THE SUPPLY OF EQUITY
FINANCE
TO SMES: REVISITING THE
“EQUITY GAP”
A report to the Department for
Business, Innovation and Skills
SQW CONSULTING
URN 09/1573
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Acknowledgements
SQW Consulting would like to acknowledge the substantial contributions to this study made
by Professor Colin Mason, University of Strathclyde, for his advice and guidance, and by
Oxford Innovation, for help in engaging business angels. However, the views expressed here
are those of the authors alone.
The authors would also like to thank all those who made data available to the study; those
informants in the public and private sectors who participated in interviews; and the business
angels who participated in a group discussion. Special thanks are due to staff in the British
Venture Capital Association for advice on the use of data sources.
www.sqw.co.uk
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Contents
Executive Summary............................................................................................................... 1
1 Introduction....................................................................................................................... 10
2 Methodology and definitions ........................................................................................... 13
3 Analysis of the supply of equity finance - venture capital ............................................ 16
4 Venture capital funding – characteristics and processes ............................................. 33
5 Analysis of the supply of equity finance – informal equity (from business angels) ... 37
6 Publicly-backed funds in UK ........................................................................................... 43
7 Other public sector interventions in the equity finance market in the UK ................... 51
8 Equity investment and institutional investors................................................................ 54
9 Corporate venturing in the UK......................................................................................... 58
10 International comparisons ............................................................................................. 61
11 Implications of the current economic climate .............................................................. 73
12 Assessing the Equity Gap.............................................................................................. 76
13 Bibliography.................................................................................................................... 83
Annex A: Data sources and definitions ........................................................................... A-1
Annex B: Additional data on investment activity............................................................ B-1
Annex C: List of consultees.............................................................................................. C-1
www.sqw.co.uk
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Executive Summary
Introduction
1.
This study into the supply of equity finance1 for SMEs was conducted on behalf of BIS2 (then
BERR3 and DIUS4) by SQW Consulting with contributions from Oxford Innovation and
Professor Colin Mason, University of Strathclyde. It was conducted during the period
September 2008 to January 2009.
Research objectives
2.
The research was commissioned to refresh the evidence base on equity finance and,
specifically, to establish whether the existence and boundaries of the equity gap have changed
since the initial ‘Bridging the Finance Gap’ research was undertaken in 2003 by HM
Treasury and the Small Business Service. The latter research identified the shortage of
modest amounts of risk capital – the “equity gap” – to be most acute for businesses seeking
investments of between £250k and £1m, but extending up to £2m, and for some businesses it
may be higher.
3.
The prime objective of the current study has been to determine within which segment(s) of
the SME equity supply market the structural equity gap is most acute and whether there are
any differences across sectors (especially high technology), stages in business development
and regional geographies. The study also provides an assessment of more recent factors
affecting the supply of equity capital to SMEs including the economic downturn and Credit
Crunch.
Methodology
4.
The study deployed a mix of research methods, including:
•
desk research on:
¾
published reports and data
¾
data provided by public sector bodies
•
consultations with individuals active in the equity supply-side market
•
facilitated workshops with business angels.
1
Equity finance is defined as capital invested in a business for the medium to long term in return for a share of the
ownership and sometimes an element of control of the businesses. Unlike debt finance, equity finance investors do
not normally have a legal right to charge interest or to be paid at a particular date. Instead their return is usually
paid in dividend payments and depends on the growth and profitability of the business. Equity finance is often
referred to risk capital as it shares the risk of the business and equity is the last source of finance to be repaid out of
any residual assets in the event that the business fails.
2
Department for Business, Innovation and Skills
3
Department for Business, Enterprise and Regulatory Reform
4
Department for Innovation, Universities and Skills
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The Supply of Equity Finance
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A report to the Department for Business, Innovation and Skills
5.
The primary research involved consultations with key private and public sector stakeholders.
Consultees included finance experts, sector/industry experts, fund mangers, investors and
representatives from British Venture Capital Association (BVCA), European Venture Capital
Association (EVCA), British Business Angel Association (BBAA), National Endowment for
Science, Technology and the Arts (NESTA), Technology Strategy Board (TSB) and Regional
Development Agency (RDA) finance leads.
Key findings
Supply of venture capital
6.
Out of a total of £12bn invested in unquoted equity in 2007, early stage equity accounted for
4% by value (£434m in 502 companies). Expansion capital accounted for 9% of investment
by value (£1.1bn in 595 companies). Therefore, private equity (early stage and expansion
stage combined) accounts for 13% of total private equity, with the remainder mainly
comprising finance for Management Buy Out (MBO) and Management Buy In (MBI). Over
the period 1998-2007, the level of early stage equity remained relatively constant, with peaks
in 2000 (the height of the dotcom boom) and again in 2006. The supply of expansion
investment has been more variable throughout the period, with prominent peaks in 2000 and
2006.
Figure 1 Investment in early stage and expansion in the UK by BVCA members, 1998-2007 (£m)
3,000
2003
2007
Investment (£m)
2,500
2,000
1,500
1,000
500
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
Total early stage
Expansion
Total early stage and expansion
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; Expansion excludes
refinancing bank debt and secondary purchase.
7.
The bubble caused by the dotcom boom was not just a case of arguably reckless investment
by VCs but also a function of their ability to raise funds from institutional investors who took
an interest in the ICT sector. Many VC funds were raised just before the dotcom bubble burst
and given their ten year lifespan, these funds have been suffering ever since in reported
performance returns due to the aftermath of dotcom failures. The dotcom crash therefore
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The Supply of Equity Finance
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A report to the Department for Business, Innovation and Skills
meant not only that VCs withdrew from the sector on risk rounds, but also that they found it
harder to raise funds for any type of investment. This led to venture capital suffering from a
bad reputation with institutional investors.
8.
By 2005, the worst of this problem had begun to dissipate and VCs were able to raise a good
level of funds. This meant they had plenty of money to invest in 2006. By this time, new
types of investor had taken an interest in the VC market, including banks and hedge funds.
The decline of VC activity in 2007 may now be seen as an early warning of the current
economic problems: the Initial Public Offering (IPO) market began to dry up, cutting off an
important exit route for private equity.
9.
Sub-£2m investments have accounted for between 70% and 80% of all venture capital
investments for the period 2001 and 20075. However, investments below £2m accounted for
12% of all investments in 2001 falling 6% in 2007. The most common amount received by
companies during the period 2001 and 2007 appears to have between £200k and £500k.
However, the extent to which sub-£2m investments are elements in larger syndicated deals is
uncertain from examination of published sources.
10.
In recent years, the key sectors for VC funding (of all types) by value have been consumerrelated and communications. In terms of number of deals, computer-related, medical
health/biotech and consumer-related have been the highest. In terms of technology-related
transactions, the key areas for early stage investment have been software, biotech and
communications.
11.
Since 1998, London and the South East regions dominate in terms of early stage equity
provision, both absolutely and when compared to the number of VAT registered businesses in
the each of the English regions.
Venture capital characteristics
12.
The investment criteria of early stage funds are designed to meet the initial needs of the target
client base. However, these criteria, if rigidly applied, may prevent the funds providing
follow on finance, thus requiring them to pass on the deal to other providers with deeper
pockets.
13.
Good management is by far the most important attribute in making a company attractive to
potential VC investors (more important even than the initial product or service proposition),
as VCs consider it is this which will help ensure good returns. Investment readiness schemes
need to take this into account as there is a perception by some fund managers that those
delivering schemes are not tough enough on entrepreneurs about the need to bring in
professional management.
14.
The early stage VC due diligence and deal process is time consuming and expensive when
compared with the potential returns and the risk that those returns will not be realised. This
has contributed to the withdrawal from the market of former key players and to the
syndication of deals. However, the early stage market, where the investment sizes (for non5
Pierrakis & Mason (2008) Shifting Sands: The Changing Nature of the Early Stage Venture Capital Market in the
UK. NESTA research report.
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capital intensive businesses) are relatively small, can act as a first step for new VC fund
managers with only limited resources to invest. So, whilst there are only a few VC funds at
this end of the market, it is not true to say there are none.
Supply and characteristics of business angel finance
15.
Business angels are playing an increasingly important role in providing early stage finance
(business angels’ share of private sector investment rose from 15% in 2001 to 30% in 2007).
However, the total value of recorded deals done has fallen over the period from 2005
(£47.8m) to 2007 (£29.5m). However, data on business angel investment are incomplete and
hence these figures could understate the real scale of transactions. What the figures are likely
to be reflecting, however, is the anecdotal evidence that a lack of market ‘exits’(e.g. IPOs,
trade sales) means that business angels are having to stay involved with investees for longer,
constraining their ability to invest in new deals.
16.
One important investment route for business angels is through acting as co-investors for
publicly backed funds, as business angels are willing to operate at the smaller end of the
market. VCs are seen as less willing to be co-investors as the deals are too small to be viable
(given that they would still want to undertake their own due diligence). Business angels tend
to invest only in sectors in which they have direct previous experience and hence they do not
need to undertake such extensive due diligence as VCs.
17.
A key trend is the increasing use of angel syndicates to invest. These allow angels to share
the risk and take part in larger deals (i.e. £250k to £500k). The syndication approach also
allows angels to appoint a ‘lead angel’ with both financial experience and knowledge of the
sector in which the investee company operates. VCs confirm that the presence of an
experienced lead angel at the early stage makes the deal much more attractive to later stage
investors because they take comfort from the expertise that has been involved.
18.
Although business angels rate the satisfaction of their direct involvement in an investee
highly, they are of course looking to generate a commercial return from their investment.
Publicly backed funds
19.
There are a large number of publicly funded VC funds: Table 1 provides a summary of these
by fund type.
Table 1 Summary of publicly backed VC funds
Fund type
Total funds
available (during
investment
6
period)
Investment size
range
End of investment
period
Geographical
scope
Regional Venture
Capital Funds
(RVCFs)
£241m
Up to £660k
2007 - 2008
Regional
RDA VC funds
£220m
£50k - £2.5m
2008 - 2012
Regional
Early Growth Funds
£36.5m
Up to £200k
2014 – 2016
Regional
6
Investment period was defined as last two years i.e. 2007 and 2008. Variations in the way the data from different
sources are recorded may lead to slight differences in the time period covered.
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A report to the Department for Business, Innovation and Skills
Fund type
Total funds
available (during
investment
6
period)
Investment size
range
End of investment
period
Geographical
scope
University Challenge
Seed Funds
(UCSFs)
£60m
£25k - £250k
Evergreen
National
UK High Technology
Fund (UKHTF)
£126m
Up to £2m
2006
National
Community
Development
Venture Fund (Also
known as Bridges
Fund)
£40m
£100k - £2m
May 2009
National
Enterprise Capital
Funds (ECFs)
£185m
£500k - £2m
2011 – 2013
National
Carbon Trust Funds
£27m
£250k - £3m
Still open to
investments
National
NESTA fund
£50m
£250k - £1m
Evergreen
National
(EGFs)
Source: BERR/DIUS/RDAs/Carbon Trust/NESTA
20.
It is clear from discussions with market stakeholders that publicly backed VC funds are vital
for providing early stage equity capital to SMEs. Business angels do not have enough
capacity by themselves to meet the financing needs of businesses seeking equity finance.
Therefore, publicly backed funds help fill the gap at the early stage of the market that would
otherwise exist.
21.
However, there were concerns expressed by some consultees that individual publicly backed
funds were too small both in terms of overall capacity (it is suggested that they need to be
£30-50m to be commercially viable) and in terms of the maximum amount they could invest
in any one company (initially £250k, then increased to £500k, and then increased again to
£660k for an RVCF or £2m for an ECF). An example of the former would be one of the
RVCFs which had total funds of only £12m. This means that they may not be able to provide
all the funding the company needs and they often do not have sufficient capacity to provide
follow-on funding. Hence their investees may need to find other investors to avoid growth
being constrained.
22.
The issue of follow-on funding highlights other concerns, including whether the fund
manager of the publicly backed fund has been sufficiently tough with the investee and
ensured that it is ready for the next round of investment. Also, having a public sector fund
and a group of angels involved might not be attractive to some later stage investors who may
only be willing to invest if they can take over the whole transaction.
23.
Another problem identified with publicly backed funds was their limited time spans for
investment. RVCFs and some RDA VC funds have come and gone leaving perceived gaps
behind them in regional markets. However, ECFs are being made available in tranches and
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The Supply of Equity Finance
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A report to the Department for Business, Innovation and Skills
hence at present their geographical coverage is varied7. There have been a number of new
VC schemes recently introduced including the Capital for Enterprise Fund and Aspire Fund.
(Since completion of the research for this report, the Government announced on 29th June
2009 the new UK Innovation Investment Fund which will focus on providing equity finance
to growing small businesses, start-ups and spin outs in digital, life sciences, clean technology
and advanced manufacturing.)
24.
Publicly backed funds are not generally viewed as crowding out the private sector as the
private sector has commercial reasons for not being more involved in the early stage market.
Co-investment arrangements were cited by stakeholders as a way of encouraging the private
sector (in the form of business angels) to invest alongside the public sector. Likewise, the
ECFs are seen as a way of the public sector making use of private sector fund management
skills to do deals that the private sector might not otherwise consider.
Other public sector equity interventions
25.
Although not a focus of this report, there are a number of tax based initiatives designed to
increase the supply of equity finance to SMEs. These include Venture Capital Trusts (VCTs)
and Enterprise Investment Scheme (EIS).
Venture Capital Trusts (VCTs)
26.
VCTs came into existence in 1995 as a tax efficient way for High Net Worth Individuals
(HNWIs) to invest (passively) in early stage companies. Funds raised/invested reached a
peak in 2006 when changes in the Finance Act (FA) tightened the rules and reduced the range
of companies in which VCT funds could be invested.
27.
Whilst VCTs have been structured to ensure that only small companies are supported, the
structure does impose constraints on the use of the vehicle. VCTs are limited to £1m on any
one investment.
Enterprise Investment Scheme (EIS)
28.
The EIS allows HNWIs to invest more actively in early stage companies (as business angels).
The key benefits of the EIS include:
•
20% of the cost of the investment can be offset against income tax
•
Capital Gains Tax relief on any gains made on the investment if held for at least three
years prior to disposal
•
loss relief whereby any losses made on investments disposed of after three years can
be offset against income tax.
29.
These reliefs make investing a tax efficient arrangement for HNWIs as well as
cushioning any losses incurred.
7
It is understood that ECFs are not restricted from investing outside of their immediate geographic area and so in
theory are able to invest throughout the UK. In practice, fund managers often choose to make investments closer
to their geographic location to minimise costs.
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Institutional investors in venture capital funds
30.
Over the period 1987-2000, unquoted equity outperformed other asset classes in terms of
returns. Its reputation was however, tarnished by the dotcom crash which depressed returns
for a number of subsequent years. By 2006, institutional investors were back in the market
only to ease off funding again in 2007 as the early effects of the economic downturn began to
cause concern. The European Venture Capital Association is stepping up promotion of VC as
an asset class to try and improve its image with institutional investors.
31.
In terms of funds raised in 2007, only 10% were earmarked for early stage and expansion
deals (down from 15% in 2006). Also, 75% of funding came from overseas sources. Pension
funds remained the largest single class of investor but their share has declined as the
importance of fund of funds and banks has grown. This is a concern given that the present
credit crunch has also left banks capital constrained.
International comparisons
32.
Trends in VC investment in Europe between 1998 and 2007 were broadly similar to those in
the UK. However, Europe recovered far more quickly from the dotcom crash than the UK.
The reason may be that the UK, being by far the largest source of VC funding in Europe (40%
of deals) was much more seriously affected by the market collapse than other countries.
33.
The UK is also the largest angel investor in Europe (31% of volume and 44% in number of
deals). The average deal size in the UK has fallen below the average for Europe between
2005-2007. It therefore appears that the UK is doing many more deals than other EU
countries but the deals are smaller in size.
34.
The UK is the second largest VC market in the world after the US. In terms of VC deals the
UK transacted a total volume of £12bn, 56% of the volume transacted in the US (£21.5bn
equivalent). It also lagged the US with regard to the percentage of deals that were early stage
(on like for like definitions - 13% vs 21%). However, given the higher GDP in the US, the
penetration rate in the UK was higher.
35.
In volume terms, US angel investment is an order of magnitude larger than in the UK. In
2007, US angels invested US$26bn (£18.7bn) compared with UK business angels investing
the equivalent of US$4m (£29.5m). Average deal size in the US in 2007 was US$455,182
(£327,527) compared with US$91,332 (£65,705) in the UK.
Implications of the current Credit Crunch
36.
Fund managers state it is currently ‘too early to tell’ when the market will pick up, but recent
experience from the dotcom crash suggests that downturn in the equity markets could be
prolonged. The early stage end of the equity market will only pick up again when VCs can
raise funds themselves. However, institutional fund raising, new early stage deals and exits
are all adversely affected by current uncertainties over company valuation.
37.
Most of the usual exit routes from private equity are currently restricted and hence early stage
investors are staying involved in investments for longer, tying up funds that would otherwise
be invested in new deals. In many areas business angels are less active in new deals because
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they need to concentrate on existing investments or have less income available for
investment.
Conclusions – assessing the equity gap
38.
Most consultees consider that even in normal market conditions a structural equity gap
remains. However, it is clear that the boundaries of the equity gap are more complex than a
single set of parameters. The parameters of the gap are believed to stretch from £250k to at
least £2m (with some putting the ceiling at £5m). In the case of sectors requiring complex
R&D or large capital expenditure the gap may extend up to £15m. This is generally
consistent with the previous assessment presented in Bridging the Finance Gap (2003) which
concluded that ‘the gap appears most acute for investments between £250k and £1m, but is
also severe for businesses seeking up to £2m, and for some businesses it may be higher.
39.
These equity gap parameters define the first round funding gap, but there are additional
concerns relating to the possible underfunding of UK companies at each stage of the venture
capital process relative to the US. This could constrain the growth of early stage companies
which then do not fulfil their potential.
40.
The early stage market has been changing in recent years with the growing importance of
business angels, both as individuals and as members of syndicates. Business angels also
constitute the most frequent source of private sector match funding in co-investment deals.
41.
Whilst there is concern that VCs have abandoned the early stage market, this is not entirely
true. Some new VCs have entered this market. Early stage funding can provide a stepping
stone for new VC funds on the way to larger deals. The ECF structure encourages this
approach.
Areas for further research
42.
First and foremost, in considering the ‘equity gap’, this report has only investigated the
existence of a gap in supply-side provision. When considering the overall ‘equity gap’, it will
be important to consider the demand-side and the ability of firms to obtain the equity finance
they need.
43.
However, the report has shown that even in terms of the supply-side, there are areas where
further research would be useful. These include:
•
investigation of the true extent of business angel funding in the UK. This would
require use of the combination of techniques suggested in the recent report by Mason
and Harrison.8
•
further examination of the funding available within each region. This would include
the additional data on business angel investment and more detailed input from the
RDAs (not all of which were able to provide data for the current research). This
8
Mason and Harrison (May 2008) Developing Time Series Data on the Size and Scope if the UK Business Angel
Market,
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could then be used, in combination with demand-side research, to ascertain more
fully how acute the equity gap is in regions outside London and the South East.
•
further in-depth investigation of US VC investment data to arrive at a breakdown of
average deal size by funding stage. This would enable a comparison with UK
average deal sizes to see if the anecdotal concerns about UK underfunding of early
stage companies relative to competitor countries are justified.
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1 Introduction
1.1
This research project was conducted on behalf of BIS9 (then BERR10 and DIUS11) into the
supply of equity finance12 for SMEs. The research was undertaken by SQW Consulting in
collaboration with Oxford Innovation and Professor Colin Mason, University of Strathclyde
during the period September 2008 to January 2009.
Background
1.2
Access to finance is essential in enabling some businesses to start up and expand. Although
only a small proportion13 of businesses actually use or consider using equity finance, it is an
important source of finance for SMEs, particularly those that have strong and rapid growth
prospects. In addition, certain businesses are unable to obtain debt finance because they may
not have sufficient cash flow to service repayments, and so equity finance is suitable for the
early, pre-revenue stages of company development. SMEs can also benefit from involvement
by investors in the running of the business through their expertise and personal contacts.
