Venture heavyweights denounce government’s £1bn scale-up fund plans
The government’s flagship £1bn scale-up fund will miss out on top deals and chalk up poor performance for its pensioner investors should ministers select a traditional firm to manage it over a specialist venture capital shop, a group of the UK’s top early-stage investors has warned.
The industry heavyweights, who between them are early backers of British unicorns Elevenlabs, Synthesia and Fuse Energy, warned that awarding the tech-focused UK Scale-Up Fund to an institutional investment house would “make a mockery” of the UK’s venture industry and lead to it missing out on access to the most exciting firms.
The warning follows the revelation that both M&G and Schroders – two of the UK’s largest asset managers – had bid to run a £1bn government-backed pot made up of cash from a consortium of pension providers.
Alex Macdonald, chief executive of seed-stage investment shop Sequel, told City AM that opting for a traditional public markets investor over a growth investing specialist would “make a mockery of the venture industry in the UK”.
“If you’re the government and you’re going to give that mandate for scale-up capital to someone, you should give it to a proven venture investment manager,” McDonald, who also founded the luxury concierge service Velocity Black, added. “One who has been there in the ecosystem has credibility, understands the space and understands technology.”
At its launch last month, the government hailed its UK Scale-up Fund, which will be geared to invest in both science and technology companies, as a vital means to connect institutional capital with the companies “driving the next wave of British innovation”. Andy Burnham said it would help “unlock growth in every postcode” and generate “more opportunities for working people”.
However, venture investors have raised concerns that a traditional asset manager, with less specialist experience in the venture and early-stage investment ecosystem, would struggle to access to the same opportunities as specialist investors with track records backing successful UK start-ups.
Scale-up fund would miss out on top deals
Unlike public markets, fast-growing private firms can be highly selective over the kind of investors they choose to take on board, and will often turn down more prospective backers than they accept.
Harry Stebbings, the founder 20VC, warned that that the crowded nature of that investment process means a generalist investor will be left with an “adverse selection” of potential companies.
“They are not equipped to analyse the next generation of technology companies,” he said. “If they get chosen, it will because companies that could not fundraise anywhere else go to them.”
Tom Wilson, partner at Seedcamp, added: “It’s not just a matter of turning up and saying I want to invest in this amazing company – like a Synthesia or whoever that might be. It’s incredibly competitive at the growth stages because the best companies have a huge amount of options.”
The warnings come amid a concerted effort to ring-fence more of the pension industry’s vast pools of capital for British-grown success stories. Last year, UK’s largest providers all signed up to a government-backed push to unlock billions of pounds for domestic private companies.
Schroders has already played a pivotal role facilitating that drive, launching the UK’s first long-term asset fund (LTAF) geared specifically at pension providers. The fund has used cash from its first investing round to back the likes of autonomous vehicle firm Wayve and deeptech darling Elevenlabs.
Meanwhile, M&G has been an early backer of Physics X and the chipmaker Pragmatic Semiconductor.
“I would say it is incentives that drive outcomes, and when you go for the cheapest provider, you will most often get the worst quality product,” Stebbings added. “I think that would very much be the case here. Government organisations align and focus on cost, not upside, which drives poor performance, which will ultimately hurt the pensioners in this fund.”
The government declined to comment. Schroders and M&G, whose interest in the UK Scale-Up Fund was first reported by Sky News, declined to comment.