The Treasury has launched a consultation on a new national investment fund to help British startups scale. The proposal is a part of the government’s review of patient capital and the lack of sustained support for British companies.
The Patient Capital Review is an initiative announced by the Prime Minister in November 2016 to strengthen the UK as a place where innovative firms can obtain the long-term finance they need to scale.
The government hopes increased access to scale-up finance will help homegrown startups become “world-leading unicorns”. That is, joining the global pantheon of elite companies - like Uber, Deliveroo and Snap inc. - valued at over $1bn (£760m).
"If the plans progress, it's very positive news for ambitious startups in the UK," says Shachar Bialick, founder and CEO of Curve, a prominent London based startup. "From a global perspective, it's still quite early days for the UK's startup scene which came to prominence quite recently in comparison with the likes of the US and Israel - so it's no surprise that the UK is also behind on access to growth funding."
The new fund will ostensibly fill any void left by the severing of Britain’s relationship with the European Investment Fund.
The government’s review identified a number of glaring weaknesses in the UK scale-up scene. There is a £4bn funding gap between American and British companies and fewer than one-in-10 firms that receive seed funding in the UK go on to receive fourth round investment, compared to nearly a quarter in the US.
According to Bialick, the UK does extremely well with 'seed' funding because the SEIS and EIS tax shields "are great programmes that allow companies to kickstart their development". But the support falls short beyond that, he says. "The amount of professional VCs in the space, and governmental support via loans or subsidies is still lower than it needs to be.
"We should expect to see continued growth in filling that gap, so that ambitious startups don't have to look East or West for funding to transition from 'startup' to 'scale-up'. At Curve, we're already seeing strong desire to start filling that gap for the 'fintech' sector - and as we transition from Series A stage to rapid growth, access to that funding will be vital if we are to become one of the UK's next technology success stories."
The UK does have some existing pedigree when it comes to unicorns - but, again, it lags far behind the US and also China, which accounts for 54% and 23% of unicorn companies respectively. Just four percent of unicorns are UK based.
Commenting on the consultation launch, the Chancellor Philip Hammond reiterated that it’s “vital that we make sure our cutting-edge firms have the funding they need to meet their potential and conquer new markets”.
The Treasury still needs to decide how the fund would be set up. The new fund could be either be a public-private partnership (much like how the EU’s innovation funding works) or be placed fully on the government’s balance sheet to be sold off once it has established a sufficient track record.
It’s encouraging to see the government thinking now about initiatives to support businesses looking to start up in the UK.
The new fund will ostensibly fill any void left by the severing of Britain’s relationship with the European Investment Fund (EIF). The new UK based fund, the Treasury said, would “would help ensure that firms still have access to the funding they need, should our relationship with the European Investment Fund end when the UK leaves the EU”.
It’s a cavernous hole to fill: the EIF injected £1.9 billion into 144 UK VCs between 2011 and 2015. Added to that, any new funding has already been paused since May pending clarification on the fund’s post-Brexit status, leaving many UK VCs in the lurch. "With the EIF pulling its funding due to Brexit, the pool gets even more shallow, damaging chances of innovation, growth and employment," says Curve's Bialick.
Reshma Sohoni is the founding partner at Seedcamp, one of the funds affected by the pause in EIF funding. Sohoni reacted to the consultation warmly, telling BusinessZone: “It’s encouraging to see the government thinking now about initiatives to support businesses looking to start up in the UK.
“We believe strongly that European entrepreneurs have the power to compete on a global scale and access to capital is obviously critical to help startups achieve this. We hope these encouraging words from the government translate into tangible action.”
The consultation will also look at how companies can receive investment from pension funds and how examine how to commercialise research from UK’s top research universities.