6 reasons for the surge in venture capital investment
Why investors are putting their money where their mouths are and backing fledgling UK businesses
Last week CB Insights, the venture capital database, released their list of the most active venture capital and early-stage investors in the UK.
The data also shows how UK venture investment has changed in recent years – making it a good time to reflect on the increased activity of the UK venture capital market in general, and the part that early-stage investments have played in it.
What stands out is that a number of critical factors have converged at the same time, leading to a positive flywheel of talent, investment and success.
The first important factor, which, while often lauded, shouldn’t be underestimated, is the government’s supportive approach to the venture ecosystem. This runs across much of the activity occurring including:
1. Legislative environment and policies
The government is actively facilitating the sharing economy, tackling head-on the challenges associated with this new market, and looking to help promote rather than hinder them.
An example of this is the recent decision to update historic legislation limiting house owners’ ability to rent their homes out for periods of less than 90 days.
Similarly, George Osborne announced at the recent Innovate Finance event that the government is considering how to bring crypto-currencies into the fold. This is in stark contrast to what is happening in other countries, for example Berlin’s recent banning of Uber or New York’s ongoing battle with Airbnb.
2. Fostering community
From the great work UK Trade & Investment (UKTI) is doing to help entrepreneurs from other countries set up in the UK through schemes like Jobandtalent to the £500,000 investment being made available to help fund teachers learning to code, the increased sense of an enterprise community in the UK is fuelling the ecosystem.
3. Funding incentives
Tax incentives and government investment have been a key provider of equity finance to small and medium sized enterprises (SMEs) in recent years. The most high-profile of these publicly-backed schemes are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
These initiatives, backed by HMRC, are designed to encourage investment into small and mid-sized companies by reducing the risk for equity investors through tax reliefs. Recently, the government has also offered these schemes to resident non-domiciled individuals through Business Investment Relief (BIR).
4. Regional support
In addition to offering incentives to individual investors, the government has also continued to support small businesses with its own funding initiatives, such as the European Regional Development Fund (ERDF) and Enterprise Capital Funds (ECFs), which are often designed to tackle the particular needs of that country or region.
The government’s support of small and growing businesses through these various initiatives has provided a much needed injection of capital to effect change.
5. Accelerators and seed support
Another factor in the current UK venture landscape has been the explosion of accelerators and angel investors (many of whom are able to invest due to SEIS/EIS). The considerable growth in investment at this earlier stage is helping to develop a strong pipeline of investment-suitable companies for institutional investors, as well as providing the support and guidance fledgling entrepreneurs need to take the leap and set up on their own.
Entrepreneur First is a great example of this. They take super-smart graduates and help them find business partners and a business idea; the talent coming out of the programme so far has been impressive.
6. Consumer buying habits
The final reason, and perhaps the most exciting, is the shift in consumer and business sentiment towards change.
All generations are beginning to embrace the benefits that the proliferation of technology is offering them, from flexible freelance working to easy access to services.
From a personal perspective, this is most evident from my parents’ recent holiday, where they stayed in Love Home Swap accommodation, Instagrammed their favourite holiday snaps, shared the rest of them with the family on Dropbox, visited the gym using Payasugym and sent flowers via Bloom and Wild to a friend for their wedding anniversary.
Today, many of these disruptive companies are being founded in the US but I am hopeful that in five years’ time we will see many more home-grown equivalents coming to the fore. This is especially true in areas such as fashion and food tech: sectors in which innovation is being led by Europe.
All of these bode well for continued and sustainable activity for active investors in the UK venture capital market.
Camilla Dolan is an investment manager for venture capital firm MMC Ventures.