1.3
This research has been commissioned to refresh the evidence base on equity finance and,
specifically, to establish whether the existence and boundaries of the “equity gap” for SMEs
seeking modest amounts of equity finance have changed since the ‘Bridging the Finance Gap’
research undertaken by HM Treasury and Small Business Service in 2003.
1.4
The latter investigation identified the shortage of risk capital – the “equity gap” – to be most
acute for businesses seeking investments of between £250k and £1m, but extending up to £2m,
and for some businesses it may be higher.
1.5
Since this earlier research was conducted there have been a number of new public sector
initiatives to address the issue: the introduction of Enterprise Capital Funds (ECFs) and the
provision of additional venture capital funds by Regional Development Agencies (RDAs) cofinanced by the European Regional Development Fund (ERDF).
1.6
The present study is being conducted against a background of mixed views. For example,
research by Library House (2006) questioned whether a funding gap currently exists at all.
However, the weight of other evidence appears to indicate that venture capital deals have been
continually increasing in size in recent years, contributing to a gap in the supply of equity
9
Business, Innovation and Skills
Business, Enterprise and Regulatory Reform
11
Department for Innovation, Universities and Skills
12
Equity finance is defined as capital invested in a business for the medium to long term in return for a share of the
ownership and sometimes an element of control of the businesses. Unlike debt finance, equity finance investors do
not normally have a legal right to charge interest or to be paid at a particular date. Instead their return is usually
paid in dividends payments and depends on the growth and profitability of the business. Equity finance is often
referred to risk capital as it shares the risk of the business and equity is the last source of finance to be repaid out of
any residual assets in the event that the business fails.
13
The BIS Annual Small Business Survey 2007/08 shows of SMEs seeking finance in the last 12 months (23%),
only 3% sought equity finance. Similarly, the CBR Financing UK SMEs Survey for 2007 shows that of those
SMEs seeking finance in the last three years (36%), only 2% sought equity finance.
10
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finance for smaller deals required by early stage businesses. The present study has the objective
of testing and resolving the disparate views.
Scope
1.7
Building on earlier evidence, this study examines the status of supply in terms of the scale of
overall supply, supply by stage of business development, regional distribution of supply and
supply by industry/technology sector.
1.8
In addition to providing a snapshot of the current supply of equity in the UK to SMEs, the study
also examines trends in volume, deal sizes and coverage over time.
1.9
It assesses the supply of equity from three relevant sources – from formal investment activity
through venture capital institutions; from informal equity investments by business angels; and
also from publicly-backed funds.
1.10
It is important to note that the current research has not revisited the underlying market failure
arguments for the existence of an equity gap, as these are already evidenced in ‘Bridging the
Finance Gap’ report.
Objectives
1.11
The original objective of the research was to look at structural issues affecting the existence and
scale of the equity gap. Whilst this is still the case, the study also provides an initial assessment
of more recent factors affecting the supply of equity capital to SMEs including the ‘Credit
Crunch’ and recession.
1.12
The study has sought to determine within which segment(s) of the SME equity market is an
equity gap most acute in terms of lack of supply and whether there any differences across
sectors (especially high technology) and across stages in business development. The study also
assess what factors cause differences in the availability of private sector finance.
1.13
The specific study objectives are to examine:
•
changes in VC investment over time to determine the recent and current pattern of
venture capital provision to SMEs, examining data from 1998 onwards
•
changes in informal investment over time to determine the recent and current pattern
of informal investment made through individual business angels and angel
groups/syndicates
•
public sector backed funds to determine the pattern of investment by public sector
backed venture capital funds14, including targeting of funds in relation to patterns of
private sector supply and also an assessment of the strategic “fit” - the
complementarity of public backed interventions in terms of rationale, objectives and
investment activities
14
Including Regional Venture Capital Funds (RVCF) and Enterprise Capital Funds (ECF).
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1.14
•
market drivers to identify the factors that have driven recent trends and determine
how these will impact on future investment behavior and supply, including
specifically attitudes and likely supply of early stage high tech investments
•
views of institutional investors to ascertain the attitudes of institutional investors to
venture capital as an asset class
•
corporate venturing to ascertain the current state of corporate venturing and the
current attitude of larger corporates to investing in early stage third party companies.
The study also provides an insight into the following issues:
•
total supply of equity capital in the UK and by region for formal and informal
investments by total size and number of businesses helped
•
the investment appraisal process which Venture Capitalists go through including due
diligence before the decision to invest is given
•
other supply side barriers which could restrict the provision of equity finance to
SMEs.
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2 Methodology and definitions
2.1
The study has been conducted using a mix of research methods including:
•
2.2
desk research on:
¾
published reports and data
¾
data provided by public sector bodies
•
consultations with individuals active in the equity supply-side market
•
facilitated workshops with business angels.
The primary research has involved consultations with key private and public sector
stakeholders into the existence of an equity gap across: (a) sectors, including high technology
sectors, (b) funding stages and (c) regions. Consultees included: finance experts,
sector/industry experts, fund mangers, investors and others such as representatives from
British Venture Capital Association (BVCA), European Venture Capital Association
(EVCA), British Business Angel Association (BBAA), National Endowment for Science,
Technology and the Arts (NESTA), Technology Strategy Board (TSB) and Regional
Development Agency (RDA) finance leads. A list of all informants is provided in Annex C.
Data sources and definitions
2.3
The various UK and international data sources relevant to this project have important
differences in the methods of data collation and analysis, and also in the definition of key
terms and coverage. Full details on methodology and definitions by data source can be found
in Annex A.
UK Venture capital
Data sources
2.4
The British Private Venture Capital Association (BVCA) represents over 400 full and
associate members, constituting the vast majority of UK-based private equity and venture
capital providers and their advisors. In analysing the supply of venture capital finance in the
UK, this research relies heavily on the BVCA’s annual reporting of investment activity15 as it
is the most robust and comprehensive source of data for the UK. The data are compiled from
a survey of full members16 of BVCA and attracts a very high response rate. In some years
this has been 100% including the 2007 survey used in this research.
15
BVCA and PricewaterhouseCoopers (PwC) (2008), BVCA Private Equity and Venture Capital Report on
Investment Activity 2007.
16
According to BVCA, there are five main categories under which BVCA full members fall into, these include:
private firms; partially public backed funds; captive funds; angel syndicates and listed funds. Captive funds invest
their own money and/or manage or invest funds on behalf of a parent organisation.
13
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A report to the Department for Business, Innovation and Skills
Definitions
2.5
There are a number of specific methodological and definitional points that need to be
considered when interpreting the BVCA data. These are outlined in Annex A (see Table A-1
and Table A-2).
UK Business angels
Data sources
2.6
To measure the level of business angel activity in the UK between 1998 and 2007, the British
Business Angel Association (BBAA) was contacted for data in the UK. However, no timeseries data on the number and value of investments since 1998 was available.
2.7
As an alternative source, the European Business Angel Network (EBAN) survey of national
and regional business angel networks (2008)17 was used to provide figures for number of
deals/ investments, amount invested and the average deal size but for the period 2005-2007
only. In the UK, BBAA and LINC Scotland18 were surveyed by EBAN.
2.8
Evidence was also based on data reported by Mason19.
2.9
There are two key points to note in relation to business angel data. Firstly, any BBAA data
may only be the ‘tip of the iceberg’ of angel investing because the majority of business angel
investment is unrecorded20. Secondly, the data that is recorded may not be representative of
the remaining angel investment activity.
Definitional issues
2.10
EBAN does not provide explicit definitions for the number of deals/ investments, amount
invested and the average deal size. We have assumed the common understanding of these
terms. However, it is important to highlight the difference in the definitions for ‘number of
deals’ used in relation to venture capital funding (see Annex A) with that implied by EBAN.
Deals for venture capital funding were counted as being equivalent to the number of
companies, whereas EBAN refers to the number of investments. Consequently, the estimates
for the average deal size would be measured differently.
European business angels
2.11
European Business Angel Network (EBAN) is the main source of data for European business
angel investment activity, in particular its publications:
•
EBAN Statistics Compendium 2008 and 2007
17
EBAN (2008) Statistics Compendium, based on the information provided by business angel networks having
responded to the survey conducted in 2008.
18
LINC Scotland is the national association for business angels in Scotland – www.lincscot.co.uk
19
Mason (2006) The Informal Venture Capital Market in the United Kingdom – Adding to the Time Dimension,
Venture Capital and the Changing World of Entrepreneurship
20
Mason & Harrison (2008) identify the gap in data relating to business angel investment activity and advocate
that all developed countries should produce time-series data on business angel activity, suggesting a variety of
ways in which this could be achieved. This is reported in: Measuring Business Investment Activity in the United
Kingdom: A Review of Potential Data Sources, Venture Capital – International Journal of Entrepreneurial
Finance.
14
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
•
EBAN European directory of Business Angel Networks in Europe 2008 and 2007.
European venture capital
Data sources
2.12
European venture capital statistics are available from the European Venture Capital
Association21 (EVCA) Yearbook 200822. These statistics are compiled using a survey of
European countries for the industry’s new database, the Private Equity Research Exchange
Platform (PEREP Analytics). This represents the most authoritative source of data on
European venture capital.
2.13
Some important points in relation to the methodology and definitions used in the ECVA
Yearbook need to be highlighted when interpreting the EVCA data (see Table A-3 and Table
A-4 for details).
US venture capital
Data sources
2.14
The only available and comparable source of data for venture capital activity in the USA is
the National Venture Capital Association Yearbook 200823 (NYCA). The data come from a
survey of the Association’s 741 members active in the last eight years.
2.15
Definitions used in the context of the US venture capital investment are presented in Table A5.
21
EVCA has been established since 1983 and is based in Brussels. It represents the European private equity sector
and has a membership of over 1,250 in Europe. ECVA’s activities include venture capital (from seed and start-up
to development capital). www.evca.com
22
EVCA Yearbook (2008) Pan-European Private Equity & Venture Capital Activity Report.
23
The Yearbook includes statistics from the PwC/National Venture Capital Association MoneyTree Report based
on data from Thomson Financial.
15
The Supply of Equity Finance
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A report to the Department for Business, Innovation and Skills
3 Analysis of the supply of equity finance venture capital
Key findings
3.1
The findings on the supply of formal venture capital by BVCA members are summarised
below:
•
In 2007, venture capital comprised 13% of all private equity with total early stage
funding accounting for 4% of total private equity investment and expansion stage 9%
of all private equity. This led to the financing of around 1,000 companies in the UK.
•
Over the period 1998-2007, the level of early stage equity remained relatively
constant, but with peaks in 2000 and 2006. The supply of expansion investment has
been more variable throughout the period, with prominent peaks in 2000 and 2006.
•
The main sectors in receipt of funding (all stages) by value were consumer-related
and communications. In terms of number of deals, computer-related, medical
health/biotech and consumer related were the highest.
•
The main technology-related sectors in receipt of early stage VC funding were
software, biotech and communications.
•
The figures for the period since 1998 demonstrate the dominance of London and the
South East in terms of early stage equity provision, both in absolute terms and when
adjusted for the number of VAT registered businesses by area.
Introduction
3.2
3.3
The analysis of formal venture capital investment has been subdivided into two main parts:
•
current supply of equity finance in 2007 – this provides a brief overview of the
position of equity finance in the UK
•
recent investment trends between 1998 and 2007 - this is to observe the trends before
and after the last global finance shock (the bursting of the “dotcom bubble” in 2001)
and to refresh the evidence since 2003 and the Bridging the Finance Gap report
The key results are set out in this section with further data presented in Annex A being
referenced where relevant.
16
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Supply of venture capital investment in 2007
3.4
A total of nearly £12bn in private equity capital was invested in the UK in 2007 by BVCA
members in companies at total early, total expansion24 and MBO/MBI stages. Of this, £1.6bn
(13%) is accounted for by investment in total early and expansion stages, in 976 companies in
the UK. The total investment made overseas was nearly £19.7bn, of which investment in total
early and expansion stages represented £1.9bn (10%) in 186 companies.
3.5
An overview of the position in 2007 of the venture capital market in early and expansion
stages in the UK and overseas is provided in Table 3-1.
Table 3-1 Investment in the UK and overseas by BVCA members, 2007
UK investment
(£m)
Number of
companies
financed in UK
Overseas
investment (£m)
Number of
companies
financed overseas
Start-up
190
207
134
23
Other early stage
244
295
115
59
Total early stage
434
502
249
82
Expansion*
1,137
474
1,645
104
VC (Total early stage
& expansion*)
1,571
976
1,894
186
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007. * Expansion excludes
refinancing bank debt and secondary purchase.
Investment activity trends over time, 1998-2007
3.6
In nominal (i.e. non-adjusted) terms, the total investment in private equity25 in the UK by
BVCA members has more than doubled (an increase of 217%), from £3,775m in 1998 to
£11,972m in 2007. In real terms (removing the effects of inflation) there has been a 155%
increase in supply over the same time period. The total amount invested over the period
1998-2007 was nearly £63,970m, for all financing stages.
3.7
Of this, the total amount of venture capital invested during 1998-2007 in early and expansion
stages only was £15,852m (see Table 3-2), consisting of :
3.8
•
11% start-up investment
•
16% other early stage investment
•
73% expansion investment.
Since 2003, the total amount of investment in the UK by BVCA members was £38,422m, for
all financing stages26. The total investment during 2003-2007 in early and expansion stages
24
Total expansion includes: “refinancing bank debt” and “secondary purchase”. BVCA report these as separate
financing stages within the expansion phase. However, the BVCA suggests these should be treated as private
equity and not venture capital. Unless otherwise stated, the figures reported relating to BVCA data excludes
refinancing bank debt and secondary purchase within the expansion stage.
25
Total investment in total early stage, total expansion (i.e. expansion, refinancing bank debt and secondary
purchase) and MBO/MBI.
26
This includes: start-up; other early stage; expansion; refinancing bank debt; secondary purchase; and MBO/MBI.
17
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
was £7,692m. This total was made up of almost the same split between start-up, other early
stage and expansion as found during 1998-2007 (see Table 3-2).
Table 3-2 Investment in the UK by BVCA members, 1998-2007
Startup
(£m)
Other
early
stage
(£m)
Total
early
stage
(£m)
Expansion
(£m)
Total
expansion*
(£m)
Total early
stage and
expansion**
(£m)
Total
MBO/MB
(£m)I
Total
investment
(£m)
1998
111
177
288
688
822
976
2,665
3,775
1999
128
219
347
980
1,156
1,327
4,666
6,169
2000
175
528
703
2,012
2,122
2,715
3,546
6,371
2001
163
227
390
1,339
1,636
1,729
2,726
4,752
2002
99
196
295
1,118
1,374
1,413
2,811
4,480
2003
73
190
263
477
867
740
2,944
4,074
2004
96
188
284
789
954
1,073
4,098
5,336
2005
160
222
382
1,144
1,951
1,526
4,480
6,813
2006
531
415
946
1,836
2,994
2,782
6,287
10,227
2007
190
244
434
1,137
3,817
1,571
7,721
11,972
Total
1,726
2,606
4,332
11,520
17,693
£15,852
41,944
63,969
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007. *Total expansion figures
include secondary purchase and refinancing bank debt. **Excludes secondary purchase and refinancing bank debt.
The data on the amount invested in early and expansion stages since 1998 (Figure 3-1) show
that early stage investment has been relatively flat for much of the period, with highs in 2000
and, notably, in 2006. The supply of expansion investment has been more variable throughout
the period, with prominent peaks in 2000 and 2006.
Figure 3-1 Investment in early stage and expansion in the UK by BVCA members, 1998-2007 (£m)
3,000
2003
2007
2,500
Investment (£m)
3.9
2,000
1,500
1,000
500
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
Total early stage
Expansion
Total early stage and expansion
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007. NB: Expansion excludes
refinancing bank debt and secondary purchase.
18
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
3.10
3.11
Although the value of investments varies over time, investment has been relatively stable in
start-up, other early and expansion stages since 1998 when measured as a proportion of the
total early and expansion stage investment. Between 1998-2007 the average investment at
each financing stage as a proportion of the total early stage and expansion investment was
(Figure 3-2):
•
10% for start-ups
•
17% for other early stage
•
27% for total early stage (including start-up and other early stage)
•
73% for expansion.
The data for 2003-2007 show that the average investment supplied at each financing stage as
a proportion of the total early stage and expansion investment was relatively consistent for
start-ups but fell slightly for other early stage companies (Figure 3-2).
Figure 3-2 Investment by financing stage as a proportion of total early stage and expansion investment,
1998-2007
2003
90%
2007
80%
70%
60%
Percentage
50%
40%
30%
20%
10%
0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
Start-up
Other early stage
Total early stage
Expansion
Source: Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW; NB:
Expansion excludes refinancing bank debt and secondary purchase.
3.12
The number of companies at start-up, other early stage and expansion that received
investment during 1998-2007 was 9,292 (see Table B-1), and of this population:
•
19% were start-ups
•
25% were other early stage companies
•
56% were companies undergoing expansion
19
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
3.13
The average amount invested (average deal size) in early stage and expansion during 19982007 was £1,706m (see Table B-2). The average investment in early stage and expansion
since 2003 has been £1,552m. Figure 3-6 demonstrates that:
•
following the decline in average deal size between 2000 and 2003, the average
expansion investment in 2003 nearly matched that of the average investment in all
early stage companies in that year.
•
during the rising trend in average investment from 2004 onwards, the difference
between the average expansion investment and the average investment in all early
stage companies has been re-established.
Figure 3-3: Average amount invested (deal size) in the UK by BVCA members, 1998-2007 (£m)
2003
4,500
2007
4,000
Investment (£m)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
Start-up
Other early stage
Total early stage
Expansion
Total early stage and expansion
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW; NB: Expansion
excludes refinancing bank debt and secondary purchase.
3.14
The number of companies receiving VC funding per year has remained relatively constant
since 2001 at approximately 1,000 companies a year. There has been some change in the
composition with the number of expansion stage companies declining since 2003, which is
off set by an increase in total early stage funding. In 2007, the number of early stage
companies exceeded the number of expansion stage companies for the first time in the
decade.
20
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Number of companies invested in
Figure 3-4: Investment in early stage and expansion in the UK by BVCA members, 1998-2007 (number
of companies)
1,200
1,000
800
600
400
200
0
1998
1999
2000
Total early stage
2001
Expansion
2002
2003
2004
2005
2006
2007
VC (early stage and expansion combined)
Size of investments
3.15
Pierrakis and Mason27 have compiled and analysed figures based on BVCA data for the
period 2000 and 2007, investigating the number of companies and amount invested within
sub-£2m investments (see Table 3-3 and Table 3-4). According to these authors, this sub-£2m
category is the scale typical of early stage investments. Unfortunately, BVCA data for sub£2m investments are not broken down by financing stage and it is not possible to distinguish
between initial and follow-on investments.
Table 3-3 Number of investee companies by investment size - sub £2 m investments, 2000-2007
2000
2001
2002
2003
2004
2005
2006
2007
Total (SQW
calculation)
0-4.9
6
19
19
18
16
38
92
53
261
5-9.9
14
8
13
14
9
11
11
19
99
10-19.9
16
23
18
14
27
19
21
28
166
20-49.9
61
40
47
80
95
100
80
110
613
50-99.9
79
84
87
105
114
98
109
138
814
100-199.9
128
135
145
171
167
172
198
161
1,277
200-499.9
230
225
216
296
283
291
258
279
2,078
500-999.9
172
195
180
165
169
146
125
141
1,293
1,000-1,999
176
204
181
152
152
156
115
120
1,256
Total 0-£499.9
534
534
545
698
711
729
769
788
5,308
Total 0-£2m
880
933
906
1,015
1,032
1,031
1,009
1,049
6,847
61%
57%
60%
68%
69%
71%
76%
67%
Not applicable
Investment size (£000s)
Investments of less than
£500k as a percentage of
investments of under £2m
27
Pierrakis & Mason (2008) Shifting Sands – The changing nature of the early stage venture capital market in the
UK, NESTA
21
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Source: BVCA & PwC (2008), Private Equity and Venture Capital Report on Investment Activity 2007; Pierrakis & Mason
(2008) Shifting Sands – The changing nature of the early stage venture capital market in the UK, NESTA.
