Tuesday 31 August 2021 7:10 pm

Exclusive: City's venture capital guru on Brexit, ESG fundraising and impact investing

VCTA chair David Hall, who is also the managing director of YFM

With Brexit just behind us, and the pandemic gradually being brought under control, it seemed like a good time to measure the temperature of London’s venture capital investment space.

City A.M. sat down with David Hall, for his first major interview as chairman of the Venture Capital Trust Association, since succeeding Stuart Veale in January of this year.

The Square Mile-based industry group represents the ten largest VCT funds in the UK, with £4.5bn under management and around 600 businesses in their portfolio, spanning practically every sector.

In recent years, VCTA’s investment vehicles have pumped capital into companies like Secret Escapes, Zoopla, Cazoo and Fat Face. 

Hall is also the managing director of VCTA member YFM, where he is involved in all aspects of the business, including fundraising and the management of investments.

In this exclusive interview, Hall discusses the flow of overseas capital into British businesses post-Brexit, and how the Brexit agreement has impacted startups and small businesses across different industries.

He also zooms in on how the government can re-evaluate UK’s current funding infrastructure for small businesses to generate greater opportunities for domestic investment and impact investing.

Has Brexit raised questions about the appetite of overseas investors to back British businesses? I am asking because this has been so crucial to the growth of UK scale-ups in the past.

For fast growth companies, we are still seeing high demand from overseas investors. It is just more centred around emerging industries or those that have done particularly well in the pandemic, such as e-commerce, collaboration tech and cybersecurity. In particular, there is a lot of cash to invest in mid-market companies.

Despite Brexit, overseas investors still know that the UK is producing some of the most innovative companies in the world.

Many will look past political changes and not be put off investing in organisations based here. In fact, some European investors will consider having a UK footprint more important than ever post-Brexit. This desire will only grow if the pound continues to increase in value as it has done over the last couple of months.

Culturally too, a previous issue for overseas investment was how to meet potential portfolio companies and build face to face relationships with them before making any decisions, [but] it is becoming increasingly acceptable for deals to go ahead without an in-person meeting.

Apart from fundraising, how has the Brexit deal impacted startups and small businesses across different industries, depending on whether they deal in goods or services and software?

In the short term, there will be lots of extra paperwork for all businesses, particularly those reliant on the movement of physical goods. However, this particular problem isn’t going to impact the majority of fast-growth startups, many of which are in the tech sector.

Businesses in the software and services space are going to be primarily impacted by issues around data adequacy, and how such regulatory changes, and the associated red tape, will impact their operations.

There’s a priority to sort out the operation of the financial services sector, where there will be a leakage of jobs from the UK until there’s clarity regarding our trading relationship.

I’d caution against those suggesting that as the numbers are currently not as stark as some of the gloomier predictions that its not a real problem. Damage can still be caused, and we need to avoid this as it will take a long time to recover.

On a longer-term basis, Brexit could well impact the UK’s talent pipeline, as our ability to hire European nationals may be compromised. It’s going to be important to overcome this problem quickly, whether through special visas or other agreements with the EU to ensure innovative businesses have access to skilled workers. If there is a choice between New York and London and it’s harder to come here, you can see the issues that may arise.

The City of London was, and many argue still is, the beating heart of Europe’s banking and investment community, and Shoreditch and Old Street the Silicon Valley of Europe. Do you expect that to change in the post-Brexit era?

As the son of a butcher from Salford, I hope Brexit will accelerate the levelling up agenda, building a vibrant environment across the country that is conducive to small business growth and focuses on nurturing regional talent and clusters. I do think that London will remain the heart of the ecosystem, given the majority of fast-growth companies and funding is based there. But we need to ensure that regional hubs feed off the capital’s success rather than be starved by it.

Also consider the positives, Brexit will open up new ways of trading that are more efficient. Deals will make it easier to exchange goods and services with markets such as the US and Singapore.

