technology Fund structure that was announced in 1998. This was a £125 million “fund of funds” which invested in a number of specialised technology VC funds such as Advent, Amadeus, MTI and Scottish Equity Partners. Back then the Government provided a cornerstone investment of £20 million which the funds were able to leverage with an additional £105 million from the European Investment Fund, UK pension funds and a French bank.
So overall, the questions are this.
Is this the best way to fund good start-ups? We still haven’t seen any movement on the UK government on capital gains tax, an area which tended to provide a great pool of seed funding before it was destroyed a couple of years ago. The issue I hear from startups time and time again is that it’s pretty cheap to build a beta, but getting seed funding to do this is tough.
And why has the government not used the tax system to stimulate innovation? In France, a recent new law brought in by President Sarkozy to allow private individuals to invest in startups has proved a rip-roaring success. It even allows them to spend 25% of their allocation in other EU countries. Talking to entrepreneurs and startups in Berlin recently, the chatter even suggested that the Germans may copy this French law. Where would that leave the UK? Right now it leaves startups stumbling back into the much higher barrier to entry VC eco-system.
And which VCs will get access to this fund of funds? Will they be the “good” ones that have consistently picked big global / European plays like Skype, SeatWave, Wonga and the like?
What happens if this fund is distributed to VCs that are actually using it to prop up a failing business model? The ones which, left to market forces and the changing role of VC, would have withered and died?
Let’s take a look at who did the bulk of the lobbying. The BVCA’s committee to lobby the government on this issue consisted of the following:
Gary Le Suer
Unfortunately it’s not disclosed which venture firms these people were with – though perhaps readers can help me to identify their companies. Update: He’s what we have so far:
Andrew Carruthers – Spark
Anthony Clarke – BBAA/LBS
Russ Cummings – Imperial Innovations
David Hunter – NESTA
Patrick Reeve – Albion Ventures
Ernie Richardson – MTI
Simon Walker – BVCA
So, there we have it. No tax loosening from the government, but instead a system to prop up the VC industry. Hopefully it will work and feed through into innovation and entrepreneurs. Fingers crossed.