“It is notoriously difficult to get public funds to publish their returns,” he said. “You cannot help being suspicious that it is because the figures are not very good. But they have little choice if they are to justify their existence.”Mr Kestenbaum’s comments concerning the funds, which are estimated to manage about £500m, were triggered by research that his own publicly supported body will publish next week. This shows that the funds are now the most frequent investors in early-stage venture capital. This financing is important to fledgling technology companies.
The report Shifting Sands found that funds supported by taxes backed 141 early-stage start-ups in 2007, while solely private investors made only 106 investments. In 2001, in contrast, government agencies and their co-investors had participated in just 47 deals against 306 by private rivals. Publicly supported investments rose to £81m in value last year, within spitting distance of the £94m put in by solely private investors. These still dominated across all types of venture capital, with £783m in investments compared with £179m from public funds.
The government has set up a range of taxpayer-backed venture funds since 2000 in response to the Treasury’s belief there is an “equity gap” for knowledge-based start-ups trying to raise finance. Usually these funds co-invest with private partners, although the state may take a disproportionate share of any losses.
The Conservatives have questioned the establishment of the funds, as well as their lack of disclosure, which government officials have defended on grounds of “commercial confidentiality”. However, Mr Kestenbaum’s position is distinct. He believes public funds have a vital role to play in stimulating innovative start-ups and must disclose their returns to help improve their credibility. Nesta set up a £5m venture capital fund more than a year ago, which plans to publish its returns when it has made more realisations.
Some British venture capitalists regard public funds as a sop to second-rate entrepreneurs with political clout. However, they have been credited with successes in California, Scandinavia and Israel.