UK Government and Venture Capital
New startup have a potential for high growth, and these businesses have been emerging at a fast pace since the recession of 2008. However, the success of these companies is based on a number of factors, one of which is the availability of an appropriate source of business finance. Due to the credit crunch, new businesses suffered a lot in the UK in terms of getting finance. Therefore, it was important to rehabilitate the economy of the United Kingdom by encouraging alternate sources of investments, such as, Private Equity or Venture Capital funds.
The main challenge faced by the government of the UK was not to create high-growth firms, but to take measures in order to ensure continued growth of these companies. Innovative ideas can only thrive if the right investment opportunity is available. The businesses with a potential of high-growth need a substantial amount of funds up-front, which is hard to obtain via traditional sources of finance.
Rise of Business Angels in the UK
Right after the credit crunch, business angel network evolved in the UK and took the form of well-structured and organized groups of professionals. It allowed them to make significant initial investments and undertake subsequent investments in the same professional way as Venture Capital investors do. However, the Venture Capital funding system was not established and focused on investing in innovative ideas, but it began to change.
The UK Government Support for Venture Capital Investment
Inspired by the Venture Capital (VC) backed firms in the United States, economists and authorities in the UK showed rising interest in this alternate investment opportunity for its unique role in distributing resources and expertise to a small percentage of high potential businesses.
Every major economy in the world has implemented initiatives to promote the role of VC, and many governments have formed their own VC funds. Similarly, the UK government has established various hybrid VC funds to achieve the entrepreneurial objectives and bridge the equity gap by strengthening the VC ecosystem. The purpose of these funds is to focus on growth oriented startup firms with innovative ideas that continue to face difficulties in obtaining capital. The UK government has a history of such interventions in a financial market that goes back to 1945 the Industrial and Commercial Finance Corporation (ICFC) was formed for SMEs (Small and Medium Enterprises).
The Government VC Funds (GVCFs)
There are three main GVCFs operating in the UK, namely UK Innovation Investment Fund (UKIIF), Enterprise Capital Funds (ECF), and Angel Co-investment Fund (ACF). All of these are the hybrid co-investment schemes and their aim is to promote public-private sector investment.
- UK Innovation Investment Fund (UKIIF) – It was established in 2010 to encourage VC investment in the Research and Development sectors. It supports the formation of viable investment capital and targets the high-potential IT businesses in the UK. The investment is made via two underlying funds, i.e., the UK Future Technology Fund (now ceased) and the Hermes Environmental Impact Fund. These funds invest in those VC funds that are involved in giving capital to strategically crucial sectors of the UK, such as, life sciences, digital technologies, advanced manufacturing, or clean technology.
- Enterprise Capital Funds (ECF) – This fund started operating in 2006. It represents a combination of private and public investments in businesses that have a tendency of high-growth. The purpose of establishing this fund was to lower the entry barrier for fund managers to operate in the VC ecosystem as well as to increase the supply of equity in the region where small businesses do not have access to the growth capital. It is rolling a program of 19 funds around £840 million with a planned life-cycle of ten to twelve years.
- Angel Co-investment Fund (ACF) – It is the UK government’s £100 million fund that was launched in 2011. The objective of this fund is to provide direct investment to SMEs with high growth potential and to support the UK business angel market. Under this scheme, funds are allocated across the UK with a goal to support companies at every stage of development in different sectors. Furthermore, it operates at an arm’s length from the UK government under the administration of the British Business Bank.
Government interventions have become more important with the rapidly changing business environment and more initiatives are required to be taken by the government to promote the innovative ideas in the country to boost the overall economic environment.