Report: Government Venture Schemes Must Learn Lessons of the Past

Wednesday, 2 September 2009

Entitled 'From Funding Gaps to Thin Markets: UK Government Support for Early Stage Venture Capital', the report analyses the impact of investment from six UK government-backed venture capital schemes on 782 companies over the period 1995-2008.

The report finds that these government-backed VC schemes have had a positive effect on company performance and job creation. But this effect has been small, and significantly less than the effects that purely private venture capital would be expected to bring. Many of the problems arise from the structure and limitations of government-backed schemes established in the UK to date. Too often they have been too small, too regionally focused, poorly managed, or unable to provide enough capital or effective follow-on funding.

The report therefore makes the following policy suggestions:

• Raise the minimum size of 'hybrid' venture capital funds (funds with a mix of public and private money) to £50m. Smaller funds do not have sufficient scale to take high-performing firms in their portfolio through the several rounds of financing necessary for a successful IPO or trade sale exit.

• Remove geographical constraints. Requiring a fund to invest only in a limited geographic area reduces the size and calibre of the start-ups that they can invest in, limiting their ability to generate commercial returns.

• Remove limits to maximum investment levels per portfolio company. Filling narrow funding gaps by restricting the amount of capital funds can invest per company forces growing companies to devote too much time to the disruptive and costly search for new investors, rather than running and growing their business. Policy should focus on the creation of 'funding escalators' (a fund or group of funds able to provide multiple rounds of funding over time) to assist growth companies in their progression from formation to successful market exit.

Simon Walker, Chief Executive of the BVCA, said:

"While it is clear that progress has been made and these initiatives have recorded commendable successes, policy in the future must be smarter and heed the lessons of the past ten years. These schemes are often prisoners of regional and operational constraints which prevent them from unleashing the true potential of high-growth companies. The obvious tension between regional and industrial policy should be settled in favour of a forward-thinking industrial policy which focuses on flexible, bottom-up regional policies, rather than inflexible top-down ones. The structure of the recently announced UK Innovation Investment Fund shows that lessons are being learnt and to fashion a new strategic direction for Britain policy must continue to evolve by eradicating the constraints of the past."

Jonathan Kestenbaum, NESTA's Chief Executive commented:

"Previously we had little more than anecdotal evidence about the performance of these funds. The conclusions of this report can now help to shape the structure of the Government's new Innovation Investment Fund. Multiple objectives have been the downfall of previous Government-backed schemes but we now have the opportunity to put this right so that the UK is creating, and growing tomorrow's great businesses". 

- ENDS -

For further information please contact:

Nathan Williams, BVCA      020 7420 1807/ 07825 678 701

                                                nwilliams@bvca.co.uk

Chani Hirsch, NESTA          020 7438 2601/ 07967 800 494

                                                Chani.Hirsch@nesta.org.uk

Notes to Editors

1. The British Private Equity and Venture Capital Association (BVCA) is the industry body for the UK private equity and venture capital industry. The BVCA has over 400 member firms, representing the majority of UK-based private equity and venture capital firms and their advisers. The UK private equity and venture capital industry accounts for almost 60% of the European market

2. NESTA is the National Endowment for Science, Technology and the Arts, an independent body which works to foster innovation in the UK. With the largest portfolio of early-stage businesses in the country, NESTA is a leading authority on how to grow new ideas. www.nesta.org.uk