Why Osborne should use venture capital to drive the British growth agenda

December 4, 2012

–Simon Cook is CEO if DFJ Esprit. The opinions expressed are his own.–

With George Osborne’s Autumn Statement due to be announced on Wednesday, vehicles to boost the British economy have once again been thrust into the spotlight. Venture capital, much discussed and essential to the government’s innovation-led recovery, is uniquely designed to grow companies from small concerns into large multi-national organisations, and the government could be doing far more to support development of these high growth gazelles by learning from Silicon Valley’s emphasis on venture backing.

The UK is suffering from a £2 billion equity gap compared with investment levels in Silicon Valley.* For investments under £3 million, the UK is not doing too badly, running at about 80% the level of Silicon Valley, but on deals of more than £3 million it enjoys just 20% as much venture investment (according to VentureSource figures). As Google’s executive chairman Eric Schmidt’s said: “The UK does a great job of backing small firms and cottage industries, but there’s little point in getting a thousand seeds to sprout if they’re then left to wither or get transplanted overseas.”

The good news is that catching up with Silicon Valley is a solvable problem. To close the gap, Osborne needs to concentrate on providing vehicles for the long-term development of British businesses – taking them from small concerns to major players in the global market.

Unlike private equity buyouts, venture capital investment puts money directly into new, fledgling companies with global potential, and the majority of this money is spent on salaries and new jobs. All of this creates PAYE and national insurance revenue from the outset. The average British technology worker’s salary is currently in the region of £36,000 per year, and as such £13,000 of tax and national insurance will be ploughed straight back into the economy each year, making government investment exceptionally worthwhile.

The government is making efforts to support this concept, with initiatives like the Enterprise Investment Scheme (EIS) designed to support angel investment in new business, but EIS does not go far enough. Because of the limits of the scheme, too much EIS money is being fed into low risk business like care homes, pubs, and forestry, and not enough is directed towards businesses with long-term global potential – tomorrow’s Facebook. In order to really promote sustainable growth the money behind EIS needs to go to higher risk deals, with better potential for long-term gain. This can only be done through extension of the existing parameters, to larger companies with more employees, and greater funding rounds. That way Britain can produce more genuine leaders in the global marketplace like Vodafone or Cambridge Silicon Radio, both of which were VC backed.

*Based on the US and Europe having roughly the same GDP at US$14-US$15 billion, and Silicon Valley and the UK both counting for about 40% of the respective venture capital markets.

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