Table 3-4 Amount invested by investment size by BVCA members, 2000-2007 (£m)
2000
2001
2002
2003
2004
2005
2006
2007
Total (SQW
calculation)
0-49
-
-
-
-
-
-
-
-
Not available
5-9.9
-
-
-
-
-
-
-
-
Not available
10-19.9
-
-
-
-
-
-
-
-
Not available
20-49.9
2
2
5
2
3
3
3
8
28
50-99.9
6
8
13
6
8
7
8
22
78
100-199.9
19
28
35
21
23
23
29
54
232
200-499.9
87
88
117
79
86
86
88
171
802
500-999.9
145
153
156
100
115
98
95
206
1,068
1,000-1,999
337
301
307
186
215
215
174
278
2,013
Total 0-£499.9
114
126
171
108
120
119
128
256
1,142
Total 0-£2m
596
580
634
394
450
432
397
740
4,223
Investment size (£000s)
Investments of less than £500k
27%
35%
as a percentage of investments
19%
22%
27%
27%
28%
32%
Not applicable
of under £2m
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; Pierrakis & Mason
(2008), Shifting Sands – The changing nature of the early stage venture capital market in the UK, NESTA. Note: - denotes value
between 0 and 0.5.
3.16
The following observations can be made on this analysis of data on sub-£2m investments
made during 2000-2007:
•
the most common amount invested measured on the basis of the number of investee
companies was £200k-499k, followed by £500k- £999k and £100k-£199k
•
the most common investment amount in value terms was between £1.0m- £1.9m
followed by £500k-£999k and £200k-£499k
3.17
During 2003-2007, the total value of investments under £2m increased by 88%, while the
number of companies receiving sub-£2m investment over the same period only rose by 2%.
This suggests that average deal sizes below £2m have also increased.
3.18
Research by SBS28 finds that 79% of private sector venture capital funds in England invest on
a co-investment basis and that “co-investment is the norm for most funds”. Two thirds of
funds co-invest on more than half of investments and more than half co-invest on more than
75%. Co-investment in syndicates allows funds to invest in larger deals and diversify their
investments more effectively. Aggregate figures may overstate the true level of smaller deals.
Investment by sector
3.19
From the 2007 BVCA data it is not possible to separate investment in industry sectors by
financing stage. Thus the findings presented are for all investments, including MBO/MBI and
this limit the conclusions that can be drawn. Taking this into consideration, the aggregate
28
SBS (2005) A Mapping Study of Venture Capital Provision to SMEs in England.
22
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
investment in the UK during 1998-2007 was mainly allocated to consumer-related sectors
followed by manufacturing, agriculture & other; and communications (see Table B-3). The
line graph for the total investment by sector illustrates the relative success of the consumerrelated sectors in attracting investment (see Figure B-2).
3.20
The number of companies (deals) by industry sector shows that computer-related, medical
health biotechnology, and consumer-related are the main beneficiaries of finance (see Table
B-4). However, as mentioned previously, this includes MBO/MBI deals.
3.21
The actual investment by industry sectors as a proportion of the total investment aggregated
for the period 1998-2008 (Figure 3-5) shows that consumer-related; manufacturing,
agriculture & other; and communications have the largest share of equity finance. Electronics,
energy, construction and transport sectors have the smallest proportion of funding. It is
important to note that some of these differences may be explained by differences in the size of
the industry sector rather than investors willingness to invest.
Figure 3-5: Proportion of investment within industry sectors in the UK by BVCA members, 1998-2007
Manufacturing,
agriculture & other,
12%
Consumer related,
29%
Other services, 10%
Financial Services,
7%
Construction, 4%
Computer related, 8%
Transport, 4%
Electronics related,
1%
Energy, 2%
Communications ,
10%
Medical health
biotech, 9%
Industrial related, 5%
Source: BVCA & PwC (2008), Private Equity and Venture Capital Report on Investment Activity 2007; Statistics include
MBO/MBI investments.
3.22
The trend for the average amount invested (average deal size) in each sector during 19982007 (Table 3-7) highlights that the average investment in consumer-related sectors has
increased. It is worth noting that because these figures include later stage private equity
deals, they also cover sums invested in Private Finance Initiative (PFI) transactions, which
may account for the peaks in investment observed in transport and construction sectors.
23
The Supply of Equity Finance
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A report to the Department for Business, Innovation and Skills
Figure 3-6: Average investment (deal size) by sector, 1998-2007
2003
60
2007
Average deal size (£m)
50
40
30
20
10
0
1998
1999
2000
2001
2002
2003
Consumer related
Electronics related
Medical health biotech
Energy
Construction
Other services
2004
2005
2006
2007
Computer related
Industrial related
Communications
Transport
Financial Services
Manufacturing, agriculture & other
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007. The average investments
include MBO/MBI deals.
Investment in technology
3.23
Although the BVCA for 2007 do not provide statistics on all industry sector by investment
stage, it does provide figures on early stage technology investment deals. The aggregate
investment during 1998-2007 in technology-based early stage companies was greatest in
those which specialised in software, followed by biotechnology and then communications
(see Table 3-5).
Table 3-5: Total investment in technology by BVCA members – total early stage, 1998-2007 (£m)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
13
12
59
61
33
19
15
12
3
14
241
6
21
5
3
2
3
2
2
-
5
49
12
49
88
35
4
2
7
5
4
9
215
1
16
32
24
9
14
12
13
8
16
145
Software
99
55
155
70
30
44
50
52
91
58
704
Other electronics related
10
7
10
17
9
8
15
17
24
13
130
Biotechnology
31
54
49
39
33
62
45
34
14
33
394
0
6
2
13
6
27
10
25
24
20
133
Pharmaceuticals
14
4
4
26
20
25
22
15
41
31
202
Healthcare
10
4
3
13
7
1
4
63
7
10
122
Other
8
7
86
14
21
18
10
17
11
5
197
Total
204
235
493
315
174
223
192
255
227
214
Communications
Computer hardware
Internet
Semiconductors
Medical instruments
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007.
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A report to the Department for Business, Innovation and Skills
3.24
Data on the number of early stage technology deals also highlight the prominence of software
companies amongst investees (see Table B-5).
3.25
The trend for the average amount of early stage investment (average deal size) declined
during 1998-2007 overall but has been more stable since 2003 (see Figure 3-7).
Figure 3-7: Average investment (deal size) in technology – early stage, 1998-2007 (£m)
1.6
Average investment (£m)
1.4
1.2
2003
2007
1.0
0.8
0.6
0.4
0.2
0.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007.
3.26
The total number of early stage technology companies as a proportion of all early stage
investees generally increased between 1998 and 2003 but has since declined to the near 1998
level in 2007 (Figure 3-8).
25
The Supply of Equity Finance
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A report to the Department for Business, Innovation and Skills
Figure 3-8: Proportion of early stage technology companies invested in by BVCA members, 1998-2007
2003
100%
2007
Proportion of tech companies
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total early stage technology companies as a proportion of all early stage companies
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW.
The value of investment in early stage technology companies as a proportion of all early stage
investment demonstrate a fluctuating pattern between 1998 and 2007, with a steep fall
between 2003 and 2006 (Figure 3-9).
Figure 3-9: Proportion of investment in early stage technology companies, 1998-2007
Proportion of investment in tech companies
3.27
2003
2007
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Investment in total early stage technology companies as a proportion of all early stage
investment
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW
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Investment by region
3.28
The total early stage investment by region29 in the UK aggregated for the period 1998-2007,
shows that London, South East, East of England, North West and jointly Yorkshire &
Humber and Scotland are regions with the highest level of venture capital funding (Table 36)30. Whereas, the highest regions in terms of the number of companies invested in (i.e.
number of deals) are London, South East, East of England, North West and Scotland (Table
3-7).
3.29
When aggregating early stage investment from 2003 onwards, the regions with the highest
venture capital funding are London and the South. The regions with the highest number of
companies receiving investment is the same as for the 1998-2007 time period.
Table 3-6 Total investment by region – total early stage, 1998-2007 (£m)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
South East
65
99
128
82
72
84
69
80
142
131
952
London
87
119
286
85
99
45
73
106
278
140
1,318
South West
11
14
32
17
11
8
11
26
90
28
248
East of England
25
23
47
88
57
71
40
86
97
45
579
West Midlands
21
7
29
12
3
2
4
4
18
6
106
East Midlands
10
11
18
10
2
10
17
20
105
19
222
4
15
44
7
1
2
24
12
113
12
234
North West
21
35
34
28
17
9
20
22
56
21
263
North East
3
2
9
2
2
2
3
2
7
7
39
37
15
55
45
12
7
14
15
20
14
234
Wales
1
2
7
9
8
14
4
6
16
7
74
Northern Ireland
3
5
14
5
11
9
5
3
4
4
63
288
347
703
390
295
263
284
382
946
434
4,332
Yorkshire and The Humber
Scotland
Total
29
The region refers to where the investee company is located.
Investment may be more clustered around London and South East than the figures show because the BVCA data
includes some public backed funds.
30
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Table 3-7 Total number of companies (deals) by region – total early stage, 1998-2007
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
South East
48
60
82
56
79
98
94
104
90
88
799
London
51
75
126
82
69
66
75
75
104
110
833
8
12
16
19
15
22
29
42
35
29
227
East of England
31
23
53
72
67
66
59
61
50
50
532
West Midlands
9
8
22
23
14
20
21
24
35
32
208
East Midlands
11
9
8
11
5
15
25
22
20
18
144
Yorkshire and The Humber
12
11
14
26
5
13
6
20
10
19
136
North West
21
12
23
34
41
42
61
65
70
77
446
North East
8
6
8
9
16
15
16
16
10
19
123
32
33
41
49
30
22
34
36
40
34
351
Wales
5
6
4
16
26
15
14
13
20
17
136
Northern Ireland
5
5
12
11
31
33
20
13
16
9
155
241
260
409
408
398
427
454
491
500
502
4,090
South West
Scotland
Total
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW
3.30
The average investment (deal size) during 1998-2007 by region shows that the largest deals
were in London, Yorkshire & Humber and South East (Table B-7). Whereas, during 2003 2007, the average investment is largest Yorkshire & Humber, East Midlands and London.
3.31
The key trends during 1998-2007 that emerge when calculating the total early stage
investment by region as a proportion of all early stage investment in the UK are as follows
(Figure 3-10):
•
London and East of England show more fluctuation as compared to other regions.
Since 2003, London had the highest increase in investment
•
During 2003-2007, the greatest rise was in London, South West and Yorkshire &
Humber
•
Scotland, West Midlands and North West experienced the sharpest decline during
1998-2007, whereas during 2003-2007 it was East of England, Wales and Northern
Ireland
•
North East and Wales have generally remained consistently low during 1998-2007.
28
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A report to the Department for Business, Innovation and Skills
Figure 3-10: Total early stage investment by region as a proportion of all early stage investment in the
UK, 1998-2007
2003
45%
2007
Proportion of investment
40%
35%
30%
25%
20%
15%
10%
5%
0%
1998
1999
2000
2001
2002
Year
2003
2004
2005
2006
South East
London
South West
East of England
West Midlands
East Midlands
Yorkshire and The Humber
North West
North East
Scotland
Wales
Northern Ireland
2007
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW.
3.32
To capture the full picture of venture capital funding by region, it is not sufficient just to
analyse the total investment in each region because some regions may have lower levels of
funding than others due to their relatively smaller business stock. For example, the North
East has fewer businesses than London. Therefore, to obtain a more useful comparison, it is
reasonable to use the number of VAT registered businesses for the various regions of the UK
as a measure of the scale of business stock. Dividing the level of early stage investment by
the number of VAT registered businesses for the period 1998-2007 provides an indication of
the supply of finance relative to a region’s business activity (see Table B-8).
3.33
The results show that the regions attracting the most early stage investment are again London
and the South East, followed by the East of England. The West Midlands has the lowest
supply of early stage investment relative to the size of its business stock.
3.34
The line graph for regional early stage investment divided by the regional population size of
VAT registered businesses during 1998-2007 is shown in Figure 3-11. All regions
experienced a decline in early stage investment in 2007 following a peak in 2006. Based on
these data, some regions experience more instability in supply than others. This graph appears
to shows London, South East and East of England have less of dominance than in the
unadjusted graph above. This may suggest business stock may explain some of the regional
differences in the supply of equity finance.
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Figure 3-11: Total early stage investment by region divided by the total number of VAT registered
business, 1998-2007 (£)
2003
1,200
2007
Investment (£)
1,000
800
600
400
200
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
South East
London
South West
East of England
West Midlands
East Midlands
Yorkshire and The Humber
North West
North East
Scotland
Wales
Northern Ireland
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW
Summary
Table 3-8 Summary of venture capital investment in the UK by BVCA members, 1998-2007
Total investment
(£ million)
Number of
deals
Average deal
size (£ million)
4,332
4,092
1.1
11,520
5,200
2.2
£15,852
9,292
1.7
952
799
1.2
1,318
833
1.6
South West
248
227
1.1
East of England
579
532
1.1
West Midlands
106
208
0.5
East Midlands
222
144
1.5
Yorkshire and The Humber
234
136
1.7
North West
263
446
0.6
North East
39
123
0.3
234
351
0.7
Wales
74
136
0.5
Northern Ireland
63
155
0.4
UK investment:
Total early stage
Expansion
Total early stage and expansion
Regional investment (total early stage):
South East
London
Scotland
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW
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Underlying causes – analysis of consultee perceptions
3.35
Looking at the VC investment data over the past ten years, there is evidence of a peak at the
height of the dotcom boom in 2000/2001 followed by a major falling away to a low point in
2004/5. Market supply then picks up sharply in 2006 before declining again in 2007.
Stakeholders explained these trends as reflecting the ease of fund raising by VCs as well as
reflecting changes to investors’ appetite for risk in investing in VC.
3.36
The bubble caused by the dotcom boom was not just a case of arguably reckless investment
by VCs but also a function of their ability to raise funds from institutional investors who took
an interest in the ICT sector. In the view of stakeholders, many VC funds were raised just
before the dotcom bubble burst and given their ten year lifespan, have been reporting poor
performance as a result of the aftermath of the dotcom failures. The dotcom crash therefore
meant not only that VCs withdrew from the sector on risk rounds but also that they found it
hard to raise funds for any type of investment as venture capital then suffered from a bad
reputation with institutional investors.
3.37
By 2005, the worst of this problem had begun to dissipate and hence VCs were able to raise a
good level of funds which meant they had plenty of money to invest in 2006. By that time,
new types of investor had taken an interest in the VC market such as banks and hedge funds.
The decline in VC activity in 2007 was an early warning of the current problems as the IPO
market began to dry up, cutting off an exit route perceived as key by VCs. (See Section 11
for a discussion of current issues in the IPO market).
3.38
The level of IPO activity on AIM (Alternative Investment Market) is seen by many in the VC
industry as an indicator for the health of the early stage VC market. This is interesting given
research by Cass Business School31 that found market flotations accounted for only 3% of
divestments from unquoted equity over the time period 1998-2006. This compares with
nearly 25% of divestments taking the form of trade sales. As Cass suggests, the issue appears
to be that flotations have become established as the preferred choice of exit for some private
equity firms32. A tailing off in flotations therefore means VCs have had to stay involved with
investee companies for longer, tying up funds that would otherwise have gone into new deals.
3.39
At the same time, some but not all of the newer investor groups (e.g. banks and hedge funds)
have had serious problems of their own, meaning that VCs now have more difficulty again in
raising the money they need to invest. This has led those that have the right contacts (e.g. the
Carbon Trust) to look at other investor groups such as sovereign funds.
3.40
In terms of the VCs active in the early stage market, there have been a number of notable
withdrawals amongst firms that were major investors in 1998 (e.g. 3i and Apax Partners).
These firms have withdrawn because of less attractive returns in early stage investment
compared to other investment stages. This theme is discussed further in Section 4 but appears
to be part of the natural development of VC firms. Stakeholders certainly reported that the
floor at which most private sector VCs were willing to get involved in early stage equity had
risen over the period to a minimum of £2m (with some consultees putting the floor at £5m).
31
Cass Business School (2008) The London markets and private equity backed IPOs
However, other evidence by Library House (2006) suggests that VC fund managers perceive trade sales to be the
most likely exit route from their investments (67%) compared to 37% who thought IPO to be the most likely exit
route.
32
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However, those VCs still involved with early stage deals felt that the small amounts involved
in early stage investment allowed new entrants in the VC market to get established and
develop a reputation before moving on to larger deals. Thus, providing such firms are
encouraged (e.g. through involvement in publicly-backed ECFs) the private sector can still
play a role in the early stage market. This is confirmed by Table 3-3 which demonstrates that
sub £2m deals are being done.
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4 Venture capital funding – characteristics and
processes
Key findings
4.1
The findings are summarised below:
•
The investment criteria of early stage funds are designed to ensure that they meet the
initial needs of their target client base. However, these criteria, if rigidly applied,
may prevent the funds providing follow-on finance, thus requiring them to pass on
the deal to other providers with deeper pockets.
•
Good management is by far the most important attribute in making a company
attractive to potential VC investors (more important even than the product or service)
as VCs consider that it is this which helps ensure good returns. Investment readiness
schemes need to be more aware of this as there is a perception that they are not tough
enough on entrepreneurs about the need to bring in professional management.
•
The early stage VC deal process is time consuming and expensive when compared
with the potential returns and the risk that those returns will not be realised. This has
contributed to the exit of former key players in the market. However, the early stage
market, where the investment sizes (for non-capital intensive businesses) are
relatively small, can act as a first step for new VC fund managers with only limited
resources to invest. So, whilst there are only a few private sector investors at this end
of the market, it is not true to say there are none.
Fund characteristics
4.2
Table 4-1 provides an example of a private sector VC fund serving the early stage market.
Further examples can be found in Section 6 which looks specifically at publicly backed funds
in the UK. The example fund is designed to address the needs of companies seeking seed or
first round finance. However, given the investment size criteria, this begs the question of how
much capacity early stage funds have to provide follow on finance on their own.
Consequently there are concerns amongst some early stage fund managers that they have to
step back when a business requires further funding, thus allowing the new investors to then
gain all the benefits of eventual exit rather than the early stage investors who took the major
risks.
Table 4-1: Example of VC fund characteristics
Name
of fund
Fund size
Investment
size
Term of
fund
Date of end of
investment
period
Growth
stage of
investee
Sector
specialisations
Geographical reach
OCP
£40m
Up to £2m
(average of
£750K)
N/A
N/A - OCP raise
£10m p.a.
Early stage
Sustainable
technology,
healthcare
devices,
ICT
UK-wide
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Source: OCP
The deal process
Attracting deals
4.3
VC funds use a variety of means to attract potential investments. Most of the funds consulted
had developed close partnerships either with universities (through the commercialisation
offices) or with local professionals (in particular accountants, banks and solicitors). Other
forms of promotion included use of websites and reputation through word of mouth. In
general, referrals from trusted contacts are the preferred route as each fund receives many
unsolicited applications, which are generally of insufficient quality.
Criteria in investment decision
4.4
4.5
Consultees cited a number of investment criteria. The ones common to most VC funds are:
•
Good management. This came top with all consultees. A common issue for early
stage investors is that entrepreneurs, although expert in their technological field, are
often not suitable as general business managers. As a result, VCs often demand
management changes or a seat on the board before they are willing to invest.
•
Patented technology. In early stage companies, often the only asset is the Intellectual
Property of the product/service. However, one consultee admitted they would prefer
a company with average technology but excellent management than vice versa.
•
An addressable market of sufficient size. The prospective investee needs to
demonstrate that they have identified a realistic market for their product/service
which is large enough to produce a good financial return.
•
Potential to produce an attractive financial return. Whilst VCs know that not all
investments will succeed, they want to be assured that the management team is
aiming for substantial profit and growth at the outset.
