The Role of Government Venture Capital Funds: Recent Lessons from the UK Experience

Abstract

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Early Stage Investing in Green SMEs: The Case of the UK

“…In this way UKIIF addresses many of Lerner's (2010) lessons by being private sector-led, contracting with leading international VCs with appropriate track records in early stage and Cleantech sector investing and not constrained to thin national/regional markets. Furthermore, as Owen et al (2019) observe, the scale of UKIIF underlying funds (at over £60m) is typically more than double that of ECFs, suggesting greater ability to provide large long horizon investment and follow-on funding. This addresses one of the key perceived failings of UK and European public and private VC, that they are too small when compared to their more successfully established US counterparts (Arundale, 2018;Deakins & Freel, 2012;Technopolis, 2011).…”

“…Adopting Markowitz (1952) pareto principles they need to invest in sufficient numbers of portfolio ventures and at sufficient scale over time in order to obtain returns, which are principally made up of the most successful venture exits (usually through trade sales or IPOs). The problem for VC is that early stage investment is risky and the returns are longer horizon, typically taking 5-7 years and lengthening in times of recession (Owen et al, 2019).…”

“…Table 1 demonstrates that the UK early stage innovative venture market contains a range of public interventions including investor tax breaks, grants and equity funds, to address perceived early stage private equity funding gaps (where banks will not lend, North et al, 2013), particularly in the key, high risk valley of death area from proof of concept to early trading (up to 2 years). This is the so-called Macmillan gap (1931), currently thought to extend in the UK between £250k to £5m (Owen et al, 2019) and which may extend further for long horizon Cleantech R&D (BEIS, 2017). North et al (2013) highlight the importance of early stage funding complementarity to meet the financing demands of early stage ventures, suggesting that a fluent funding escalator requires effective bundling of different forms of finance, whilst Hopp (2010) recognised the value of syndicationnotably between VCs (although increasingly occurring in recent times between seed VCs, accelerators, equity crowd funders and business angels (Baldock & Mason, 2015;Owen et al, 2019) -to raise investment levels, share risks, introduce more diverse investor skills, facilitate longer distance equity investment (between some investors and ventures) and open up international markets.…”

“…This is the so-called Macmillan gap (1931), currently thought to extend in the UK between £250k to £5m (Owen et al, 2019) and which may extend further for long horizon Cleantech R&D (BEIS, 2017). North et al (2013) highlight the importance of early stage funding complementarity to meet the financing demands of early stage ventures, suggesting that a fluent funding escalator requires effective bundling of different forms of finance, whilst Hopp (2010) recognised the value of syndicationnotably between VCs (although increasingly occurring in recent times between seed VCs, accelerators, equity crowd funders and business angels (Baldock & Mason, 2015;Owen et al, 2019) -to raise investment levels, share risks, introduce more diverse investor skills, facilitate longer distance equity investment (between some investors and ventures) and open up international markets. Hopp (2010) and Baldock and Mason (2015) recognize that VC typically prefers to invest locally for easy hands-on access and support to venture teams, but that more distant national and international VC and angel investors will invest in syndication with trusted local lead investors who provide the hands-on support.This suggests the increasing opportunities for a more international approach to equity investing (Owen & Mason, 2019).…”

“…The paper focuses on early stage investment in Cleantech, which is broadly defined here as private for-profit SMEs which may be pre or early trading that have a mission to develop and adopt innovative technologies to reduce CO2 emissions in their products and processes (Kenton, 2018). They typically undertake long horizon research and development (R&D) and struggle to obtain sufficient, often high, levels of private investment required to reach commercialisation (Owen et al, 2019;BEIS, 2017;Rowlands, 2009).…”