The BVCA (British Private Equity and Venture Capital Association) and NESTA (National Endowment for Science, Technology and the Arts) today publish a report which examines the effectiveness of UK government-backed venture capital schemes. The report comes ahead of the creation of the Government-backed UK Innovation Investment Fund, due to be operational by the end of the year.
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 many of the 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.
Full report: http://www.nesta.org.uk/from-funding-gaps-to-thin-markets/