Beyond this core group of criteria, consultees cited others that were specific to the structure of
their fund, e.g. the investment guidelines for public sector backed funds.
Reasons for rejection
4.6
The reasons for rejection were largely the reverse of the favourable criteria. The most
common reasons given were an insufficiently robust business model, unrealistic expectations
of market demand, and the management team lacking credibility. An unwillingness by the
entrepreneur to respond by bringing in new management can break a deal for an otherwise
promising company.
4.7
On average, VCs invest in only 2% of the applications they receive. Given that in any one
year a VC may receive up to 1,500 funding applications, a considerable amount of time is
spent sifting through what they have received. This is why VC managers prefer referrals
34
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from trusted contacts, which often result in a far higher proportion of applications being taken
forward.
Effectiveness of investment readiness
4.8
Consultees reported a low level of Investment Readiness (IR) of the propositions they
received. One VC fund turns down 98% of applications received due to a lack of investment
readiness. Another commented that investment readiness schemes do not appear to have had
much impact on the quality of applications submitted. However, other funds reported a lack
of any form of investment readiness assistance in their area and mentioned that Business Link
did not seem to be able to signpost companies to suitable support.
4.9
One fund manager stated that the problem with IR schemes is that they are not tough enough
on businesses about their management. The schemes are good at showing people how to
prepare business plans but fail to make businesses understand the importance that VCs place
on the key investment criteria (see above).
Performance expectations
4.10
With the exception of one public sector fund which stated that there was no requirement to
deliver a commercial return, most funds were looking at making returns at a rate to reflect the
high risk being taken. The funds measure this in one of two main ways, either as an Internal
Rate of Return (IRR) where they are looking for a return of 25% - 45% or as a multiple of the
amount invested (3 to 10 times). The returns need to be high to cover both the cost of due
diligence and the fact that only one or two deals out of ten are likely to make a profit. In
normal market conditions, investors would ideally like to realise their return in 3-5 years
although most are more realistic and consider 7-8 years to be a more likely timescale.
Due diligence
Time/cost breakdown
4.11
Table 4-2 provides a synthesis of the time and costs experienced by VC consultees in
structuring and closing a deal. It demonstrates that for a small investment in a technically
complex company, the costs can easily account for 10% or more of the investment.
Table 4-2 Due diligence time and costs
Due diligence element
Response range
Total time taken to completion:
6-9 months
dividing into:
•
deal structuring
•
2-6 months
•
due diligence
•
1-3 months
•
legals
•
1-2 months
Aftercare
Up to 5 years
Pre-incorporation work with spin-outs
12 months
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Due diligence element
Response range
Cost
From £20k-£50k for a straightforward deal up to £70-80k
for a technically complex business
Ongoing monitoring costs: £10-12k p.a.
Source: Stakeholder consultations
Charges levied
4.12
Not all consultees levy charges. Amongst those that do, up front fees of 1-3% of deal value
were quoted (with 2.5% being cited as the industry norm). However, as Table 4-2
demonstrates, these fees generally only cover a portion of the costs of putting the deal in
place. Consultees who did levy charges gave no indication that these amounts deterred clients
from seeking equity finance.
4.13
Additional charges levied by some funds include ongoing monitoring fees of 0.5% - 1% p.a.
(of investment deal size) plus directors’ fees for board attendance of £10-15k p.a.
Effect of cost/return on deal decisions
4.14
The high costs involved mean that the funds have to concentrate on the companies that are
likely to produce the highest returns and/or faster exit. Hence VC funds are now more willing
to invest in early stage ICT deals (a now relatively mature market with exits in 3-5 years)
compared with drug development which involves a much longer time to market. Cleantech is
still a relatively new sector and hence the risks and potential rewards are not fully known. As
a result, early stage Cleantech funding has until very recently been unattractive to private
sector VCs due to unfamiliarity. This appears to be in the process of changing as, the credit
crunch notwithstanding, some private sector VCs are beginning to look at setting up funds
specialising in Cleantech.
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5 Analysis of the supply of equity finance –
informal equity (from business angels)
Key findings
5.1
The findings on angel activity are summarised below:
•
Business Angels are playing an increasingly important role in providing early stage
finance (business angels’ share of private sector investment rose from 15% in 2001 to
30% in 2007). However, the total value of recorded deals done has fallen over the
period from 2005 (£47.8m) to 2007 (£29.5m). Data on business angel investment is
not complete and hence these figures understate the real volume of transactions.
•
There is anecdotal evidence that a lack of market ‘exits’(e.g. IPOs, trade sales) has
led to business angels having to stay involved in deals for longer, constraining their
ability to invest in new deals.
•
One important investment route for business angels is through acting as co-investors
for publicly backed funds. They are an important source of finance for business
seeking modest amounts of finance as they are willing to operate at the smaller end of
the market. VCs are less willing to be co-investors as the deals are still too small to
be viable (given that they would want to undertake their own due diligence).
Business angels are perceived to be more flexible. Business Angels tend only to
invest in companies in sectors in which they have previous experience and hence do
not need to undertake such extensive due diligence as venture capitalists.
•
A key trend is the increasing use of angel syndicates to invest. These allow angels to
share the risk and take part in larger deals (i.e. £250k to £500k). The syndication
approach also allows angels to appoint a ‘lead angel’ with both financial experience
and knowledge of the sector in which the investee company operates. VCs confirm
that the presence of an experienced lead angel at the early stage makes the deal much
more attractive to later stage investors because they take comfort from the expertise
involved.
•
Although business angels rate the satisfaction of company involvement highly they
are still looking to generate a commercial return from their investment and look to
make use of the additional tax benefits to be gained through the Enterprise Investment
Scheme (EIS).
UK business angel activity
5.2
The data from EBAN, which includes information from BBAA and LINC Scotland, show that
the amount invested by business angels in the UK has fallen between 2005 and 2007 (Table
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The Supply of Equity Finance
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5-1). In contrast, the number of deals/ investments has nearly doubled, with the average deal
size becoming smaller over the same period33.
Table 5-1 Business angel activity in the UK, 2005-2007
Total investment
Number of deals/ investments
Average deal size
2005 (£)
2006 (£)
2007 (£)
47,823,639
43,407,232
29,501,722
226
383
449
211,609
113,335
65,705
Source: EBAN Statistics Compendium based on the information provided by business angel networks having responded to the
survey conducted in 2008.The data includes BBAA plus LINC Scotland figures. Also, the monetary statistics provided by EBAN
were originally in Euros, but have been converted by SQW into Pounds Sterling using average annual rates for the years 2005,
2006 and 2007, calculated from the monthly average rates for each year, available at: http://www.xrates.com/d/GBP/EUR/hist2005.html, http://www.x-rates.com/d/GBP/EUR/hist2006.html, http://www.xrates.com/d/GBP/EUR/hist2007.html
5.3
Data collated and analysed by Mason34 on business angel activity during 1993 to 2003 show
that (see Table 5-2):
•
Between 1998/99 and 2001, there was a general increase in business angel investment
followed by a decrease in 2002 and an increase again in 2003 – overall investment
has risen between 1998/99 and 2003
•
The number of companies raising finance declined during 1998/99-2003 and the
number of registered business angels increased during 1998/99 and 2003.
Table 5-2 Business angel investment activity in UK 1993-2003
1998/99
1999/00
2000/01
2001 H2
2001
2002
2003
Number of investments
192
224
217
74
186
136
161
Number of companies
raising finance
185
215
211
73
182
134
159
Number of registered
business angels
280
386
346
112
311
216
353
Amount invested by
registered business angels
(£m)
20.0
28.3
30.0
14.3
32.4
20.4
26.1
Source: Mason (2006) The Informal Venture Capital Market in the United Kingdom
5.4
Investment by financing stage during 1998-2003 is presented in Figure 5-1.
33
This is in contrast to feedback from stakeholder consultations (see later in section 5) which highlights the
increasing use of business angel syndicates and thereby suggesting larger deal sizes. This maybe explained by the
fact it is difficult to rely on the data from both EBAN and BBAA as it is only measuring part of the market and
therefore can not be considered reliable indicators of trends.
34
Mason (2006), The Informal Venture Capital Market in the United Kingdom – Adding the Time Dimension,
Venture Capital and the Changing World of Entrepreneurship.
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A report to the Department for Business, Innovation and Skills
Figure 5-1 Business angel investment in the UK by financing stage 1998-2003
40
Percentage of investments
35
30
25
20
15
10
5
0
1998/99
1999/00
2000/01
2001[H2]
2002
2003
Year
Seed
Start-up
Other early stage
Expansion
MBO/MBI
Other receivership
Source: Mason (2006) The Informal Venture Capital Market in the United Kingdom
5.5
Business angel investment in technology sectors35 more than doubled during 19982003 but exhibits an erratic trend over the same period (Figure 5-2).
Figure 5-2 Business angel investment in technology sectors, 1998-2003
80
Percentage of investment
70
60
50
40
30
20
10
0
1998/99
1999/00
2000/01
2001[H2]
2002
2003
Year
Source: Mason (2006) The Informal Venture Capital Market in the United Kingdom.
35
Technology sectors: Communications; Computers (hardware, internet and software); Other electronics related;
Biotechnology; Medical (instruments, pharmaceuticals, healthcare); Other.
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Characteristics
5.6
The key difference between business angels and VC funds is that business angels are
investing their own money and hence have a personal interest in the performance of the
investee company. Consultees estimate that there are about 9,000 business angels in the UK,
of which around 6,000 are active at any one time (a lower number than some published
figures which do not take into account double counting of angels who belong to more than
one network).
5.7
Business angels can invest via a number of routes:
•
as individuals into companies they have become aware of through their contacts
•
though angel networks – which provide forums to bring investors and investee
businesses together
•
in syndicates – small groups of business angels investing together. These can be
permanent organisations or ad hoc ones for particular investments
•
on-line at the smaller end of the market - but this route is still too new to have gained
general credibility.
5.8
Consultees report that the average individual angel investment is around £50k, with the
highest amount being around £100k and the smallest as low as £5k-£10k. However, when
investing as a syndicate, deals can be as large as £500k. This sum can then be doubled
through the matching involved in a publicly backed co-investment scheme.
5.9
Angels have traditionally been seen by stakeholders as providers of seed capital and first
round funding. However, the amounts that can now be raised through syndicates suggest that
for some types of companies (i.e. those not requiring large amounts of capital expenditure)
angels can carry on and invest in later funding rounds. Although in cases where an exit
cannot be found, the continued involvement can become an obligation.
5.10
Many business angels are former business owners themselves and prefer to invest in the
sector in which they have experience. Therefore, business angels operate in sectors as varied
as farming, manufacturing, hotels and leisure, and property. However, only a relatively small
proportion of angels have a high technology background. Such angels are invaluable to coinvestment fund managers as they are the only private sector investors that will get involved
at the seed stage of high tech developments. However, even high tech angels have a
preference for software developments because they only need about £5m to reach the break
even stage. This allows angels as syndicate members /co-investors to stay involved in the
whole cycle rather than passing on the investment for follow on funding. Other more capital
intensive high tech developments can require £10-30m to break even which is well beyond
the capacity of most angels. Hence these investments will need to be passed on to other
investors in the follow on funding stage who have greater financial resources.
5.11
Given that business angels wish to have a hands-on involvement in the investee business,
angels have been viewed as being highly local investors. However, as demonstrated by focus
group attendees, angels can belong to a number of networks in different parts of the country
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and will invest well out of their immediate geographic area for the right deal (one UK based
angel had an investment in Dubai). However, their preference is not to have to travel too far.
Hence, there are benefits of having angel networks in as many regions as possible.
The deal process
5.12
Any one business angel will look at between 20 and 30 projects ending up with investments
in two or three, with which they will then have an active, hands-on involvement. More
experienced investors may invest in four or five investments at a time but with a lower level
of involvement.
Attracting deals
5.13
Individual angels are most likely to come across deals through word of mouth. However, the
benefit of joining an angel network is that the network managers then organise presentations
by prospective investee companies to showcase their activities. These allow angels to see a
number of companies which have generally been through an initial sifting process by the
network manager and hence are likely to be stronger propositions than those arising from
unsolicited applications.
Criteria in investment decision
5.14
Given their personal involvement in the company’s future, business angels are looking for
two main attributes. Firstly, the relationship with the company’s management is critical.
Business angels are generally looking for hands on involvement in their investee company
and know that this can only be done with the cooperation of the people running the business.
If the management is inexperienced, business angels want to make sure that they are
‘coachable’. The business angels see themselves providing the management expertise that a
VC would otherwise parachute into an investee business.
5.15
Secondly, business angels want to support a product/service they understand and that has a
clear route to market. Despite some comments from VCs about business angels getting ‘hung
up on the technology’, the angels attending the focus groups were clear that they wanted to be
sure that the technology could translate into a marketable product.
Reasons for rejection
5.16
Key reasons for rejection include a poorly thought through business plan, a product with no
clearly identified market, unrealistic expectations by the management about the value of the
company and management that look unreceptive to advice. These are similar reasons to those
reported by VCs.
Effectiveness of investment readiness
5.17
The angels attending the focus groups did not comment specifically on investment readiness
schemes. One network manager felt that they are too focussed on ‘ticking the right boxes’ i.e.
helping businesses to produce polished business plans at the expense of taking harder
decisions about their businesses.
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5.18
In the case of business angels, investor readiness is the subject of more debate. Network
managers consider that it is important to encourage more HNWIs to come forward as business
angels and thus they need information/advice on how to become investors.
Performance expectations
5.19
A common view expressed by business angel consultees was that of any 10 investments, four
will fail, three will trickle along, a couple will do alright but not provide the expected return
on investment and the final one will pay for the others. As a result, angels are looking for
returns of 10 times the original investment.
Due diligence
Time/cost breakdown
5.20
Focus group attendees stated they were happy to have external firms do the accountancy and
legal due diligence but wanted to assess the business model themselves. Due diligence for
start-up companies does not take that long. However, a company that has been in operation
for some time (18 months) will be more complex and hence due diligence will take longer.
Consultees felt that due diligence conducted by business angel tends to be less onerous than
that undertaken by VCs. The reason given for this was that business angels know that they
are going to be closer to the business on an ongoing basis and hence more likely to able to
assist in mitigating risks. In comparison, VCs are more ‘distant’ investors and prefer to
protect themselves with very formalised and thorough due diligence.
5.21
One angel network manager broke the process down into commercial due diligence for which
the angel may rely on his/her own knowledge and technology due diligence for which the
investor is likely to have to pay. Overall costs, including financial and legal due diligence,
can therefore be as much as 10-12% of the investment.
Charges levied
5.22
Where no public sector money is available to finance their activities, angel networks charge
investee companies membership fees (e.g. £700 per month) and success fees (e.g. 6% of
money raised).
Effect of cost/return on deal decisions
5.23
Although business angels are looking for a commercial return from their investments, they are
also looking for the satisfaction that comes from involvement in the companies. As one focus
group attendee admitted, the time he has spent working with one of his investments has far
exceeded the return he will gain.
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6 Publicly-backed funds in UK
Introduction
6.1
This section looks at the range of funds backed by public sector money. This includes:
•
Regional Venture Capital Funds (RVCFs)
•
Regional Development Agency funds
•
Early Growth Funds (EGFs)
•
University Challenge Seed Funds (UCSF)
•
UK High Technology Funds (UKHTF)
•
Community Development Venture Fund (CDVF)
•
Enterprise Capital Funds (ECFs)
•
Carbon Trust Funds
•
NESTA fund.
Summary
6.2
Table 6-1 provides a summary of the publicly backed funds by fund type.
Table 6-1 Summary of publicly backed VC funds
Fund type
Total funds
available (during
investment
36
period)
Investment size
range
End of investment
period
Geographical
scope
Regional Venture
Capital Funds
£241m
Up to £660k
2007 - 2008
Regional
RDA VC funds*
£220m
£50k - £2.5m
2008 - 2012
Regional
Early Growth Funds
(EGFs)
£36.5m
Up to £200k
2014 – 2016
Regional
University Challenge
Seed Funds
(UCSFs)
£60m
£25k - £250k
Evergreen
National
UK High Technology
Fund
£126m
Up to £2m
2006
National
Community
Development
Venture Fund
£40m
£100k - £2m
May 2009
National
(Also known as
36
The data covers the last two years i.e. 2007 and 2008. Variations in the way the data from different sources are
recorded may lead to slight differences in the time period covered.
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Fund type
Total funds
available (during
investment
36
period)
Investment size
range
End of investment
period
Geographical
scope
Enterprise Capital
Funds (ECFs)
£185m
£500k - £2m
2011 – 2013
National
Carbon Trust Funds
£27m
£250k - £3m
Still open to
investments
National
NESTA fund
£50m
£250k - £1m
Evergreen
National
Bridges fund)
Source: BERR/DIUS/RDAs/Carbon Trust/NESTA
* Please note data does not include figures from North West and South East Venture Capital Funds in the regions
Regional Venture Capital Funds
6.3
Regional Venture Capital Funds (RVCF) are operational in the nine English regions and
provide funding for SMEs that show growth potential. The Funds are managed by
professional venture capital firms and the investment in the RVCFs is through BIS, European
Investment Fund, Institutional and Private Investors37. Seven of the Funds have been
operational since 2002 and two since 2003. All nine Funds have come to the end of their
investment period, with the majority ending in 2008.
6.4
The objective38 of the RVCFs was to create at least one viable commercial fund in each of the
nine English regions to increase the availability of venture capital to SMEs, within the bounds
of the equity gap at the time. It was also to show to potential investors that commercial
returns are possible from funds used to invest in SMEs within the bounds of the gap, as well
to raise the supply of quality fund managers working at this level.
6.5
Analysis of data provided by BIS reveals the following:
•
The average fund size was nearly £27m and 177 investments (deals) were made in the
last two years39, with a total of 97 businesses receiving investment.
•
Nearly all the Funds had a general investment range up to £500k (later extended to
£660k) and the overall average size of investment per company (average deal size)
for all the Funds was £362,550.
•
The average duration of the Funds was five years and investment was made in all
financing stages (including MBO/MBI). However for most Funds the dominant
focus was on seed, start-up, early stage and expansion.
•
London was the most active region in terms of deals done followed by Yorkshire &
Humber and the South West.
•
The smallest fund was in the North East and it made the lowest number of
investments.
37
BIS; www.bis.gov.uk
www.bis.gov.uk
39
The data covers the last two years i.e. 2007 and 2008. Variations in the way the data from different sources are
recorded may lead to slight differences in the time period covered.
38
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Regional Development Agency venture capital funds
6.6
In addition to the RVCFs, eight40 of the nine Regional Development Agencies in England
operate their own venture capital funds which aim to provide investment for SMEs in their
respective regions. Data are available for six41 of the eight42 regional funds. Analysis reveals
the following43:
•
The average fund size was just over £17m44 and a total of about 800 investments
(deals) were made in the last two years with over 500 businesses in receipt of
investment. However, the majority (68%) of the investments were in Yorkshire &
Humber.
•
The average size of investment per company made by five45 regional funds was
nearly £423,000. This has been invested in seed, early-stage, start-up and expansion.
•
The average duration of most of the funds is about 10 years with the majority closing
to new investments during 2008-2010.
•
The main sectors invested in include: life sciences, “high technology”, creative
industries and manufacturing.
•
Yorkshire & Humber has the largest fund size followed by West Midlands and the
North East.
•
East Midlands had the smallest fund and had one of the lowest number of investments
in the last two years.
Early Growth Funds
6.7
Early Growth Funds (EGFs)46 were designed to encourage risk funding for companies in
start-up and growth phase. The aim was to increase the availability of small amounts (average
of £50,000) of risk capital. The main intended beneficiaries of EGFs were47:
•
innovative and knowledge intensive businesses
•
start-ups or university spin-outs
•
smaller manufacturers in need of new investment to pursue new opportunities
•
other early growth business.
40
East of England does not have a RDA funded venture capital fund in the region.
The six RDA funds include: South West Development Agency, Yorkshire Forward, Advantage West Midlands,
One NorthEast, East Midlands Development Agency and London Development Agency.
