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Government venture capital schemes must be ‘smarter’

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Government supported venture capital schemes should be overhauled if they are to have a greater impact on business performance, a new study has argued.

Research carried out by the British Venture Capital Association (BVCA) and NESTA, the innovation agency, found that while government-backed VC schemes have had a positive effect, their influence has been less effective than purely private venture capital would be expected to bring.

The study compared the performances of 782 businesses that have received government venture capital backing with those of 7,000 firms that have benefited from private venture support.

Government schemes produced an extra 1,400 jobs, fewer than two per business, between 1995 and 2008. The boost to profitability was also described as “modest”.

The two organisations concluded that many of the problems arise from the structure of the government-backed schemes, which often have been too small, too regionally focused, or unable to provide enough capital or follow-on funding.

NESTA and the BVCA want to see a series of reforms introduced to improve the results that publicly funded venture capital is capable of achieving.

Changes include raising the minimum size of ‘hybrid’ venture capital funds (funds with a mix of public and private money) to £50 million because smaller funds do not have sufficient scale to take high-performing firms through the several rounds of financing necessary for a successful trade sale exit.

Current geographical constraints should be removed since they limit the size and calibre of firms in which investment can be made.

Also to go, the report recommended, should be the ceilings on maximum investment levels per business. The BVCA and NESTA claimed that restricting the amount of capital that can be invested per enterprise forces firms to devote too much time to searching for new investors rather than running and growing their business.

The report was published ahead of the introduction of the government’s UK Innovation Investment Fund which aims to create a fund of £1 billion.

Simon Walker, chief executive of the BVCA, said: “While it is clear that progress has been made and these initiatives have recorded commendable successes, policy in the future must be smarter and heed the lessons of the past ten years.

“These schemes are often prisoners of regional and operational constraints which prevent them from unleashing the true potential of high-growth companies. The obvious tension between regional and industrial policy should be settled in favour of a forward-thinking industrial policy which focuses on flexible, bottom-up regional policies, rather than inflexible top-down ones.”

Jonathan Kestenbaum, NESTA’s chief executive, commented: “Previously we had little more than anecdotal evidence about the performance of these funds. The conclusions of this report can now help to shape the structure of the government’s new Innovation Investment Fund.

“Multiple objectives have been the downfall of previous government-backed schemes, but we now have the opportunity to put this right so that the UK is creating and growing tomorrow’s great businesses.”