Just as Silicon Valley was an idea by the US government which has spawned something wildly successful, creating clusters in the UK will also be vital to spreading scale-up innovation and funding across the country. It will help to maintain nationwide enthusiasm for entrepreneurship and incentivise founders to give back to their local ecosystems.

Let’s zoom in on the pandemic as funding for later stage scale-ups has been decreasing significantly since March of last year. This places limitations on the volume of investment coming from VCs. How challenging is it to raise funds, currently? 

Fundraising for investors actually looks relatively steady, despite the seismic waves the pandemic has sent across the world. However, demand for funding hasn’t decreased and this is where we’ll probably start seeing pinch points, particularly as scale-ups seek VC capital to reduce their debt and fuel growth. Although investment has remained fairly consistent, we might see a growth capital gap should the number of companies seeking funding outweigh the amount that VCs can invest.

I take it the National Security Bill is making life not any easier for you ?

Surprisingly, the National Security Bill has not had a significant impact, yet. Although there might be some transaction friction in the short term as the adjustments are made, in the long run, we’ll build the new legislation into the deal timetable, so it will just become another piece of due diligence that needs ticking off the list. Buyers are just going to need to become aware of the process and work it into their plans.

What changes should the government make to the UK funding infrastructure for small businesses, in order to generate greater opportunities for domestic or foreign investment?

The challenges from Brexit aside, the political shift has provided us with an opportunity to alter investment regulation by making our own State Aid rules. Before the 1st of January, government-backed funding schemes such as VCTs had to comply with EU rules on State Aid. This meant the government was not allowed to provide financial support beyond certain limits because income tax relief is regarded as State Aid.

These rules originated in Brussels and were designed for a multi-national trading bloc and not a single nation like the UK. This is especially pertinent now as the UK has its own priorities, including fuelling its thriving startup environment, with the government trying to provide greater than usual support to the country’s struggling small businesses.

Can you explain that in a bit more detail?

Yes, this is because the law places limits on the amount of funding a company can raise over their lifetime from government-incentivised schemes. There are also age limits in place in terms of how young a business has to be to qualify for government-subsidised schemes, which restrict the range of businesses that can benefit from public-private investment schemes.

Just like people, age should not be a barrier to a company’s ability to grow and innovate.

Often businesses reach these limits before they are ready for new, bigger funders to come in and take them to the next stage of the investment pathway. If we use Brexit as an opportunity to relax these limits, it would enable the government, and its co-investors, to better support businesses and provide them with the capital required to scale.

Ultimately, developing a world-class funding infrastructure for growth businesses means creating a holistic investment pathway that both creates the global unicorns that grab the headlines and feeds capital to the broader pipeline of small businesses that contribute to job creation and regional growth.

Everyone has something to say about ‘impact’ investing these days. It has become the go-to buzzword for corporate firms and investment platforms. What do you make of that?

The rise of impact investment is a positive long-term development. What is encouraging to see is that over the last 5-10 years, the phrase ‘impact’ has gone from “something that we need to incorporate in a paragraph in the chairman’s report” to an activity where data is proactively being collected and analysed so companies can take tangible action on how they can make a fairer and better impact.

While this is a step in the right direction, there is a long way to go. It’s good that the impact of an organisation on the local community and environment is being considered and becoming a focus in an organisation’s larger strategic goals, and I’m sure this will only increase over the coming years.

Finally, your association represents the ten largest VCT funds in the UK. You have supported some of the country’s most successful entrepreneurs. In which sector and where do you see the best returns, currently?

VC by their nature hunts for growth, so we are looking at the sectors where the pace of change is accelerating. At the moment, this includes areas such as data analytics, cybersecurity, medtech, edtech and financial technology, but we are not pigeonholed to these sectors alone. Members within our association have recently invested in Parsley Box, Virgin Wines and Entertainment Magpie, to name just a few outside those industries.