Investment in 'patient capital' vital for post-Brexit Britain
UK must move faster on regulatory issues, writes Alexander Mann
By announcing a review into defined contribution (DC) pension investment in 'patient capital' last month, the chancellor has moved to address a major structural issue in the British venture scene.
This change cannot come too soon - particularly now the European Investment Fund (EIF) - previously a cornerstone of most UK funds - has all but pulled out of the UK.
Despite thriving in Europe, the venture capital sector here is still underdeveloped and underperforming on the global stage, primarily due to lack of institutional capital. This not only impacts our ability to support the start-ups and - crucially - scale-ups that drive employment and growth, it also impacts the possible long-term returns available to savers and investors
How will demand for VCTs and EISs hold up in 2018/19?
In contrast, large institutions in the US, including pensions schemes, support the ecosystem in a huge way, largely down to a greater propensity to take on venture risk and a deeper understanding of the return profile. As a result, the US is home to some of the biggest ‘scale-ups' in the world, such as Airbnb and Uber, and start-up funding is poised to hit $100bn this year. In the UK, we are aiming for something closer to £5bn.
UK VCTs increasing
Venture funds here are gradually getting bigger, with at least one £1bn-plus fund announced in recent months. But with just a handful of £100m+ rounds this year so far, we have a long way to go if we want our start-up ecosystem to compete with that in the US. A lack of cash means UK start-ups are frequently slow to scale, or to expand globally, thereby limiting their addressable market size and growth potential. We also see too many UK founders sell to US or Asian companies, rather than taking their business to the next level themselves.
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Europe as a whole incorporates more tech companies than the US, possesses five of the top ten computer science schools, and produces more developers. But our tech entrepreneurs and innovators need big institutions, such as pension funds, endowments and corporations, to become more comfortable investing in venture, to bump up fund sizes and supercharge our spending clout. That requires a cultural shift, and more encouragement from the powers that be - which is why the Chancellor's announcement is such an important step.
UK regulation
More institutional investment will turbocharge the growth of British startups, while reducing the likelihood that they will look abroad for funding or sell prematurely (as happened in the case of Deepmind, which sold to Google). These innovative businesses are vital for our economy in an increasingly competitive and lucrative world, while also ensuring we do not miss out on the benefits the latest technologies will bring.
However, going forward, the UK government must move faster on regulatory issues, especially post Brexit, to ensure we stay at the cutting edge of the business and technological frontier - and to give more investors the chance to support the early-stage companies that will shape the future.
Alexander Mann is a venture investor at Concentric.
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