October 2015 – ‘Consolidating the gains. Government intervention in risk capital’ by David Gill

‘Consolidating the gains. Government intervention in risk capital’ by David Gill
Featured in: ‘Venture Capital. An International Journal of Entrepreneurial Finance’

Gaps in the provision of funding for growth-potential firms in the UK are both cyclical and structural. The dynamic nature of the gaps means that their characteristics vary over time, and quantification remains problematic, but recent evidence suggest shortages are most acute in the £2M–£10M range. Government intervention has become increasingly sophisticated, notably in the design and targeting of hybrid public–private funds, such as Enterprise Capital Funds. But mismatches between supply and demand persist, with substantial opportunity costs to the UK economy. The recent creation of the British Business Bank (whose formation was announced in September 2012 and which received EU state-aid clearance in October 2014) opens up an exceptional opportunity to apply government lessons learned in early-stage risk capital. In addition to leveraging further financial resources, the Business Bank has unique convening power to assist in rebuilding the venture market through example and leadership. The structured risk venture activity of the Business Bank (for which precedent exists in Israel and elsewhere) needs to take account of sector and cluster issues. Timing is opportune as Business Bank activity can harness developments in alternative financing, including crowd funding. To ensure that investment remains profitably focused on ‘the gap’, funds supported must: be of sufficient scale, be structured for the long term, contribute to rebuilding the UK’s venture expertise, and be restrained from mutating into mainstream private equity vehicles. The experience of regional funds over the previous decade was largely disappointing, but the emerging divide between the venture markets of the South East and the rest of the UK cannot be ignored. Centralized technical and industry expertise can make localized investment more cost-effective, enabling the UK to replace (but improve on) 3i as it was in the 1970s and 1980s.