42
There are no data available on the North West and South East regions.
43
The investment made by the six RDA funds for which data is available includes a mixture of both public and
private investment. The proportion of investment from the private sector cannot be determined based on the
available data.
44
This includes a mixture of equity, loan and mezzanine finance.
45
Five regional funds include: South West of England Development Agency, Yorkshire Forward, One NorthEast,
East Midlands Development Agency, London Development Agency.
46
www.bis.gov.uk
47
www.bis.gov.uk
41
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6.8
The EGFs came into existence during 2002-04 and all EGFs are still operational. All of the
EGFs are expected to close from 2012 onwards, with the last Fund ending in 2016.
6.9
The data for EGFs indicate that the average fund size across the seven Funds was just over
£5m: a total of 74 companies received investment in the last two years. The average size of
investment per company for all the EGFs was nearly £153k.
University Challenge Seed Funds
6.10
The University Challenge Seed Funds (UCSFs) were set-up with the aim of commercialising
research from universities. UCSFs were introduced in 1999, in 2000 and then four more in
2002/03. There are 19 Funds in all, with all but four “live” in the sense that investment and
support for investees is on-going48. The total investment allocated to UCSFs was £60m49 and
a total of 51 institutions are involved in the initiative. The majority of investment is in the
biomedical sector (twice as many than any other sector) followed by bioscience (nonmedical) and then informatics, and physics & engineering.
6.11
Although no details of the Funds as a whole were available, one consultee gave an example.
Table 6-2: Example of UCSF characteristics
Name of
fund
Fund size
Investment
size
Term of
fund
Date of
end of
investment
period
Growth stage
of investee
Sector
specialisations
Geographical reach
Javelin
Iceni
Seedcorn
Fund
£4m
£25k
pathfinder
funding,
£250k
equity
investment
Evergreen
N/A
Preincorporation
and seed
None
Proposals
from
partner
universities
only
Source: Javelin
6.12
The UCSFs were an experiment and therefore did not follow one specific path. Broadly,
three approaches were taken:
•
concentration on Proof of Concept (PoC) – providing up to £50k
•
pathfinder equity investment involving a small investment as a lead into a larger
investment
•
funds which focused on larger equity investments.
6.13
There was a hope rather than a requirement that UCSFs would be “evergreen”. The majority
of the Funds have had difficulty in achieving this status.
6.14
The UCSFs were designed to plug the equity-gap for commercialisation of university research
/spin-out activity beyond the point where for example Research Council funding would stop.
In addition to the supply of finance, other benefits of the Funds are seen to include:
48
According to Dr Dean Patton, University of Southampton, the four Funds that are currently not investing does
not mean that they will not be investing in the future.
49
www.bis.gov.uk. £45m was allocated in 1999 and £15m in 2001.
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•
the creation of a more commercial mind set among Technology Transfer Offices
(TTOs)
•
encouraging private fund managers to become more interested in spin-out activity.
6.15
According to ongoing research on UCSFs50, some of the UCSFs are being replaced by VC
activity, with VCs becoming actively engaged with universities (e.g. Leeds University,
Loughborough University). Universities have developed relationships with private fund
managers and are more active in commercialising university activity. The universities have
become more professional in their approach to fund managers and the fund managers
themselves have become more aware of the benefits of “mining the gems” from the university
research departments to find good commercial opportunities.
6.16
Although university commercialisation of research and follow-up funding will undoubtedly
carry, the picture of activity and likely outcomes is patchy and difficult to assess. Funding for
UCSFs directly from central Government has been replaced by the University Higher
Education Innovation Fund (HEIF). The universities have the power to decide how to allocate
HEIF income, including to UCSFs. In essence, funding from Government continues to be
there for the purpose associated with UCSFs, should individual universities decide to use the
HEIF money in this way.
UK High Technology Fund
6.17
The UK High Technology Fund (UKHTF) aimed to invest in early stage, high technology
venture capital specialist companies and increase the amount of finance in these companies.
It was a fund of funds which means that it invested in other funds that invest in high tech
companies, rather than funding companies directly. It is no longer making investments.
Community Development Venture Fund
6.18
The Community Development Venture Fund (CDVF)51 aims to provide venture capital
finance to SMEs capable of growth that are located and have economic links with the 25%
most disadvantaged wards in England. It is a generalist Fund that was established in 2002 and
is due to end in 2009. The total value of the Fund is £40m.
6.19
BIS data on CDVF indicate that the general investment size range is between £100k and £2m.
The average size of investment per company (average deal size) is £796,412. A total of 12
businesses have received funding in the last two years. Investments made by financing stage
were distributed as follows:
•
50% early stage
•
33% property-backed
•
8% development
•
8% MBO.
50
51
By Dr Dean Patton, School of Management, University of Southampton.
Also known as the Bridges Fund.
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Enterprise Capital Funds
6.20
Enterprise Capital Funds (ECFs) are a hybrid of Government and private sector funds for
SMEs. They are aimed at addressing the equity gap for investments up to £2m52. ECFs are
national, generalist funds. There are eight Funds, with the first five being launched in 2006-07
and the remaining three were launched in 2007-08. The third round competition for ECFs has
been opened and further competition rounds are expected up to 2010. The end of the
investment period for most of the current ECFs is 2011.
6.21
The analysis of data available for seven of the ECFs shows that:
•
Fund size ranges from £10m to £30m and the average fund size is just over £26m
•
A total of 29 businesses have received investment in the last two years and the
average size of investment per company (deal size) is just over £535,270
•
Nearly all the Funds focus on seed, early stage and expansion phase.
Carbon Trust funds
6.22
6.23
The Carbon Trust is an independent Government-funded company which aims to “accelerate
the move to a low carbon economy by working with organisations to reduce carbon emissions
and develop commercial low carbon technologies53”. The Trust has its own investment arm,
Carbon Trust Investments (CTI) which is responsible for two Funds54:
•
Clean Energy Fund – a £25m fund launched in 2002 to commercialise clean energy
companies in the UK. It has invested approximately £10m in 11 companies since
2002, including both early and later investment stages. Of the remaining amount, £5m
has been committed for potential follow-on investments and £10m is to be made
available for new investments.
•
Imperial Low Carbon Seed Fund – a £2m fund launched together with the Shell
Foundation in 2007, managed by Imperial Innovations. To date it has made three
investments with a total value of approximately £0.5m.
According to SEF Alliance Publications (2008), CTI can only invest up to half of each
round’s total value and only invest in the range £250k to £3m per investment transaction. The
remaining investment is met with support from an investment syndicate involving private
venture capital firms. During 2007-08, the Carbon Trust brought in a total of nearly £24m in
additional private sector funding into early stage clean energy technology companies. The
total cumulative private funding generated by the Carbon Trusts portfolio companies since
2002 is more than £91m.
52
www.bis.gov.uk
www.carbontrust.co.uk
54
SEF Alliance Publications (2008) Public Venture Capital Study.
53
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NESTA fund
6.24
NESTA (National Endowment for Science Technology and the Arts) supports innovation
through direct investment, research aimed at shaping policy and innovation awareness
programmes. In regard to the first element, NESTA runs a fund for direct investment in early
stage technology companies (Table 6-3):
Table 6-3: NESTA evergreen fund
Name of
fund
Fund size
Investment
size
Term of
fund
Date of
end of
investment
period
Growth
stage of
investee
Sector
specialisations
Geographical reach
NESTA
£50m
£250k £1m
Evergreen
N/A
Early stage
technology
Life
sciences,
Cleantech,
ICT
UK-wide
Source: NESTA
Analysis of stakeholder views on the role of publicly backed funds
6.25
The consultees all considered publicly backed funds to be vital. Business angels do not have
enough capacity by themselves to meet all the remaining financing needs in their market and
hence publicly backed VC funds help address the early stage supply gap. Many of the
schemes, for instance ECFs, use private sector fund managers. However, there are some
concerns expressed that publicly backed funds are too small both in terms of overall capacity
(it is suggested that they need to be £30m-£50m in size to be commercially viable) and in
terms of the inflexibility over the maximum amount they can invest in any one company
(initially £250k, then increased to £500k, and then increased again to £660k for an RVCF or
£2m for an ECF). An example of the former would be one of the RVCFs which had total
funds of only £12m. This means that they may not be able to provide all the funding the
company needs and they often do not have sufficient capacity to provide follow-on funding.
Hence their investees may need to find other investors to avoid growth being constrained.
6.26
Whilst acknowledging the above concerns, it is also important that these schemes remain
targeted at where the equity gap is most acute.
6.27
The issue of follow-on funding highlights other consultee concerns, including whether the
fund managers of the publicly backed funds are sufficiently “tough” with investees to ensure
that the businesses are ready for the next round of investment. Also, having a public sector
fund with a group of angels involved might not be attractive to later stage investors who may
only be willing to invest if they can take over the whole transaction. This not only gives later
investors a more straightforward deal but also ensures that they gain the better returns to be
had on exit (potentially to the detriment of the original co-investees). However, there is the
counter argument that without the initial public sector investment businesses would not be in
a position to gain later stage investment.
6.28
Another issue identified with publicly backed funds was their limited time spans for
investment. There is a perception that RVCFs and UCSFs have come and gone, leaving gaps
behind them. However, ECFs are being made available in tranches and hence at present their
geographical coverage is varied. ECFs are not restricted in investing outside of their
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immediate geographic area and so are able to invest throughout the UK. In practice, fund
managers often choose to make investments closer to their geographic location to minimise
costs.
6.29
There have also been a number of new VC schemes recently introduced including the Capital
for Enterprise Fund and Aspire Fund. The Capital for Enterprise Fund is a £75m fund that
aims to provide equity and quasi- equity finance to business of up to £2m. The Aspire Fund
is a £12.5m co-investment fund providing up to £2m of funding55 to female led businesses
looking to grow. (Since completion of this research the Government announced on the 29th
June 2009 a new UK Innovation Investment Fund, which will focus on providing equity
finance to growing small businesses, start-ups and spin outs in digital, life sciences, clean
technology and advanced manufacturing.)
6.30
Many stakeholders consider the public sector to have learned lessons from its previous
schemes as many consultees preferred the structures ECF structure. Under the RVCFs the
first losses were covered by the public sector and the returns the public sector could earn were
unlikely to compensate for these. However, under the ECFs the private sector covers the first
losses and the public sector gains a 4.5% priority return on its share ahead of other investors.
6.31
Most consultees felt that the publicly backed funds were not crowding out the private sector
as, for the reasons discussed above, the private sector had good commercial reasons for not
being involved to any greater extent in the early stage market and investments below £2m.
Co-investment arrangements were cited as a way of encouraging the private sector (in the
form of business angels) to invest alongside the public sector.
6.32
Likewise, the ECFs are seen as a way of the public sector making use of private sector fund
management skills to do deals that the private sector might not otherwise consider. However,
consultees noted that in some areas (e.g. Merseyside) there is such a proliferation of public
sector funds that private sector VCs avoid the market.
55
Total investment size including matched co-investment.
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7 Other public sector interventions in the equity
finance market in the UK
Introduction
7.1
Although the focus of this report was primarily on Government equity schemes, this section
provides a summary of indirect public sector interventions in the early stage equity market,
through tax based measures mainly used to encourage HNWIs to invest in early stage
companies. These include Venture Capital Trusts (VCTs), Enterprise Investment Scheme
(EIS) and Corporate Venturing Scheme (CVS).
Venture Capital Trusts
7.2
Venture Capital Trusts (VCTs)56 came into existence in 1995 and aim to increase the supply
of finance to high-risk trading companies that are not listed on the stock exchange. A VCT
allows investors to provide finance for these unquoted companies indirectly by investing in
the VCT, which itself is managed by a fund manager/ investment group. In return, investors
are eligible for exemption from corporation tax on capital gains from the disposal of their
investment57.
7.3
Data on VCTs from HM Revenue & Customs (HRMC) show that the amount of finance
raised through VCTs has fluctuated between 2001/02 and 2007/08 (Table 7-1). Funds peaked
in 2005/06 and then declined in 2007/08. This is likely to be the result of the changes in the
Finance Act 2006, which tightened the rules on VCTs.
7.4
This is complemented by the number of ‘VCTs raising funds’ following a similar pattern and
includes both new and existing VCTs raising funds. The trend is different for ‘VCTs
managing funds’ which have risen steadily since 2001/02.
Table 7-1 Number of Venture Capital Trusts and the amount raised, 2001-2007
Amount of funds raised
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
155
70
70
520
780
270
230
45
32
31
58
82
32
54
70
71
71
98
108
121
131
(rounded to the nearest
£5m)
VCTs raising funds in the
year
(includes both new and
existing VCTs raising funds
in each tax year)
VCTs managing funds
(no. of VCTs in each tax
year)
Source: HMRC
56
www.hmrc.gov.uk
Cowling et al. (2008) Study of the Impact of Enterprise Investment Scheme (EIS) and Venture Capital Trusts
(VCT) on Company Performance, HM Revenue & Customs Research Report 44.
57
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A report to the Department for Business, Innovation and Skills
Table 7-2 Venture Capital Trusts – number of investors and amount of investment
2005-06
2004-05
2003-04
Investors
(%)
Amount of
investment
(%)
Investors
(%)
Amount of
investment
(%)
Investors
(%)
Amount of
investment
(%)
0
5
-
6
-
27
1
£2,000
7
1
13
2
16
3
£5,000
21
4
22
5
18
7
£10,000
36
16
34
19
21
21
£25,000
12
13
11
14
9
19
£50,000
7
13
6
13
3
11
£75,000
2
5
2
5
2
14
£100,000
3
9
2
9
4
24
£100,001
7
39
5
33
-
-
100
100
100
100
100
100
Size of
investment
(£)
Total
Source: HMRC
Enterprise Investment Scheme
7.5
The Enterprise Investment Scheme (EIS) was introduced in 1994. It is designed to support
small, higher-risk unquoted trading companies58. Various forms of tax relief are offered to
private individuals investing in these companies. These individuals also qualify for an income
tax reduction based on the amount invested59.
7.6
There is no time-series data on the EIS in terms of parameter of interest to this study.
However, it is appropriate here to outline some of the main findings from research carried out
by Cowling et al. (2008) on EIS (and on VCTs):
•
EIS investments tend to be associated with general capacity building (growth in fixed
assets and employment) and increased sales
•
the trend for EIS in terms of number of first investments between 1996 and 2000
exhibits rapid growth, followed by a rapid decline to 200460.
Corporate Venturing Scheme
7.7
The target audience of the Corporate Venturing Scheme (CVS) are companies that are
seeking direct investment in the form of minority shareholding in small independent higher-
58
Cowling et al. (2008) Study of the Impact of Enterprise Investment Scheme (EIS) and Venture Capital Trusts
(VCT) on Company Performance, HM Revenue & Customs Research Report 44.
59
According to Cowling et al. (2008), individuals are eligible for tax relief on share disposal and can also postpone
the charge on capital gains tax on gains arising on the disposal of other assets at the time they make their
investments.
60
VCTs also follow the same general pattern.
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A report to the Department for Business, Innovation and Skills
risk trading companies or group of companies. In return, the Scheme provides tax incentives
for investments in the same types of companies which qualify under the VCT scheme61.
7.8
Figures for CVS are also provided by HMRC. The total amount raised since 2001/02 was
nearly £54m: the average amount raised was £9.0m per annum. Assuming the number of
companies obtaining funds is equivalent to the number of deals then the average deal size is
nearly £123,29062.
Table 7-3 Corporate Venturing Scheme – number of companies and amount invested
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Total
Number of
companies
raising
funds
63
63
75
98
78
61
438
Number of
investing
companies
115
95
133
93
89
70
595
Amount
raised (£m)
6.9
6.5
10.8
13.0
9.5
7.2
53.9
Source: HMR
7.9
Further information on corporate venturing is set out in Section 9.
61
62
www.hmrc.gov.uk
SQW assumption and calculation.
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8 Equity investment and institutional investors
Key findings
8.1
The findings on institutional investors are summarised below:
•
Over the period 1987-2000, unquoted equity outperformed other asset classes in
terms of returns. Its reputation was, however, tarnished by the dotcom crash which
depressed returns for a number of subsequent years. By 2006, institutional investors
were again active in the market only to ease off funding again in 2007 as early signs
of the credit crunch began to cause concern. The EVCA is increasing its promotion
of VC as an asset class to try to improve its image with investors.
•
In terms of funds raised in 2007, only 10% were earmarked for early stage and
expansion deals (down from 15% in 2006). It is also important to note that 75% of
funding came from overseas sources. Pension funds remained the largest single class
of investor but their share has declined as the importance of fund of funds and banks
has grown. This is some concern from consultees that the present economic
conditions may impact on future fund raising.
Introduction
8.2
In light of consultee comments that VC has fallen out of favour with institutional investors as
an asset class, this section examines investors’ views on VC over time and the reasons behind
them.
Trends in institutional investors’ attitudes towards VC as an asset
class
8.3
The role of private equity as an “asset class” was considered by the London Business School
(LBS) in 200063. The report defined Private Equity and made the distinction between the
coverage of the ‘private equity’ term as used in the UK and Europe, compared with the
United States64.
8.4
At the time of the LBS report there had been a consistent positive trend in the returns
produced by the private equity asset class with cumulative returns reportedly outperforming
all principal UK comparator asset classes over the period between 1987 and 2000. The longterm performance of the UK private equity industry since 1980 had stood at over 14% per
annum net of all costs and fees.
63
London Business School (2000) UK Venture Capital and Private Equity as an Asset Class for Institutional
Investors.
64
“The terms venture capital and private equity describe equity investments in unquoted companies. In the UK
and much of continental Europe, the term venture capital is used synonymously with that of private equity. In the
US, however, venture capital usually refers to the provision of funds for younger, early stage and developing
businesses whereas private equity is mainly associated with the financing of leveraged management buy-outs and
buy-ins (MBOs and MBIs)” in BVCA (2000) Private equity – the new asset class: Highlights of the London
Business School report ‘UK Venture Capital and Private Equity as an Asset Class for Institutional Investors’.
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A report to the Department for Business, Innovation and Skills
8.5
Coupled with the attractive returns, the LBS report maintained that the risks of investing in
private equity funds were considerably lower than the prevailing perception, providing
investments were made on the basis of a diversified portfolio. At that time (2000), the
prediction was for future strong returns. UK-managed private equity funds were at the
forefront of the growing pan-European market as the second largest private equity industry in
the world after the USA it accounted for nearly half of all European investment. Any
concerns of trustees considering investment in private equity funds regarding liquidity were
presented as “more of a psychological barrier” than a reality.
8.6
However, the sources of investment were increasingly overseas, with an increasing
dependence reported on funds particularly from the USA. The view was that US sources were
using the experience of UK private equity managers “as an access point for attractive returns
and wider pan-European private equity investment”. The LBS study reported that UK pension
funds had been investing a decreasing amount in the industry over recent years.
8.7
The drive in 2000 was therefore to overcome the barriers to investing in what was identified
by LBS and the BVCA as an extremely attractive investment proposition, and to obtain
recognition of UK private equity as a mainstream asset class.
8.8
Despite the dotcom crash which wiped out $5 trillion in market value of technology
companies from March 2000 to October 2002, UK private equity was still being promoted as
a success story in early 2006 by the BVCA65, reporting that the sector was still
outperforming other key asset classes. At that time, the BVCA’s most recent performance
study highlighted the out-performance by private equity of both the FTSE All-Share Index
and hedge funds on a three, five and ten year basis.
8.9
However, by 2007, the picture looked very different from an institutional investor
perspective. The National Association of Pension Funds (NAPF) identified that “the
environment in which pension funds are operating has changed significantly since 2001 …
then many schemes were in surplus and the focus was on how to expand institutional
investment into new areas such as venture capital … now the focus is on deficit correction,
the strength of scheme sponsor covenants and scheme-specific funding”66 They attributed the
deficits and the sensitivity of sponsor companies to a number of factors outside the influence
of the private equity sector, in particular increased longevity of pension fund members and
new accounting provisions. However, adverse market movements played a large part in the
downturn and, in response; one of the consequences has been a shift in investments from
equities to bonds.
