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The lack of private funding for start-ups and high-growth businesses has long been a source of concern in this country.
Well, rejoice. It turns out the UK has the biggest venture capital fund in Europe. And it is managed by none other than the government.
It is odd that the emergence of Her Majesty’s Treasury as a major venture capital investor has not prompted more questions, particularly when so little is known about where it has been putting our money.
The Future Fund, run through the British Business Bank, has racked up £1.2bn in convertible loans to innovative businesses.Â
This might feel like small change against the billions doled out in various Covid-19 support packages. At some point, though, the chancellor Rishi Sunak should tell us more about what is going on in his megafund.
Launched in April last year, the fund was an attempt to stop a slew of start-up and early-stage businesses going under as other sources of funding dried up. Originally restricted to £250m of public money, it was quickly expanded.Â
Whereas the BBB, through its commercial arm, has previously put money into VC funds as an investor, this time it went direct.
Government loans of between £125,000 and £5m had to be match-funded by private investors, outsourcing some of the vetting work. Companies had to have raised money from third-party investors, suggesting some financial record. And it used familiar structures and templates, enabling a speedy rollout.
The end result was an absolutely enormous fund. The largest venture capital funds in Europe last year raised about $800m, according to Sifted, under half the size of the government effort. A typical venture fund might hold investments in between 10 and 40 companies. The Future Fund has 1,236.
One question being asked in the industry is how the British Business Bank intends to manage this and whether it has the resources it needs. It says it is “recruiting to increase capacity as needed†and that it benefits from the expertise of its private sector co-investors.
A more pressing question from a taxpayer point of view is what is actually in the fund? So far, disclosure is minimal, which in itself is leading to sceptical talk about the quality of the portfolio the government has on its hands. The phrase “adverse selection†comes up repeatedly in conversations about it.
The BBB has given a regional breakdown, and information on the gender and ethnicity of management teams.
But there is nothing on the size of the loans given out, which might give some indication of the maturity of the companies. There is nothing on the sectors or activities of the recipients; nothing on how long they had been operating, or how much private money they had raised before.
The BBB cites “commercial confidentiality†for not disclosing names, even of the 52 companies where the government is now a shareholder. But if furlough claimants are being published, it is not clear why these recipients of government money should not be. Some are becoming public, in any case, through filings at Companies House.Â
Given concerns about quality, the government might want to get ahead of the fact that the investments here are going to be, let us say, mixed. The Future Fund might not be a classic VC model, where one outrageous success makes up for a high overall failure rate. But there will inevitably be write-offs to come.
The government seems to have a taste for the VC life. The Future Fund Breakthrough, announced at this month’s budget, is the next variant, albeit focused on selecting bigger high-tech companies to back. And there are mutterings that — after junking the UK’s industrial strategy — the government instead favours “innovation growth policyâ€.Â
Taxpayers may wonder why a government that has fought shy of taking equity in beleaguered big businesses through this crisis is so comfortable coming out of it with stakes in a huge array of smaller ones, especially in a VC market so hot that some question whether such a big rescue package was really needed in the first place.
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