Speaking at the British Business Angels Association Winter Workshop, BVCA Chief Executive, Simon Walker, discusses the BVCA's Venture Strategy
Simon Walker, BVCA Chief Executive
20th January 2009
British Business Angels Association Winter Workshop
Good afternoon.
I am delighted to be here today especially as I know a good number of you are members of both the BBAA and the BVCA.
The links between our two organisations are good and strong and I am keen to build on this.
Anthony Clarke is an active contributor to our Venture Capital Committee. Over the past 3 years, he and Jenny Tooth have worked with us on our annual spin-out conference. Key protagonists of our Venture Capital agenda, like Ernie Richardson (leading on a key debate here today) operate across the spectrum – to the benefit of both our organisations.
So, there is much to celebrate in terms of synergy between our organisations.
And I will come back to this.Let me start with news of what the BVCA has been doing for Venture. I am pleased to see that you all have copies of the BVCA Venture Capital Committee’s Manifesto.
This is the “Foundation Stone” of our strategy for venture. It was launched to our members in November – we’re trying to galvanise an industry-wide push that tells our story in a compelling way.
Despite venture capital thriving as an industry, it is clear that given the right conditions and encouragement, it could be making a much bigger contribution to the UK economy.
With new government initiatives to stimulate the right conditions and wider support, we will be in an even better position to build businesses and contribute to job growth – the 2 critical parts of our story – particularly compelling at this time in the economic cycle.
This is the core of our argument. We want to reach our full potential. And we can do it now.
We know, from politicians and commentators, there is a huge need to broaden our economic base to let the free enterprise economy flourish over the long term. With the high street in the turmoil we have seen in recent weeks, this has never been more important.
The context is clear and positive. As Gordon Brown has been saying, if 2008 was the year we confronted the global downturn, 2009 must be the year that the world comes together to invest and build a prosperous future while giving real help to families and businesses.
So, as promised by the Prime Minister, we wait for the Government to set out its further plans.
They need to include:
We wait with eager anticipation. This is exactly playing to Venture Capitalists and angels’ strengths. From an entire UK economy point of view, venture capitalists with their portfolio of businesses serve a valuable function in building these businesses….and especially in these sectors.
But …….and there is a but…. there is a big constraining factor that threatens securing Venture Capital’s rightful place in responding to the Government’s three initiatives.
We have to find a compelling argument to demonstrate that venture capital can make good returns.
So, critical to our success is our ability to heighten awareness of the key reasons
You will see in our manifesto that we highlight key examples of where Venture capital has spawned global leaders. But the compelling argument I am talking about is weakened by the fact that returns are long-term, inconsistent and tarnished by the historic problems of the dotcom period.
So, we are on a long journey to alter perceptions and prove our sceptics wrong…
We know that.
What are we doing?
Our Venture Committee’s “Access to capital” team – has viewed historical figures in a more comprehensive context and we shared exploratory figures at our member-led launch event in early November. Far more work has to be done in our annual Performance Measurement Survey to articulate the strengths of the venture capital model in terms of returns.
Our “Chairman’s Research” this year is entitled “Benchmarking UK Venture Capital to Israel and the US – What can be learned?”. This will highlight some of the successful government interventions in other countries, the performance of funds there, and the specific drivers of performance in these funds.
We need a deeper understanding of the fundraising and investment environment in the venture capital market - as well as job creation and R&D investment at our members' investee companies.
We need to demonstrate that venture capital is not only makes a positive economic and social impact but is an attractive asset class for investors. We are currently collecting data from a sample of UK venture capital firms that invest into early stage innovative intensive companies. Much of the information is very positive. The firms currently being analysed have raised around £2 billion over the past ten years. Two thirds of these funds have been invested to date and the top 4 firms, which make up three quarters of money raised in this time period, are 80% invested.
The vast bulk of money has been invested into IT & Communications with Clean Tech and Life Sciences making up the other significant areas that venture capitalists invest in. In venture capital backed firms where information is readily available, early analysis is already showing interesting trends in job creation.