8.10
Nonetheless, two surveys cited in the NAPF report identified that pension funds were taking a
more diversified approach to asset allocation and the trend towards investment by pension
funds in private equity/venture capital was still increasing – with 19% of respondents
reporting that they make such investments (52% when weighted to asset value) compared
with 15% in 2005, and up from just 6% in HM Treasury’s 2004 review. A survey in 2005 by
65
66
BVCA (February 2006), Private Equity – a UK Success Story.
National Association of Pension Funds (January 2007) Institutional Investment in the UK Six Years On.
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A report to the Department for Business, Innovation and Skills
JP Morgan Fleming67 identified that 31% of the participating pension schemes invested in
private equity, with a further 26% considering investment in the sector.
8.11
However, what is not known from these data is the percentage of the total investment in the
private equity sector represented specifically by UK pension funds’ investments. Compared
to the importance of the overseas investors, the UK institutional investors may well still be a
relatively small proportion of the total.
8.12
Latest moves by the EVCA suggest there is still an issue to be addressed concerning the
confidence of institutional investors in the venture capital/private equity sector, which was
dented and has never fully recovered from the dotcom crash and has been exacerbated by the
current global financial downturn. It is understood to have hired a senior executive from the
European Investment Fund to help promote the reputation of venture capital across Europe.68
EVCA fear that the current financial crisis “could do irreparable harm to Europe’s venture
industry”. The intention therefore is to draw up policies to improve investors’ preconceptions
of venture capital and ensure that institutional investors and policymakers have a clear view
of the benefits of the asset class.
Sources of funding for VCs
8.13
A recent NESTA report69 using BVCA data identified that venture capital investment as a
proportion of all private equity investment fell from 11% in 2000 to less than 4% in 2007.
8.14
In 2007, BVCA members raised £29.3bn, a fall of 15% from the £34.3bn raised in 2006.
Stakeholders confirm that that 2006 was a “bonanza year” for fund raising and that the
funding market was already easing off in 2007.
8.15
Of the funds raised by its members, 90% was earmarked for buyouts (up from 85% in 2006).
Funds raised for early stage investments fell from £1.24mto £830m (although assets marked
for technology companies rose). Funds raised for expansion decreased to £614m from
£775m. These figures underline the investment statistics in illustrating the move from early
to later stage deals.
8.16
Table 8-1 sets out the various sources of funding for VCs and clearly shows the dependence
on overseas funding (already remarked upon in the LBS report in 2000). In terms of type of
institution, in 2007 pension funds remained the largest class of investor but their share had
declined to be replaced by increases from fund of funds and banks. In view of the credit
crunch, this recent increase in the importance of banks is concerning given that they may be
more likely to withdraw from this market.
8.17
The other interesting point to note is the relatively large amount of funding that comes from
overseas Government agencies, compared to similar sources in the UK.
67
JP Morgan Fleming (2005) Alternative Investment Strategies Survey of 350 pension schemes.
www.penews.com/today/index/rss/content/3352831759
69
Pierrakis and Mason (2008) Shifting Sands – The changing nature of the early stage venture capital market in
the UK.
68
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A report to the Department for Business, Innovation and Skills
Table 8-1 Venture capital funding sources
Type of source
Amount raised (£m)
% of amount raised
2007
2006
2005
2007
2006
2005
UK
1,132
2,054
1,502
4
6
5
Overseas
5,560
7,919
7,175
19
23
26
Total
6,692
9,973
8,677
23
29
31
635
1,080
558
2
3
2
Overseas
1,777
2,023
3,136
6
6
12
Total
2,412
3,103
3,694
8
9
14
UK
270
442
423
1
1
2
Overseas
370
847
928
1
2
3
Total
640
1,289
1,351
2
4
5
UK
1,188
2,222
822
4
6
3
Overseas
4,380
1,307
854
15
4
3
Total
5,568
3,529
1,676
19
10
6
UK
2,067
1,523
1,131
7
4
4
Overseas
4,065
3,807
3,244
14
11
12
Total
6,132
5,330
4,375
21
16
16
59
470
517
-
1
2
Overseas
2,988
2,552
3,196
10
7
12
Total
3,047
3,022
3,713
10
9
14
20
130
65
-
-
-
Overseas
361
1,372
1,279
1
4
5
Total
381
1,502
1,344
1
4
5
UK
985
669
562
3
2
2
Overseas
1,486
1,352
1,019
5
4
4
Total
2,471
2,021
1,581
8
6
6
UK
931
1.132
292
3
3
1
Overseas
984
3,395
611
3
10
2
1,915
4,527
903
7
13
3
7,287
9,722
5,872
25
28
21
Total Overseas
21,971
24,574
21,442
75
72
79
Overall total
29,258
34,296
27,314
100
100
100
Pension funds
Insurance companies
Corporate investors
Banks
Fund of funds
Government agencies
Academic institutions
Private individuals
Other sources
UK
UK
UK
Total
Total UK
Source: BVCA
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9 Corporate venturing in the UK
Introduction
9.1
Section 7 provided data on companies making use of the tax breaks on offer under HMRC’s
Corporate Venturing Scheme. This section provides background information on corporate
venturing as a concept and illustrates this with a case study.
Background and trends70
9.2
Corporate venturing (CV) involves the creation of a formal or informal organisational team
by the parent company that is responsible for investigating and developing new ventures,
which may or may not reside within the group. The new venture may be an outcome of
innovation that exploits new markets or new product offerings, or both.
9.3
The CV industry has a global dimension. Historically, in terms of the geographic origins of
the parent company, North American companies dominated the industry, with more European
and Asian companies becoming involved in the 1990s. The geographic scope of their
investments has been spread over North America, Europe and Asia.
9.4
From its origins in the 1970s, CV has gone through three waves of growth and decline. The
first wave ended in 1973 with the oil price shock and the consequent recession, which limited
the availability of funds for investing in new venture creation.
9.5
In the 1980s, large corporations regained confidence in internal CV activities assisted by the
growth reported in the electronics and computer industry. In 1984, more than $4bn was
invested by almost 100 CV investors globally. The economic recession of the late 1980s
adversely affected the CV industry with investments dropping below $2bn.
9.6
The third CV wave occurred in the late 1990s, in response to the “creative destruction”
caused by the increased uncertainty associated with the emergence of new technologies
(information and networks, media, telecommunications, biotech), the globalisation of
competition, the disruption of industry boundaries, the decrease of product life cycles and the
emergence of new markets. Silicon Valley became the entrepreneurial hub of start-up
companies developing new services and products and the building of what is now known as
the “dotcom” economy. Large corporations were keen to participate in this wave of
innovation and get a stake in new business models and products which promised high returns.
Reuters’ IPO of Yahoo! in 1996, for instance, returned an $848m market capitalization in the
first week. In 2000, around $18bn were invested in CV funds by large corporations globally.
9.7
However, by the end of 2001 the difficult macroeconomic conditions and the collapse of the
high-technology stocks had a dramatic negative effect on the financial performance of the CV
funds. In 2000, Les Echos71 reported 126 CV funds globally with €15,548m raised. In
70
71
This section relies heavily on contributions of Dr Marina Biniari of the Hunter Centre at Strathclyde University.
www.lesechos.fr
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A report to the Department for Business, Innovation and Skills
contrast to this in 2004, only 11 active CV funds were reported raising €1,371m. Large
corporations started to lose confidence in the financial and strategic performance of their CV
programmes.
9.8
During the third wave, large corporations adopted primarily a corporate venture capital
business model to organise their CV teams, without necessarily having the appropriate
personnel, processes or experience to achieve a high number of CV deals and deliver high
financial returns. Further, the focus of the corporate venture capital business model on the
financial aspects of venturing neglected any emphasis on achieving tangible strategic returns
for the parent companies. With the economic slow-down following 2001, companies
involved in CV activities decided to withdraw from activities which were not core to their
strategy and were causing financial losses.
9.9
Since 2004, a steady increase in the CV activities of large companies has been observed.
Investments in Europe rose to €569m in 2006 from €430m in 2005, achieving an overall 32%
increase (EVCA). In 2006, the countries targeted mostly were France and Italy, which
together count for 50% of the European CV market.
9.10
In Britain, the first National Economic Development Office (NEDO) report on CV was
released in 1987 promoting CV as a means of improving the international competitiveness of
British industry. It promoted CV as a partnership between a large company and a small
entrepreneurial firm, with the company taking a minority equity stake in the small firm in
exchange for R&D, new products and markets. Media releases identified the first cases of
CV activities in the late 1990s, with more British companies establishing formal CV units
between 1999 and 2001.
9.11
The appearance of CV as a source of finance in the UK is aligned with the emergence of the
VC industry, which in the 1980s experienced sustained growth (from £120m new VC funds in
1983 to £1.68bn in 1989) (Murray, 1994). In 1998, the British VC industry accounted for
49% of the total annual European VC investments (EVCA, 2000).
9.12
While the VC market was growing, policy makers during the late 1980s and 1990s started to
recognise the growth potential of CV for small firms and became keen on promoting its
benefits. The NEDO report in 1986 and the Confederation of British Industry (CBI) report in
1999 are examples of the effort undertaken to identify the misconceptions and barriers small
and large firms shared in forming partnerships through venturing. In 1999, the Government
announced the Corporate Venturing Scheme in an attempt to provide tax incentives (20%
relief on the tax on profits) which would encourage investment in minority share holding in
small, higher risk companies.
9.13
In the late 1990s, large companies started to adopt the corporate venture capital business
model to invest in internal and external ventures and business ideas. Reuters Venture Capital,
BAE Capital, Shell Internet Ventures, Unilever Ventures are among the best known
examples. The majority of the CV investments were made in information and networks
technologies, biotech and healthcare, communications and engineering industries (BVCA,
2000).
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A report to the Department for Business, Innovation and Skills
9.14
In 2002, the DTI funded the Corporate Venturing UK association to promote further
networking activities between large and small firms for the formation of CV partnerships.
The association was closed in 2005.
9.15
Despite the fluctuations in the global CV industry which have inevitably affected the British
market, British companies appreciate the benefits of CV in terms of innovation and growth
potential. Currently, Unilever Ventures, the active collaboration between BT and New
Venture Partners, and the venturing activities of BP are cases of companies which continue to
have an active interest in CV activities.
Case study - UKE
9.16
As an example of corporate venturing in action, we consulted the venture team at a major UK
energy company, which for the purposes of this case study we have called UKE.
9.17
The company has been involved in corporate venturing for five years. It set up a corporate
venturing team 20 months ago which has six people directly involved. They are allocated an
annual budget from which to make investments. However, this is flexible and they can seek
further funds if good opportunities are identified. The role of the venture team is to identify
investment opportunities that fit the strategic needs of the business, ‘sell’ the proposal to the
appropriate internal business division and do the deal. An investment committee makes the
actual investment decision.
9.18
The motive for engaging in corporate venturing is linked to having a “vision” of the future for
the company and to help deliver on this vision. It is looking to invest in companies that can
offer solutions and opportunities that link strategically to the core business, including energy
generation, supply, IT, telecoms. It is emphasised that strategic reasons dominate investment
decisions.
9.19
UKE engages in both direct and indirect investing. It has made 12 direct investments and
invested in three VC funds as Limited Partners, in UK, US and Asian funds. A typical deal
involves a minority stake of 20-30% but it has also done 100% deals. Amounts invested
range from £50k to £15m. Investee companies can also benefit from hands-on support,
contracts and project financing. UKE will do follow-on funding (up to three rounds) and will
co-invest on some deals. In terms of exiting, it may divest or may buy-out the company – “all
options are possible”.
9.20
Areas where UKE has invested to date include geothermal, fuel cells, active network
management, smart meters, batteries, wind generation, and hydro generation. In terms of
geography it has invested all over the world, as well as in several UK companies. In some
cases non-UK based investee companies have opened up offices in the UK (e.g. as their
European HQ).
9.21
The benefits of corporate venturing to UKE include gaining first mover advantage, betting on
the right technology, and learning (e.g. an investment in photovoltaics enabled UKE to learn
where the technology was going and about market opportunities).
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10 International comparisons
Key findings
10.1
The findings on international comparisons are summarised below:
•
Trends in VC investment in Europe over the period 1998-2007 have been broadly
similar to those in the UK. However, Europe bounced back much more quickly from
the dotcom crash. This may be because the UK, being by far the largest VC market
in Europe (40% of deals) was therefore much more seriously affected by the crash.
•
The UK is also the largest angel investor in Europe (31% of volume and 44% in
number of deals). However, the average deal size in the UK has fallen below the
average for Europe over the period 2005-2007. It appears that angels in the UK are
doing many more deals than other EU countries, but smaller ones.
•
As a proportion of GDP, the UK has a higher share of early stage venture capital
investment than the US.
•
Comparing US angel investment activity with US VC investment shows that angel
investments represent 86% of VC investments in terms of dollars invested but that
angels make seven times as many investments as VCs.
•
In volume terms, US angel investment is an order of magnitude larger than in the UK.
In 2007, US angels invested US$26bn (£18.7bn) compared with UK business angels
investing the equivalent of US$41m (£29.5m). Notably, average deal size in the US
in 2007 was US$455,182 (£327,527) compared with US$91,332 (£65,705) in the UK.
Introduction
10.2
In this section, statistics on the supply of equity in Europe and USA are presented and where
possible, comparisons with the UK are made. For the comparative analysis it is important to
stress a degree of caution in interpreting the trends as European/ USA statistics are not always
directly comparable with the UK. This is due to differences in the methodologies and
definitions used by different data sources (see Annex A).
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Europe
Venture capital
Total venture capital investment, 1998-2007
10.3
Between 1998-2007, Europe generally experienced growth in the total venture capital
investment every year apart from in 2001 (Figure 10-1). The largest growth has been between
2005 and 2007 – an increase of 57%. The total investment in 2007 was €73,788m, over five
times the original amount in 1998.
Figure 10-1 Europe - Venture capital investment, 1998-2007 (€ million)
80,000
71,165
73,788
70,000
60,000
47,057
€ million
50,000
40,000
30,000
20,000
36,920
34,986
25,401
27,648
29,096
2002
2003
24,331
14,461
10,000
0
1998
1999
2000
2001
2004
2005
2006
2007
Year
Source: EVCA Yearbook 2008
10.4
10.5
As Figure 10-2 illustrates, the value of European venture capital investment has shown
similar trends to the UK from 1998 with:
•
both Europe and UK show a positive trend between 1998-2000
•
between 2000-2001 Europe and UK investment followed the same declining pattern,
but from 2002 onwards, Europe experienced an upward trend, whereas UK declined
further until 2003 before showing a steep increase from 2004 onwards
•
between 2006-2007, Europe and UK investment was levelling off at similar rates.
This suggests there are wider cross-country factors affecting the supply of venture capital to
SMEs, from which the UK is not immune. For instance, the bursting of the dotcom bubble in
2001 had a widespread effect on international equity markets and the greater availability of
funding in 2005 and 2006.
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80,000
4,500
70,000
4,000
3,500
60,000
3,000
50,000
2,500
40,000
2,000
30,000
1,500
20,000
1,000
10,000
UK investment (£ million)
European investment (€ million)
Figure 10-2 Europe and UK venture capital investment, 1998-2007 (€ million and £ million)
500
0
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
Europe venture capital
UK venture capital
Source: EVCA Yearbook 2008; BVCA; SQW; European venture capital defined as: seed, start-up, other early stage, expansion,
bridge financing, rescue/ turnaround; UK venture capital defined as: start-up, other early stage, total expansion (incl. expansion
refinancing bank debt, secondary purchase)
10.6
European venture capital investment by financing stage as a proportion of all venture capital
financing stages72 for the period 2003-2007 (see Figure 10-3) points to seed investment being
relatively steady, start-up investment showing very minor decline between 2003 and 2005,
but peaking in 2006 before declining again. Expansion investment follows a gradual positive
trend between 2003 and 2005, declining in 2006 before rising again in 2007.
10.7
The most relevant comparison that can be made with the UK is investment by financing stage
as a proportion of total early stage and expansion investment for the period 2003-2007. This
shows that:
•
UK start-ups follow the same steady pattern as Europe and that UK companies in
expansion phase also match the European trend.
•
UK start-ups have a slightly higher proportion of the total venture capital supply than
their European counterparts, whereas UK companies in expansion account for more
or less the same proportion of the total venture capital investment as those in Europe.
•
The decline between 2005 and 2006 and increase in 2007 for UK companies in
expansion matches the European pattern of supply.
72
i.e. sum of seed, start-up, other early stage, expansion, bridge financing and rescue/ turnaround.
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Figure 10-3 Europe - venture capital investment by financing stage as a proportion of all venture capital
financing stages, 2003-2007
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003
2004
Seed
2005
Start-up
2006
Expansion
2007
Rescue/turnaround
Source: EVCA Yearbook 2008; SQW; figures exclude MBO/MBI and other later financing stages
The average European venture capital deal size can be calculated from the available data
(Figure 10-4). The results show that in 2007 this was €2.6m and was lower than that for the
UK, which itself had the fourth largest deal size in Europe.
8,000
7,355
9,000
8,177
Figure 10-4 Europe – Average venture capital deal size, 2007
1,207
1,130
990
Ireland
Finland
Sweden
651
1,312
Norway
Austria
1,422
Czech Republic
721
1,645
France
Germany
1,668
Netherlands
754
1,713
Denmark
1,000
Hungary
1,716
Portugal
2,142
1,777
2,000
Belgium
3,000
2,556
4,000
3,556
4,149
Spain
5,000
4,260
4,781
6,000
United Kingdom
7,000
€ thousands
Poland
Europe
Switzerland
Greece
Romania
0
Italy
10.8
Source: EVCA Yearbook 2008; SQW
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10.9
In terms of venture capital deals as a proportion of GDP in 2007, the UK is above the
European level and achieves the fourth highest scale of venture capital activity of any
European country (Figure 10-5).
Figure 10-5 Europe – venture capital deals as proportion of GDP, 2007
0.00%
0.02%
0.02%
0.03%
0.04%
0.05%
0.05%
0.11%
Norway
0.07%
0.11%
Belgium
0.08%
0.11%
Romania
0.1%
0.10%
0.11%
Spain
0.13%
0.15%
0.17%
0.18%
0.2%
0.19%
0.21%
0.23%
0.3%
Greece
Hungary
Italy
Austria
Poland
Germany
Portugal
Czech Republic
France
Europe
Ireland
The Netherlands
Switzerland
United Kingdom
Finland
Swden
Denmark
0.0%
Source: EVCA Yearbook 2008
When comparing the number of venture capital deals by country as a proportion of the total
European venture capital deals in 2007, the UK exceeds the rest of the European countries by
a large margin (Figure 10-6), accounting for 40% of all deals done.
Figure 10-6 Europe - Number of venture capital deals by country as a proportion of total European
venture capital deals, 2007
40%
35%
30%
25%
20%
15%
10%
5%
Hungary
Czech Republic
Greece
Austria
Poland
Romania
Ireland
Portugal
Denmark
Italy
Belgium
Finland
Norway
Switzerland
Netherlands
Sweden
Spain
Germany
France
0%
United Kingdom
10.10
Source: EVCA Yearbook 2008; SQW
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Business angel finance
10.11
As Table 10-1 illustrates, the total EU angel investment increased between 2005 and 2006
before declining in 2007. The supply in 2007 still was higher than in 2005 by about 13%. By
comparison, UK angel investment declined over the same period by 38% overall. The number
of deals increased in both the EU and the UK between 2005 and 2007. However the growth in
the UK was nearly 100%, whilst in the EU it was just over 60%.
