A few weeks ago, I attended the BVCA Tech Spin Out 2008. In several panels, UK-based VCs and government representatives, including the Minister of Science and Innovation Lord Drayson, discussed the dire state that the venture capital industry in the UK as well as the need for a ‘bailout’, similar to the banking industry. One of the main problems is lack of capital: institutional money from the US is seeking refuge elsewhere, foregoing one of the largest sources of capital for European VCs.
Today the Guardian announced a dramatic shift: the UK government plans to launch a one billion pound emergency fund to rescue the technology start up industry. The fund idea was conceived by the National Endowment for Science, Technology and the Arts (Nesta) and has the backing of minister Lord Drayson as well as PM Gordon Brown.
Is government intervention good in this case? If you ask me, absolutely. But it depends who’s interest you are thinking about.
Benefits for the UK government:
- Capital investments in UK companies create more jobs
- Start up companies consume a lot: equipment, office space, services etc, serving a fuel to the economy
- Some of the money will return as tax income and if the investment succeeds, the UK gov can even earn a premium
Benefits for the start ups:
- Pre-revenue startu ps will die if they cannot raise capital, and VCs are mainly investing in growth companies with proven business models these days.
- More capital available, in a market that traditionally seeks PE rather than VC opportunities
- Entrance into the largest client a technology start up can dream of – the government.
Benefits/Shortcomings for the VCs:
- More competition on portfolio companies (which I think is good for the industry overall)
- Lowering their risk: UK VCs now have the ability to co-invest with a solid partner and serve as ‘validators’ who introduce deals to the new fund.
The program is planned to launch early next year. According to Jonathan Kestenbaum, chief executive of Nesta:
It could be the most significant direct investment in new technology firms since the post-war Labour government created 3i to provide risk capital to growing businesses
The new fund will get its capital from the private sector including private equity funds, university endowment funds and mainstream business.