Government propping up regional venture capital
Article Date: Nov 30 2009Venture capital (VC) investing outside London and the South East depends heavily on public sector funds, according to a study.
More than half of all investments in other UK regions since 2001 have involved publicly financed VC funds, finds the research from the University of Strathclyde and government enterprise support body NESTA.
In 2008 the share of early-stage investments relying on government-backed funds rose to between 80 and 90 per cent.
The authors of the report say the trend is due to a decline in private VC funds following the dotcom crash, as well as the rise of government initiatives aiming to plug the gap.
They claim the findings are worrying because ‘although government-backed VC schemes have had a positive effect on company performance and job creation, this effect has been significantly less than the effects that purely private venture capital would be expected to bring.’
However, withdrawing public money for regional VC funds would only widen the regional divide between the South East of England and the rest of the UK, the report concludes.
Comment by email:
The reliance on government support for regional venture investment is decidedly worrying. The Private Equity sector does not, in 95% of cases, provide venture capital as originally defined. The reliance on government comes through matched funding and is very largely Brussels-provided. Its continuation therefore is far from assured and the banks just won’t do anything. Matched funding is the life-blood.
The time is NOW right for a new “breed / approach” to the provision of capital in the “venture” sector as opposed to “development” or financial engineering. It will require an approach that recognises and addresses the management weaknesses of early stage companies and, as such, will be outside the “portfolio management” style of virtually every VC house.
The key questions will be: is government/Brussels sufficiently aware of this additional methodology and prepared to continue to provide funds? Will government recognise that intensive management is massively different from portfolio management? Will government provide a tax break for intensive management as an EIS-qualifying activity (barred presently if shares are owned as that equates to investment unless it falls within the rules of corporate venturing)? Can improved/more relevant financing methods be created? (They easily can and are profitable BUT require innovative thinking).
All in all, the possibility of government withdrawal and/or Brussels redirecting funds would represent a massive shock.
Richard Muir-Simpson
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