10.12
Compared to other EU countries, the UK has had the highest angel investment each year
between 2005 and 2007,
Table 10-1 Europe – business angel investment, number of deals and average deal size, 2005-2007(€)
2005
Total
invested
(€’000)
Number
of deals
(€’000)
2006
Average
deal size
(SQW
calculation)
Total
invested
(€’000)
Number
of deals
2007
Average
deal size
(SQW
calculation)
Total
invested
(€’000)
Number
of deals
(€’000)
Average
deal
size(SQW
calculation)
(€’000)
Austria
1,566
2
783
1,800
10
180
600
5
120
Belgium
5,704
44
130
12,111
35
346
7,006
35
200
Czech
Republic
-
-
-
-
30
-
500
1
500
Denmark
4,000
-
-
-
-
-
-
-
-
Finland
-
47
-
5,000
10
500
5,000
10
500
France
15,304
157
97
37,000
214
173
37,000
214
173
8,450
26
325
6,598
28
236
-
-
-
Greece
-
-
-
30,000
1
30,000
-
0
-
Ireland
-
-
-
550,000
5
110,000
2,200
5
440
8,050
35
230
19,500
120
163
19,500
102
191
-
-
-
-
-
-
80
2
40
3,125
22
142
6,200
75
83
6,200
75
83
Poland
-
-
-
800
4
200
-
-
-
Portugal
-
-
-
412
12
34
1,662
11
151
-
-
-
11
1
11
280
2
140
-
-
-
2,285
18
127
2,526
11
230
Sweden
8,515
72
118
14,000
131
107
15,000
99
152
United
Kingdom
69,895
226
309
63,672
383
166
43,084
449
96
124,609
631
197
149,381
1,143
131
140,638
1,021
138
Germany
Italy
Luxemburg
Netherlands
Slovenia
73
Spain
EU
73
Aggregate data for the Slovak Republic, Slovenia and Croatia.
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Source: EBAN Statistics Compendium 2008; EBAN Statistics Compendium 2007; EBAN European directory of Business Angel
Networks in Europe 2008; EBAN European directory of Business Angel Networks in Europe 2007
10.13
For the EU and the UK, the average angel deal size has declined during 2005-2007 (see
Figure 10-7). The UK had the greater average deal size in 2005 and 2006, but it has been
overtaken by the EU average in 2007.
Figure 10-7 Europe – business angel average deal size, 2005-2007 (€)
350,000
309,000
300,000
Investment (€)
250,000
200,000
197,000
166,000
150,000
138,000
131,000
96,000
100,000
50,000
0
2005
2006
Europe
2007
UK
Source: EBAN; SQW
USA
Venture capital
Total investment
10.14
The total US venture capital investment in 2007 was $30bn, in 3,200 companies. The trend
between 1998 and 2007 depicts an increase from 1998 to a peak in 2000 (‘peak bubble year’)
and a decline thereafter until 2003. The supply picks up again to 2007. This broadly follows
the UK pattern during 1998-2007.
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Figure 10-8 USA – Venture capital investment ($ billion), 1980-2007
Source: National Venture Capital Association, 2008
Investment by financing stage and sector
10.15
The majority of venture capital investment in the US74 was in later stage deals followed by
successively lower supply to expansion; early stage and seed stage, as is the case with the UK
(see Figure 10-9). The US venture capital investment by financing stage as a proportion of
total start-up seed, early stage and expansion stage during 1998-2007 is shown in Figure 1010.
74
US investment stage data uses different definitions to the UK data sources (see Annex A).
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Figure 10-9 USA – Venture capital investments by financing stage, 2007
Startup-seed, 4%
Early, 17%
Later, 42%
Expansion, 37%
Source: National Venture Capital Association Yearbook 2007
Figure 10-10 USA – Venture capital investment by financing stage as a proportion of total start-up seed,
early and expansion stages, 1998-2007
80%
70%
60%
50%
40%
30%
20%
10%
0%
1998
1999
2000
2001
2002
Startup-seed
2003
Early
2004
2005
2006
2007
Expansion
Source: National Venture Capital Association Yearbook 2007
10.16
The distribution by sector for 2007 identifies software and biotechnology as the main
recipients of venture capital investment in the US. It is not appropriate to compare this
directly with the UK because the sector definitions for the US differ substantially.
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Figure 10-11 USA – Venture capital investment by sector, 2007
Computers and
Peripherals, 6%
Financial services, 5%
Semiconductors, 9%
Software, 18%
Media and
Entertainment, 10%
Biotechnology, 17%
Industrial/Energy,
10%
Telecommunications,
11%
Medical Devices and
Equipment, 14%
Source: National Venture Capital Association Yearbook 2007
US and UK venture capital comparison
10.17
Using the figures on UK market activity from Section 3 and comparing these with the US
market figures above, it is possible to draw the comparison between scale of early stage
investment as set out in Table 10-2. The value of US funding is higher but when set against a
larger national GDP, the UK has a higher share of early stage venture capital funding.
Table 10-2 US and UK venture capital investment comparison (2007)
Amount of VC investment - early
stage* (bn)
GDP (bn)
GDP penetration –
early stage
UK
£1.6
£1,402
0.1%
US
$6.3
$13,742
0.05%
Source: BVCA/NVCA/OECD;*UK: start-up plus early stage; US: start-up/seed plus early stage.
10.18
Eurostat data (Table 10-3) confirms that the UK has a higher proportion of venture capital
funding as a proportion of GDP compared to the US. Differences in percentages may be
explained by differences in data collation methodology and the definitions in use.
Table 10-3: Venture early stage capital investment comparison (2005)
Proportion of early stage to GDP
Proportion expansion and replacement
stage to GDP
UK
0.047%
0.319%
US
0.035%
0.147%
Source: Eurostat (2007) Venture Capital Investments. In Statistics in Focus, Science and Technology, no. 36/2007
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Business angels
10.19
As in the UK, gaining accurate statistics on levels of angel investment in the USA is difficult
given the fragmented nature of the market. A key source of information on angel investments
is the twice yearly estimate of activity produced by the Centre for Venture Research at the
University of New Hampshire75. This is based on surveys of angels and angel groups, these
data should still be viewed as providing an indication of angel activity rather than
comprehensive and accurate statistics.
10.20
From the data in Table 10-4 and Table 10-5, the following observations can be made:
•
The amount invested by US angels fell sharply in the aftermath of the dotcom boom,
but has increased year on year between 2002 and 2007. Other measures of investment
activity (number of investments and number of investors) have also increased over
the same period. Statistics for the first half of 2008 suggest this growth may have
reached a plateau.
•
Comparing angel investment activity with venture capital investment (see Figure 108) indicates that angel investments represent 86% of VC investments in terms of
dollars invested but that angels make seven times as many investments as VCs.
•
About half of angel investments are at seed and start-up (compared with 4% of VC
investments) and about one-third are at early stage (compared with 17% of VC
investments). Although these proportions vary year on year, it is nevertheless clear
that angels invest at an earlier stage than VCs.
•
Around two-thirds of angel investments are new, rather than follow-on, investments.
•
Conversion (yield) rates, which provide a measure of how easy it is to raise finance
from business angels, have fluctuated over time, ranging from 23% in 2000 and 2005
to around 10% in 2001-2003 and in the first half of 2008.
•
In each year for which data are available, over half the members of angel groups did
not make any investments i.e. they we not active in investments made by the group –
they are ‘latent angels’.
Table 10-4: Angel investment activity in the US
Year
Amount
invested
(US$bn)
Number of
investments
Number of
angel investors
% of
investments in
seed and start
up
% of
investments in
early stage
2001
30.0
-
-
-
-
2002
15.7
36,000
200,000
47
33
2003
18.1
42,000
220,000
52
35
2004
22.5
48,000
225,000
-
-
2005
23.1
49,500
227,000
55
43
2006
25.6
51,000
234,000
46
40
75
http://wsbe.unh.edu/analysis-reports-0
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Year
Amount
invested
(US$bn)
Number of
investments
Number of
angel investors
% of
investments in
seed and start
up
% of
investments in
early stage
2007
26.0
57,120
258,000
39
35
2008 (first half)
12.4
23,100
143,000
46
33
Source: Centre for Venture Research, University of New Hampshire
Table 10-5: Characteristics of US angel investing
Year
% Conversion
(yield) rates
% Latent angels
% Women angels
% New
investments
2001
10.8
-
-
-
2002
7.1
-
-
-
2003
10.3
48
-
-
2004
18.5
-
5.0
-
2005
23.0
62
8.7
70
2006
20.1
57
13.8
63
2007
14.0
-
12.0
63
2008 (first half)
11.0
58
13.0
63
Source: Centre for Venture Research, University of New Hampshire
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11 Implications of the current economic climate
11.1
At the time this research was undertaken (September 2008 to January 2009) it was too early
for the impact of the economic downturn to be shown on investment data. This chapter
provides emerging views from consultees.
Key findings
11.2
The findings on the implications of the current economic and financial conditions are
summarised below:
•
Experience from the dotcom crash (albeit a different phenomenon) suggests that the
current downturn in the equity markets could be prolonged.
•
The early stage end of the market will only pick up again when VCs can raise funds
themselves.
•
Institutional fund raising, new early stage deals and exits are all adversely affected by
current uncertainties over company valuations.
•
All the usual exit routes are currently restricted and hence early stage investors are
having to stay involved with investees for longer, tying up funds that would otherwise
be invested in new deals.
•
Business angels are less active in new deals partly because they concentrating on
existing investments and partly because as individuals they currently have less tax to
shelter so the benefits of the EIS have become less attractive.
•
Market players state it is currently ‘too early to tell’ when the market will pick up.
Observations from past trends
11.3
Figure 3-1 shows the trends in early stage equity investment over the period 1998-2007. It
therefore covers the lead up to the dotcom boom and the effect of the crash. What it shows is
not only the rapid decline in supply from the peak in 2000, but the long period it took before
the market began to pick up again (with investment only really increasing markedly in 2005).
This long slump was a function not only of a reduced appetite for risk of the VCs but also of
their institutional investors on whom they rely for their own funding. The trend provides an
indication of how long it might take the early stage equity market to recover from the current
economic downturn.
11.4
However, whilst the dotcom boom and subsequent crash originated in one sector and then
spread to other sectors, the current economic downturn is pervasive, affecting the majority of
sectors. The impact of the economic downturn affects the ability of investors to raise new
funds. We therefore consider it likely that there will be a marked decline in the availability of
equity finance and the recovery may take longer than previously experienced.
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Impact of the economic downturn
11.5
Consultees reported a series of impacts on the market:
•
Some VCs are refraining from making new investments until the market settles and
company valuations are clearer. They predict that it will be later in 2009 before they
are likely to enter the market again. Other VCs are still investing but point out that
investments will tail off when their own funds run out.
•
The credit crunch is making it almost impossible for VCs to raise new funds.
Institutional fund managers are conserving cash and finding it difficult to make
decisions on pricing, thus causing a blockage in the system.
•
With many VCs not investing, the economic climate has exacerbated the equity gap
in terms of supply, leaving publicly backed funds and business angels as ‘the only
game in town’. However, many business angel networks comment that around half
their angels are currently inactive as they wait to see what will happen to the market
generally but also to enable them to concentrate available resources as required by
their existing investees.
•
However, demand for early stage equity is likely to rise as long as banks reduce their
lending to small companies. Whilst equity would not normally be the preferred form
of finance to cover everyday requirements, it may be the only alternative in some
cases. Where VCs and angels are already investors they may be called upon on to
provide this finance, using up capacity that they would otherwise use to make new
investments.
•
Existing investors also have to stay in deals for longer as exits have almost entirely
dried up. The markets (e.g. AIM) have their own liquidity issues. AIM reports a lack
of liquidity at the smaller end of new offerings (defined as under £25m which
effectively excludes most VC backed companies). The problem is a lack of retail
investors. Even before the current economic turmoil, retail investors had been put off
by changes in the tax regime (FA 2006) which removed some of the favourable tax
breaks. This means the AIM market is reliant on large institutional investors. These
are not interested in deals below £25m (on risk/reward grounds) and thus a gap has
opened up at the smaller end of the market. AIM statistics also show that whereas
until 2006, AIM did 60% new deals plus 40% follow-on deals, those percentages
have now reversed, i.e. more money is going into follow-on funding than into new
flotations.
•
In addition to the IPO problems, there is anecdotal evidence that large companies are
less likely to be participating in corporate venturing at present.
•
Concerns over company valuation mean that trade sales have also dried up.
•
Taken together, there is a perception that the exit routes out of private equity are
closed, which prevents existing funds being freed up to fund new deals.
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Future trends
11.6
Consultees found it hard to see past the end of the economic downturn. Most felt it was far
too early to predict how the market would turn out over the next five years.
11.7
One prediction forthcoming was that there is likely to be a consolidation of business angel
networks in mature markets such as the UK whilst the number of networks would continue to
grow in younger markets (such as southern Europe).
11.8
In terms of new sectors such as Cleantech, it is hoped that these will begin to mature in the
same way as the ICT sector with a better mix of private as well as public players in the VC
market.
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12 Assessing the Equity Gap
Key findings
12.1
The findings on the equity gap are summarised below:
•
The parameters of the gap for most investments are believed to stretch from £250k to
at least £2m (with some putting the ceiling at £5m). In the case of sectors requiring
complex R&D or large capital expenditure, the gap may extend up to £15m.
•
These parameters define the first round funding gap, but there are additional concerns
about the possible underfunding of UK companies at each stage of the venture capital
process. Underfunding could constrain the growth of early stage companies which
then do not go on to fulfil their potential.
•
The early stage market has been changing in recent years with the growing
importance of business angels, both as individuals and as members of syndicates.
Business angels also constitute the most frequent source of private sector match
funding in publicly backed co-investment deals.
•
Whilst there is concern that VCs have abandoned the early stage market this is
not entirely true. There is evidence of some new VC funds entering this market.
Early stage funding can provide a stepping stone for new VC funds on the way to
larger deals.
•
The increasing concentration of early stage funding in London and the South East
could leave an increasing gap in other regions, although an assessment of demand is
needed before a strong conclusion can be drawn.
Investment in early stage equity by type of provider
12.2
Investment by source and financing stage for the UK in 2007 is reported in (Table 12-1). This
is an attempt to capture, as far as possible from the available data, the supply of equity in the
UK. Due to only partial data being available for business angels76 and publicly-backed
investment, it is only possible to establish a partial picture on the supply of equity from
these two sources. In addition to this, some of the business angel and publicly-backed
investment figures will also have been reported in BVCA 2007 data. It is not possible to
identify definitively the scale of the overlap between BVCA data and the other sources of
finances because BVCA’s 2007 data do not provide disaggregated investment figures
attributable to survey respondents. For instance many of the public sector funds are managed
by fund managers who are members of the BVCA.
76
Business angel investment figures reported by EBAN and Mason capture only part of the informal finance
market.
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12.3
Thus, venture capital investment figures reported by BVCA are not strictly only ‘pure venture
capital’. As a result, the total supply of equity in the UK can only be established from
multiple data sources and is open to double-counting.
12.4
In view of these issues, it is important to stress that the findings in Table 12-1 should be
interpreted with caution. They should be treated as representing a partial picture on the
supply of equity, albeit the best that may be compiled at this time.
12.5
Table 12-1 shows that:
•
Venture capital is by far the largest source of investment when compared to business
angels77 and publicly-backed78 finance at start-up, other early stage and total expansion
stage. Even when taking into account deal sizes below £2m (associated with equity gap
investments), private sector venture capital is still largest source of investment compared
to Angels and publicly backed funds79.
•
Venture capital investment in total expansion stage is over 2.5 times greater than that
at start-up and other early stage put together.
•
Business angel and publicly-backed investment is similar at start-up and other early
stage.
•
Business angel investment is just over four times higher at total expansion stage when
compared to investment from the public sector.
Table 12-1 Investment by source and stage (£m), 2007
Venture capital (BVCA reported)
Seed
Start-up
Other early
stage
Total startup and
other early
stage
n/a
190
244
434
Venture capital (BVCA reported) deals below
£2m
Total
740
Business angel (EBAN: Mason pers. com.
with SQW calculations)
0.9
7.7
8.3
16
Publicly-backed * (BERR with SQW
calculations)
8.5
10.8
7.5
18.3
Source: SQW; * public includes only RVCF, ECF, UCSF, CVDF, CT.
77
Business investment figures were distributed across each financing stage in line with percentage of investment
in 2003 reported by Mason (2006): 3% seed; 26% start-up; 28% other early stage; 36% expansion; 3% MBO/MBI.
78
SQW calculation for RVCF and ECF involved taking the average size of investment per company and
multiplying it with the annual number of companies that received investment. This was then allocated across each
financing stage in the same proportions that actual investment occurred as reported by BIS. Calculations for UCSF
and CVDF are based on BIS data. Carbon Trust (CT) investment calculated from SEF Alliance Publications
(2008). Publicly-backed investments other than identified in Table 12-1 are not included because it was not
possible to calculate the annual investment in 2007 based on the available data.
79
As indicated, BVCA data for 2007 may include some publicly supported and informal investments, including
from co-investment schemes. However even if 100% inclusion is assumed and all these investments are stripped
out from BVCA totals for start-up plus other early stage and for sub-£2m investments, pure private sector
investment still contributes c. £400m and c. £697m respectively.
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12.6
The figures for public sector funding invested in early stage as a proportion of the overall
total might suggest that the role of publicly backed funds is not significant. However
anecdotal evidence from consultees highlighted the importance of the public funds in regions
outside London and the South East. In regions where for instance RVCF and RDA funds
have reached the end of their investment period and ECF funding has not so far penetrated, in
the absence of any private sector venture capital firms, business angels may be left as the only
early stage funding available. Given the reduction in angel appetite for new investment
(discussed in Section 5), this could be leaving early stage companies without the finding they
need.
The boundaries of the equity gap
12.7
The concept of an equity gap is well established and dates back to at least the 1931 Macmillan
report to the Parliamentary Committee on Finance and Industry. This results in a shortage of
equity capital to viable and potentially profitable businesses seeking relatively modest amount
of finance. The equity gap is often quantified as a set of boundaries relating to the amount of
equity finance sought in which potentially viable and profitable businesses have acute
difficulties in raising the finance they need. This does not suggest that there is no equity
finance available between these lower and upper boundaries, only that there are substantial
difficulties for viable businesses raising finance.
12.8
In practice the boundaries of the equity gap are not rigid. It is unrealistic to assume that
the supply of equity capital suddenly increases beyond the identified boundaries of the gap
and in practice there is likely to be a progressing scale of difficulty. This needs to be taken
into account when designing Government policies to avoid distorting the market and creating
new equity gaps immediately above the level of government schemes.
12.9
It is important to acknowledge that there are a large number of investments made in the sub£2m investment size category (1,049 reported in 2007 by BVCA: see Table 3-3). Investments
below £2m have accounted for between 70% and 80% of all investments over the period 2001
and 200780. However the extent to which sub-£2m investments are elements in larger,
syndicated deals is uncertain from examination of published sources.
12.10
Pierrakis & Mason also note that the number of companies raising investment of less than
£2m has risen by 20% between 2001 and 2007 (see also Table 3-3) and report that their share
of total investment has varied over this period from 12% in 2001 to 6% in 2007 (see also
Table 3-4).
12.11
Any full and quantitative assessment of the equity gap would require further research to
assess the level of unmet demand for equity finance from potentially viable businesses. This
was outside the scope of the study. In common with other research in this area, the size of the
equity gap is assessed to a degree on subjective view of well informed sources, but where
possible examined alongside investment trend data.
12.12
All but one of the consultees considered that an equity gap exists in early stage equity. The
doubter considered that in normal market conditions (i.e. ‘non-credit crunch’) a sound
80
Pierrakis & Mason, op.cit. p.13
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business proposition would find the funding it needed. Thus, according to this view, there is
no market failure only the disinclination of investors to fund unsound businesses.
12.13
Amongst all the other consultees, although one put the floor of the gap as low as £100k, most
felt the equity gap started at around the £250k (below which friends and family, grants and
seed money81 provided what was necessary). Responses were, however, much more varied
when asked about the ceiling. The majority of consultees felt that for deals involving low
capital expenditure, the upper boundary of the gap was around £2m. However, a small
number with particular knowledge of the formal venture capital market advised that as very
few VCs now invest below £5m and since most angel syndicates only invest up to around
£500k, there is a gap below the £5m ceiling.