At one firm, companies have grown their employment by more than 100% (nearly two thousand highly skilled jobs have been created in ten years). They have increased sales five-fold and their portfolio companies have enjoyed combined revenue growth of £455m).
Preliminary results from another fund show they have created 1,500 jobs in 50 companies within 3 years after their initial investment. The average company in their portfolio increases employment at a rate of 60% over three years.
Lastly, results from a venture capital firm that only invests into pre-revenue start-up companies, has created around 300 jobs in 60 portfolio companies over three years. Many of these companies will go on to receive further rounds of venture capital investment - who knows how much further they, and their workforce, will grow.
All the companies that have supplied preliminary data spend a significant portion of their investment on R&D activities. Where data is available on exports, many venture firms score well. The last Economic Impact Study that the BVCA had commissioned in 2007 shows similar results at a macro level for venture capital firms.
There are many academic reports on the correlation of venture capital investment and job creation in advanced economies. One such report published by EVCA and Professor Mike Wright of CMBOR again highlights job creation and R&D spend as two main components of venture capital across Europe.
Over the 5 years to 2006/2007, venture firms increased their worldwide employment by 8% p.a - a much higher rate than FTSE Mid-250 companies. Their UK employment also grew by 6% compared to a national rise in employment of 1% p.a.
We are actively promoting these facts among others to Government: again, Ernie and I were with strong allies like Lord Drayson and the new UK trade and investment minister, Lord (Mervyn) Davies yesterday on his second day in the job. They are onside and we need to lobby for greater support and understanding of our business case. Lord Paul Drayson, whom, as you know – (given his personal experience of being an scientist and an entrepreneur) has demonstrated his strong support for the Venture Capital and Angel investment models.
He went “on the record” at our Spinout event in November and indeed at NESTA events in December to that effect.
I am very interested to see that you are launching the first findings of research that you have been conducting with NESTA into the outcomes and returns for Angel Investing in the UK. There is some direct synergy here with our work. We are examining the different Government Schemes in the UK and how effective they have been in funding early stage companies.
We have assembled some of the best academics on venture capital in the UK including Gordon Murray, Marc Cowling, Colin Mason and Charles Baden-Fuller. The findings in this report will add to policy proposals that we will be taking to Government to maintain momentum.
But we have to keep telling this story… not just to Government but to the Investment Community and the media and public. One of the lessons I learned through decades of political activism was that it’s only when you’re absolutely sick and tired of saying the same thing over and over again that it’s possible, just possible, that your message is getting through to the people who need to understand it.
Our “Asks” of Government …especially those like
1. raising individual investment limits under the Enterprise Investment Scheme and
2. raising individual limits in Enterprise Management Incentive schemes (EMI) to attract management talent. …..are exactly what you are asking for.
Every time I see a headline that more City jobs are being lost as a result of the financial meltdown, I think - here are the next generation of potential investors and entrepreneurs. Given the problems around funding from Banks, the answers for future business investment and growth have to come from our two communities.
With a little pump priming from Government. We have to align our efforts to push up that hill to address this – and not turn into Cisephus who in Greek mythology, pushes a great stone up a hill – perpetually – only for it to roll back down again. We are not Cisephus.
If we work together even more closely than we have been in the past and demonstrate better to ourselves (by angels talking more to VCs and vice versa) – explaining how we build businesses and can make an even bigger contribution to the UK economy……. then we will be better able to explain it to investors, entrepreneurs, Government and the media.
The business case will be critical and that has to be our joint objective over the coming months. Whether it be collaboration through “joint research”, ideas for syndicates on funding to play our part in aligning with Government support, or simply greater networking at events like these ,we must seize the opportunities that will allow us to “unlock the potential” I was talking about earlier.
With our Venture Capital Committee, under the leadership of Richard Anton of Amadeus, and the leadership of Anthony Clarke of here at the BBAA, there is certainly a crucible of energy and knowledge to put pressure on policy makers and propel that compelling business case forward.
Rarely has the phrase “nothing ventured, nothing gained” been so appropriate.
Thank you.
