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Publication of the Quarter - From Funding Gaps
to Thin Markets: UK Government Support for
Early Stage Venture Capital
September 2009: Nightingale, P., Murray, G., Cowling, M., Baden-
Fuller, C., Mason, C., Siepel, J., Hopkins, M., and Dannreuther, C.
‘Hybrid’ venture capital schemes backed by private and public sector
funding play an increasingly important role in the risk capital funding of
early stage firms with the potential for significant growth. That is why
BVCA and NESTA commissioned a consortium of key UK academics
to analyse the impact of investment from six UK government-backed
venture capital schemes on 782 funded firms over the period 1995-2008.
The main findings of the report led to the following recommendations to
the government:
• Hybrid venture capital funds should be larger so that fund managers can invest in every stage
of a firms growth and not become diluted in the later stages.
• Venture capital funds with a commercial focus need to be able to select their investments
from a large pool of high quality firms. Constraining funds to invest in geographically mandated
areas is likely to have a negative impact on the size of the pool of firms they can invest in.
This will limit their ability to specialise and generate commercial returns. There is therefore a
potential tension between regional policy and innovation policy. To constrain investment in
new technologies to a sub-national focus, and outside international centres of excellence, is
particularly problematic.
• The operational constraints that keep publicly funded VC funds operating within the ‘funding
gap’ also generate significant costs. Many schemes constrain investment size and focus to
ensure that government funds provide the small sums of risk capital that are not available from
private VC funds. These constraints imposed by the public funders of hybrid programmes
might need to be less rigorously applied if business angel network investment activity was
increased, thereby providing more supply at the earliest stages of external finance.
• Policy that focuses on filling narrow funding gaps can be counter-productive. Policies that
fill ‘vertical’ gaps in finance by the specific provision of funds that address different levels
of investment (e.g. maximum investment levels per portfolio firm of £50,000; £250,000 and
£2million) can create artificial barriers between successive funding schemes that force growing
firms to undertake disruptive and costly changes in their search for new or additional investors.
Policy should focus on improving the flow of funding to high potential, growth oriented firms
(through a ‘funding escalator) as they move from formation to a successful market exit.
• The systemic approach to policymaking adopted by the UK government that encourages
Business Angel networks and links entrepreneurship and innovation policy is a positive
development. Therefore, they have the potential to support regional development ambitions
without compromising their own economic viability.
The full publication is available via the link:
http://www.bvca.co.uk/home/Home-for-launch/features/BVCANESTAFromFundingGapstoThinMarkets
Hybrid venture
capital funds should
be larger so that
fund managers can
invest in every stage
of a firms growth
and not become
diluted in the later
stages
Summer 2009 BVCA Quarterly Brief 9