Venture capital funding for UK SMEs in the post-Brexit era

Stuart Veale
Aug 24, 2017 · 2 min read

Concerns are growing that the European Investment Fund (EIF) will stop investing in UK venture capital funds following the UK’s exit from the EU. This would mean a substantial reduction in the funding available for high-growth UK businesses, as the EIF’s equity participation in the UK in 2015 was over €650 million. How can this shortfall be replaced?

A major existing source of investment for early stage UK SMEs is Venture Capital Trusts (VCTs). These are publicly quoted companies, managed by experienced venture capital investors, which effectively raise 70% of their capital from members of the public. The other 30% is provided by the UK Government. The funds raised are then invested to drive the growth of smaller UK SMEs. A great example of a company backed by VCT investment is Mergermarket. The ProVen VCTs invested in Mergermarket when it had revenues of around £1 million p.a., creating the platform for it to become the global company it is today, with an estimated value of over £1 billion.

One of the main advantages of VCTs is that they are “patient capital”. VCT funds are “evergreen”, in other words they do not have a fixed term, unlike institutional venture capital funds which typically have a duration of only 10 years. The evergreen nature of VCT funding is a great advantage to entrepreneurs who want to build their business over an extended period, rather than being pressured to sell to enable their investor to wind up their fund. It also means that profits realised by VCTs on the sale of investments can be recycled and invested into other fast-growing SMEs, rather than being returned to investors as in an institutional fund, so that each £1 raised can be invested more than once.

Given the possible loss of funding from the EIF, the Government should consider how the VCT scheme can be expanded to provide support to more rapidly growing UK SMEs. In the short term, this means continuing to provide incentives for members of the public to invest in VCTs, to ensure that the rate of investment into these vital contributors to the UK’s venture capital ecosystem is maintained.

In the medium term, as Britain exits the EU, the Government should remove some of the EU-imposed constraints on the companies into which VCTs may invest, enabling them to support a wider range of SMEs. This would also allow VCTs to provide more capital to each company they invest in, rather than being limited to £12 million per business as at present, enabling them to continue to support the companies they back as they grow into major contributors to the UK economy.

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Stuart Veale

Written by

Growth capital investor at Beringea LLP

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