Most UK VC money comes from public funds

The proportion of investments involving publicly-financed venture capital funds has been above 50 per cent in all regions except London and the South East since 2001. As a result two distinctive venture capital markets have emerged since the start of the millennium: London, South East and the East of England where private sector investors account for the majority of investments, and the rest of the country where the public sector is involved in over half of all early-stage investments, according to the study by Colin Mason of Strathclyde University’s Hunter Centre for Entrepreneurship, and Yannis Pierrakis of the National Endowment for Science, Technology and the Arts (Nesta).

The analysis classifies public sector venture capital funds as both those whose entire funding is provided by the public sector, including Co-Investment Funds which exclusively invest alongside business angels and private sector funds, and also hybrid funds that have raised finance from a combination of public and private sources and which may invest in the same deals as private investors.

This trend reflects two developments, the decline in private venture capital funds since the Dotcom technology crash at the start of the decade, and the number of venture capital initiatives backed by government, including Regional Venture Capital Funds, University Challenge Funds and Enterprise Growth Funds.

The authors say this level of government involvement is of concern. Although government-backed VC schemes have had a positive effect on company performance and job creation, the effect has been small, and significantly less than the effects that purely private venture capital would be expected to bring.

Many of the problems arise from the structure and limitations of government-backed schemes established in the UK to date. Too often they have been too small, too regionally focused, poorly managed, or unable to provide enough capital or effective follow-on funding.

The conundrum for policy-makers is that with private sector venture capital clearly exhibiting a geographical bias in favour of London and the South East, withdrawing public sector venture capital funds in the regions will lead to a widening of regional divides.

The authors recommend better pipelines to connect the players in regional entrepreneurial eco-systems with London and venture capital funds overseas, more support to create business angel groups and increased efforts to improve the quality of businesses in the regions.

The full report is available at http://www.strath.ac.uk/huntercentre/research/wp/