UK venture capitalism: Opportunities and costs

JACOB MOSELEY
THE venture capital industry in the UK, and the rest of Europe, is in something of a state of flux. During the tech bubble era, venture capital fundraising and investment activity expanded rapidly, but when the bubble burst, many firms struggled to survive the subsequent economic downturn. This has led to a consolidation within the industry, with a number of venture capital firms becoming increasingly inactive, leaving a handful of key players like Accel, Balderton, Index, Scottish Equity Partners, and others, to lead the market.

This strengthening in the position of prominent venture capital firms has led to increased appetites for larger deals. Additionally, a lack of leverage in the market is causing some private equity firms to move their focus to growth-stage companies, which would previously have been the preserve of more traditional venture funds. This means that we are seeing greater competition in the growth space.

The venture capital industry is wholly dependent upon tech and innovation. The entrepreneurial community in London is going from strength to strength, with the tech cluster in East London serving as a shining beacon of hope for the venture capital ecosystem and leading to a growing entrepreneurial talent pool. The lean start-up model has been hugely influential, and we are seeing increasingly capital-efficient businesses, with a definite shift in focus from traditional hardware and semiconductor companies to lean, rapidly scalable mobile, social media and internet businesses. M&A activity has greatly improved over the last year, and will continue to do so as larger, primarily US corporates snap up promising UK-based businesses.

Jacob Moseley is head of UK commercial banking at Silicon Valley Bank.

CLAIRE MADDEN
WHAT is the state of venture capital in the UK? That’s an easy question to answer once you have defined what is meant by “venture capital”. For some it means funding start-ups and very early stage, sometimes pre-revenue, businesses, many of which are focused on new technology. Clearly these are alive and kicking – the UK is well served by early stage venture funds, seed funds, traditional business angels and soft government money. Most good early stage businesses that should get venture capital funding do. The ones that don’t are, generally, of poor quality. However, if you define venture capital to also includes later stage growth capital for profitable, growing (albeit still small) businesses, the answer is less clear. There is considerable appetite among private investors for good quality private equity investment opportunities – inside and outside of a fund structure. And considerable scope for the government to broaden and deepen the scope of both enterprise investment schemes (EIS) and venture capital trusts (VCTs). Why not, for example, offer EIS relief on loan notes and preference shares? That would be truly transformational. The recent changes to entrepreneurs’ relief are welcome, but still fail to grasp that there are many different types of entrepreneur, often working in teams. Why not allow specific incentives for growth capital and smaller management buy-outs? Capital gains tax (CGT) rule changes should recognise the difference between a gain derived from backing a wealth-creating, job-producing SME and a gain from selling a second home.

Institutions, in the main, have moved away from providing equity funding of less than £10m (and particularly less than £5m) and they’re not coming back. Private investors can and will step into the breach in large numbers, but only when the incentives are fully in place.

Claire Madden is a partner at private client investment firm Connection Capital.

ALEX MACPHERSON
THE success of British venture capital is aligned directly with the success of the entrepreneurs we partner. The challenge is to build a strong foundation from which to create, nurture, and support the next generation of entrepreneurs.

Recent years have witnessed strong progress in the UK: a wave of student entrepreneurship is taking hold; a number of startup accelerators, incubators, and shared working spaces are connecting and fostering talent; and a growing network of angel and venture capital investors are investing significant sums in young, fast growing businesses.

As we have seen from our own experience, success breeds success: the founders of Lovefilm have evolved into a network of extremely talented and knowledgeable entrepreneurs. This cohort has shown themselves willing to start new ventures, skilled in building further teams and businesses, and keen to angel invest in the next generation of ambitious, dynamic startups: Zoopla, Graze.com and SecretEscapes.com are three of several that spring to mind.

Downing Street has done much to recognise this in recent months with the introduction of seed enterprise investment schemes (SEIS) and the enhanced tax treatment for investors under enterprise investment schemes (EIS). The government can do more to speed this momentum. The challenges facing entrepreneurs wishing to come to the UK to start or join fast-growing businesses remain too great; high speed broadband infrastructure is lacking, particularly in some major centres and the burden of employment regulation is prohibitively complex. The government must recognise the anomalies surrounding entrepreneurs’ relief and the significant risk involved in creating new businesses.

Alex Macpherson is head of the ventures division of Octopus Investments.