12.14
For technically complex developments involving extensive capital expenditure the early stage
gap is felt to be much larger. In the case of Cleantech or biosciences the upper boundary of
the gap may be as high as £10-15m.
12.15
The evidence presented in this report is roughly consistent with the previous assessment
presented in Bridging the Finance Gap (2003) which concluded that ‘the gap appears to be
most acute for investments between £250k and £1m, but is also severe for businesses seeking
up to £2m – and for some businesses, it may be even higher’82. Although it may suggest the
upper boundary is higher, now at £5m, and for certain sectors may be even higher.
12.16
A number of causes were suggested by consultees for the unattractiveness of early stage
equity, which is also consistent with the 2003 assessment:
12.17
•
the cost of due diligence relative to the returns to be made (see Section 5)
•
a knowledge gap on both sides of the transaction (perceived lack of business
management skills in the potential investee business and a lack of understanding of
the technology by ‘generalist’ VCs) which increases the perceived risk of the deal
•
the difficulty in raising the finance for funds to target the early stage (given the
perceived risks).
Consultees also felt that the equity gap was a more complicated issue than simply defining a
‘floor’ and ‘ceiling’ for early stage deals. Concern was expressed that even where UK
companies did find it possible to raise finance (at early and also later stages) they were not
raising nearly enough finance. At the early stage, consultees reported that UK companies are
only raising half of the amount a similar company would in the US. At later stages US
funding can be 2.5 times greater than for a similar company in the UK. This suggests that
growing UK companies may be seriously under-funded compared with their US peers.
Unfortunately the available data on US VC investment was not detailed enough to check this
by examining average deal size at each stage of investment. However, it is an area that merits
further research.
81
As defined in Annex A: Table A4
97% of consultees in the Bridging the Finance Gap Consultation agreed that SMEs continue to face a significant
equity gap.
82
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Changing parameters
12.18
Most consultees commented that the equity gap had not reduced over the last few years and
some felt that it had increased (due to VCs vacating the market below £5m). Therefore, the
investment limit of public sector funds need some flexibility for providing additional funding
to meet the financing needs of the business, although still maintaining the mandate to focus
on where the equity gap is most acute.
Business angels/syndicates
12.19
Business angels have become increasingly important players in the early stage market. They
are now the main source of private sector capital at this stage of financing and provide the
private sector input to many publicly backed co-investment funds. Within angel finance the
use of syndicates has increased significantly and the deal sizes have increased as a result.
12.20
However, angels alone are not the complete solution to the equity gap given that even their
syndicates typically do not invest more than around £500k. Whilst they may meet the first
funding requirements of a company, the company will soon require another funding source if
it is to grow.
Co-investment funds/RVCF run-off
12.21
Given that very few private sector VCs operate in the early stage market, publicly backed
funds have been the Government’s attempt to plug the equity gap. It is acknowledged that the
co-investment structure encourages a doubling up of amounts raised by leveraging extra
private sector funds into the market from business angels who match fund the public sector
contributions.
12.22
However, the sums the RVCFs have had to offer are regarded by those involved in the high
tech field as being too small (i.e. an investment of £250k plus £250k follow-on). Their
absence will, according to some consultees, not have too much impact.
12.23
Others dispute this and feel that little early stage funding will be left in certain regions now
that the RVCFs have reached the end of their investment period (especially given that the
ECFs are being created in tranches and hence do not yet provide a full replacement). This
will leave business angels as a potential source of funding.
VCs in the early stage market
12.24
Despite many comments that there are no private sector VCs left in the early stage market
(the departure of Apax and 3i being quoted to demonstrate this), the consultees for this study
did include early stage VCs. The explanation given is that new VCs have to start somewhere.
Hence they may ‘cut their teeth’ running a VCT and then graduate to being the manager of a
publicly backed fund such as an ECF. As they become more successful, they are able to raise
larger sums of money and hence participate in larger (more profitable) deals. This is a natural
progression and explains why Apax and 3i are no longer in the early stage market. However,
it should not cause too much concern providing that there are always new VC funds coming
up behind to fill the space. Whilst there is no hard evidence that new VC funds will continue
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to enter the early stage market especially for smaller deals, the interest aroused by the ECF
bidding rounds suggests that there are fund managers out there willing to consider operating
at this end of the market.
The dotcom effect
12.25
The dotcom crash has had a long term effect on the market. This is because funds have a ten
year lifespan, so that funds established at the turn of the century, still have to report
performance affected by the dotcom failures. Performance is tracked very closely by large
institutional investors such as pension funds, which are cautious about investing in VC funds,
particularly those focussing on the IT sector.
Minimum funding required
12.26
Consultees generally agreed that companies need around £100k at the seed stage (£2m for
Cleantech seed) and an absolute minimum of £2m at early stage (£10-15m for Cleantech and
biosciences). Where companies set out without sufficient funding they risk not fulfilling their
growth potential. As one source in Scotland put it, there is a risk of “creating a bunch of
crofters”.
Recent public sector developments
12.27
Two new funds have recently been announced by Capital for Enterprise to address perceived
market gaps.
Aspire Fund
12.28
Established in autumn 2008, the £12.5m Aspire Fund is aimed at women-led businesses
across the UK. It can make equity investments of between £100k and £1m on a coinvestment basis to help business growth.
Capital for Enterprise Fund
12.29
This £75m fund (comprising £50m from the public sector and £25m from four banks) will
make equity and quasi equity investments of between £250k and £2 m in businesses with
growth potential that are currently constrained due to over gearing (i.e. their high levels of
debt). The funds are to be used to restructure balance sheets and invest for growth.
Areas for further research
12.30
First and foremost, in considering the ‘equity gap’, this report has only investigated the
existence of a gap in supply side provision. When considering the overall ‘equity gap’, it will
be important to consider the demand side and the ability of firms to obtain the equity finance
they need.
12.31
However, the report has shown that even in terms of the supply side, there are areas where
further research would be useful. These include:
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•
Investigation of the true extent of business angel funding in the UK. This would
require use of the combination of techniques suggested in the recent report by Mason
and Harrison83.
•
Further examination of the funding available within each region. This would include
obtaining additional data on business angel investment and more detailed input from
the RDAs (not all of which provided data for the current research). This could then
be used, in combination with demand side research, to ascertain whether the equity
gap is more acute in regions outside London and the South East.
83
Mason and Harrison (May 2008) Developing Time Series Data on the Size and Scope if the UK Business Angel
Market.
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13 Bibliography
•
BIS (2008) Annual Small Business Survey 2007/08
•
BVCA (2008), BVCA Private Equity and Venture Capital Report on Investment Activity
2007
•
BVCA (February 2006) Private Equity – a UK Success Story
•
Cass Business School (2008) The London markets and private equity backed IPOs
•
Colin M. Mason (2006) The Informal Venture Capital Market in the United Kingdom –
Adding to the Time Dimension, Venture Capital and the Changing World of
Entrepreneurship
•
Cosh, A, Hughes, A, Bullock, A and Milner, I(2008) Financing UK Small and Mediumsized Enterprises: The 2007 survey, Centre for Business Research (CBR)
•
Cowling et al. (2008) Study of the Impact of Enterprise Investment Scheme (EIS) and
Venture Capital Trusts (VCT) on Company Performance, HM Revenue & Customs
Research Report 44
•
EBAN Statistics Compendium 2008 and 2007
•
EVCA Yearbook (2008) Pan-European Private Equity & Venture Capital Activity Report
•
HMT and SBS (2003) Bridging the Finance Gap: Next Steps in improving access to
growth capital for small businesses
•
JP Morgan Fleming (2005) Alternative Investment Strategies Survey of 350 pension
schemes
•
Library House (2006) Beyond the Chasm: The Venture Backed Report
•
London Business School (2000) UK Venture Capital and Private Equity as an Asset Class
for Institutional Investors
•
Mason and Harrison (May 2008) Developing Time Series Data on the Size and Scope if
the UK Business Angel Market
•
National Association of Pension Funds (January 2007) Institutional Investment in the UK
Six Years On
•
National Venture Capital Association (2008) NYCA Yearbook
•
Pierrakis and Mason (2008) Shifting Sands- The changing nature of the early stage
venture capital market in the UK NESTA Research Report
•
SBS (2005) A Mapping Study of Venture Capital Provision to SMEs in England
83
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•
SEF Alliance Publications (2008) Public Venture Capital Study
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Annex A: Data sources and definitions
UK venture capital
Table A-1: Specific BVCA methodology
1.
Investments led by overseas offices of BVCA full members (and where there has been no advice provided by
the UK office) and UK deals made by non-UK based private equity firms are excluded.
2.
The 2006 figures refer to investments made by both BVCA full member firms and those undertaken through an
overseas office, where the UK office was the lead adviser and in spite of where the investment fund was
domiciled. This was as a result of changes to the 2006 BVCA questionnaire to include investments “made” or
“advised by” the office of the BVCA full member firm. As a result more cross-border investments have been
included.
3.
From 2005, there was a change in BVCA methodology in relation to counting the number of companies by
financing stage. A company is counted once in each of the start-up and expansion categories (i.e. counted
twice) but only counted once in the overall total. “This is due to some companies receiving more than one
investment within the same year at different financing stages”. This does not affect “amounts invested” and
applies to 2005 figures only.
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007
Table A-2: Specific BVCA definitions
Definitions
Private equity and venture
capital
There is a distinction between private equity and venture capital - the latter is a
subcategory of private equity which encompasses start-up to expansion stages of
investment, whereas private equity covers both buyouts and venture capital
Investment
According to BVCA, an “investment” is only counted and reported when “money
actually changes hands” i.e. it refers to completed investments
Number of deals
Equivalent to the number of companies in receipt of investment
(This is an SQW assumption because it is not possible to separate initial and followon investment using the BVCA data)
Average deal size
Equivalent to the total amount of investment divided by the number of early and
expansion stage companies. It takes into account the distribution of deal sizes as it
excludes any MBO/MBI stage companies (MBO/MBI deals tend to be of large values
and therefore distort the average figure).
(SQW calculation)
Investment size
This is the number of companies and the amount invested within a specific range
e.g. 100 companies receiving investment of between £2 million and £5 million
totalling £100 million. The investment range is £2 million to £5 million.
Financing stages:
Start-up
“Financing provided to companies for use in product development and initial
marketing. Companies may be in the process of being set up or may have been in
business for a short time, but have not yet sold their product commercially”.
Other early stage
“Financing provided to companies that have completed the product development
stage and require further funds to initiate commercial manufacturing and sales. They
may not yet be generating profits.
Total early stage
Start-up + early stage
Expansion
“Sometimes known as ‘development’ or ‘growth’ capital, provided for growth and
expansion of an established company. Funds may be used to finance increased
production capacity, product development, provide additional working capital, and/or
for marketing. Capital provided for rescue/turnaround situations is also included”.
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Definitions
Refinancing bank debt
“Funds provided to enable a company to repay existing bank debt”
Secondary purchase
“Purchase of existing shares in a company from another private equity firm, or from
another shareholder or shareholders”
Total expansion
Expansion+ refinancing bank debt + secondary purchase
(According to the BVCA, refinancing bank debt and secondary purchase are
considered to be private equity and not venture capital. Therefore and unless
otherwise stated, the figures reported relating to BVCA data excludes refinancing
bank debt and secondary purchase)
Management buy-out (MBO)
“Funds provided to enable current operating management and investors to acquire
an existing product line or business. Institutional buyouts (IBOs), leveraged buyouts
(LBOs) and other types of similar financing are included under MBOs for the
purposes of this report”.
Management buy-in (MBI)
“Funds provided to enable an external manager or group of managers to buy into a
company”
Total MBO/MBI
MBO + MBI
Sector classification:
Consumer related
“Leisure, retailing, food, products, services”
Computer related
“Hardware, internet, semiconductors, software”
Electronics related
“Components, instrumentation, other”
Industrial related
“Chemicals and materials, services, automation”
Medical health biotech
As described
Communications
As described
Energy
As described
Transport
As described
Construction
As described
Financial Services
As described
Other services
As described
Manufacturing agricultural &
other
As described
Technology classification:
Technology
The definition of technology firm used is based on a combination of Industry
Classification Benchmark (ICB) and EVCA classification system.
The ICB is a new industry classification that was introduced in 2005 and is created
by FTSE Group and Dow Jones Indexes. It replaces the original FTSE Global
Classification System (GCS).
The definition includes ICB sector codes 9530 (software and computer services) and
9570 (technology hardware and equipment) and from the EVCA classification
system, the sectors of ‘biotechnology’, ‘computers’, ‘medical’ and ‘electronics
related’. Industrial companies which used innovative techniques to produce
traditional goods were excluded but those companies that specialised in developing
‘cutting-edge’ materials were used in the definition.
Regional classification:
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Definitions
Regions
The regions are defined according to the Government Office Regions and regional
investments relates to where the investee company is located.
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007
European venture capital
Table A-3: EVCA methodology
1.
EVCA provide investments statistics aggregated via two methods:
•
“industry statistics consist of aggregation of the figures by countries of location of the private
equity firm in charge of the deal”
•
“market statistics consist of aggregation of the figure by countries of location of the portfolio
company”
The figures between the two sets of statistics can vary considerably. For example, domestic investors
investing abroad are accounted for in the industry statistics but not in the market statistics. On the
other hand, international investors investing into the country are included in the market statistics and
not in the industry statistics.
For the purposes of this study, and keeping in line with BVCA methodology, only the industry
statistics have been used. This allows for a more appropriate comparison between BVCA figures for
the UK and EVCA figures for Europe.
2.
The overall “coverage” rate of the European private equity firms was 74% based on 1,851 eligible
private equity firms.
The survey was conducted of 28 European countries but the statistics exclude seven Central and
Eastern European countries (Bulgaria, Croatia, Estonia, Latvia, Lithuania, Slovakia and Slovenia), The
statistics relate to the following countries:
Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland,
Italy, Luxemburg, the Netherlands, Norway, Poland, Portugal, Romania, Spain, Sweden, Switzerland,
and United Kingdom.
3.
Unless otherwise stated, the European statistics includes figures for the UK.
Source: EVCA Yearbook 2008; BVCA
Table A-4: EVCA definitions
Definitions
Private equity
“Private equity provides equity capital to enterprises not quoted on a stock market.
Private equity refers mainly to management buyouts, management buy-ins, replacement
capital and venture purchase of quoted shares”
Venture capital
“A subset of private equity and refers to equity investments made for the launch, early
development, or expansion of a business
Number of deals
Equivalent to the number of investments
(Note: This differs from the definition used in relation to the BVCA investment data
where number of deals was equivalent to the number of companies)
Average deal size
The total investment divided by the number of investments
Financing stage:
Seed
“Financing provided to research, assess and develop an initial concept before a business
has reached the start-up phase”
Start-up
“Financing provided to companies for product development and initial marketing.
Companies may be in the process of being set up or may have been in business for a
short time, but have not sold their product commercially”.
Other early stage
“Financing to companies that have completed the product development stage and require
further funds to initiate commercial manufacturing and sales. They will not yet be
generating a profit”.
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Definitions
Expansion
“Financing provided for the growth and expansion of an operating company, which may or
may not be breaking even or trading profitably. Capital may be used to finance increased
production capacity, market or product development, and/or to provide additional working
capital”.
Bridge financing
“Financing made available to a company in the period of transition from being privately
owned to being public ally quoted”
Rescue/Turnaround
“Financing made available to an existing business, which has expressed trading
difficulties, with a view to re-establishing prosperity”
Venture capital deals
The classification for venture capital deals: seed, start-up, other early stage, expansion,
bridge financing, rescue/ turnaround.
Source: EVCA Yearbook 2008
US venture capital
Table A-5: USA – NYCA Definitions
Financing stages:
Seed stage financing
“This stage is a relatively small amount of capital provided to an inventor or
entrepreneur to prove a concept and to qualify for start-up capital. This may involve
product development and market research as well as building a management team and
developing a business plan, if the initial steps are successful. This is a pre-marketing
stage”.
Start-up financing
“This stage provides financing to companies completing development and may include
initial marketing efforts. Companies may be in the process of organising or they may
already be in business for one year or less, but they have not sold their products
commercially. Usually such firms will have made market studies, assembled the key
management, developed a business plan, and are ready to conduct business”.
Other early stage
financing
“Other early stage financing includes an increase in valuation, total size, and the per
share price for companies whose products are either in development or are
commercially available. This involves the first round of financing following a company’s
start-up phase that involves an institutional venture capital fund…The networking
capabilities of the venture capitalist are used more here than in more advanced stages”.
Expansion stage financing
“This stage involves working capital for the initial expansion of a company that is
producing and shipping and has growing accounts receivables and inventories. It may
or may not be showing a profit. Some of the uses of capital may include further plant
expansion, marketing, working capital, or development of an improved product. More
institutional investors are more likely to be included along with initial investors from
previous rounds. The venture capitalist’s role in this stage evolves from a supportive
role to a more strategic role”.
Later stage
“Capital in this stage is provided for companies that have reached a fairly stable growth
rate; that is, not growing as fast as the rates attained in the expansion stages. Again,
these companies may or may not be profitable, but are more likely to be than in
previous stages of development. Other financial characteristics of these companies
include positive cash flow”.
Source: National Venture Capital Association, 2008
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Annex B: Additional data on investment activity
Number of companies financed in the UK by BVCA members, 1998-2007
Table B-1: Number of companies financed in the UK by BVCA members, 1998-2007
Startup
Other
early
stage
Total
early
stage
Expansion
Total
expansion*
Total early stage
and expansion**
Total
MBO/MBI
Total
1998
115
126
241
484
561
725
320
1,122
1999
101
159
260
481
539
741
310
1,109
2000
153
256
409
498
548
907
225
1,182
2001
190
218
408
590
653
998
246
1,307
2002
165
233
398
568
619
966
179
1,196
2003
185
242
427
582
645
1,009
202
1,274
2004
190
264
454
522
580
976
267
1,301
2005
208
285
493
511
573
1,004
308
1,307
2006
245
255
500
490
573
990
365
1,318
2007
207
295
502
474
595
976
349
1,330
Total
1,759
2,333
4,092
5,200
5,886
9,292
3,811
12,446
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007. * Total expansion figures
include secondary purchase and refinancing bank debt. ** Excludes secondary purchase and refinancing bank debt.
Average amount invested (deal size) in the UK by BVCA members, 1998-2007
Table B-2: Average amount invested (deal size) in the UK by BVCA members, 1998-2007 (£m)
Start-up
Other early stage
Total early
stage
Expansion*
Total early stage
and expansion
1998
965
1,405
1,195
1,421
1,346
1999
1,267
1,377
1,335
2,037
1,791
2000
1,144
2,063
1,719
4,040
2,993
2001
858
1,041
956
2,269
1,732
2002
600
841
741
1,968
1,463
2003
395
785
616
820
733
2004
505
712
626
1,511
1,099
2005
769
779
775
2,239
1,520
2006
2,167
1,627
1,892
3,747
2,810
2007
918
827
865
2,399
1,610
Total average
981
1,117
1,059
2,215
1,706
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007. * Excludes secondary
purchase and refinancing bank debt
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Amount of investment by investment size by BVCA members, 2000-2007
Figure B-1: Amount of investment by investment size by BVCA members, 2000-2007 (£m)
2003
800
2007
700
Investment (£m)
600
500
400
300
200
100
0
2000
2001
2002
2003
2004
2005
2006
2007
Year
£10-19.9k
£100-199.9k
£1,000-1,999k
£20-49.9k
£200-499.9k
Total 0-£499.9k
£50-99.9k
£500-999.9k
Total 0-£2m
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007. Pierrakis & Mason
(2008) “Shifting Sands – The changing nature of the early stage venture capital market in the UK”.
Total investment by sector, 1998-2007
Table B-3: Total investment by sector, 1998-2007
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
Consumer
related
557
1,640
2,132
1,122
1,561
1,616
1,421
2,563
2,172
3,990
18,774
Computer related
253
680
892
663
284
285
316
297
816
417
4,903
Electronics
related
103
93
197
62
78
62
85
49
35
31
795
Industrial related
381
431
382
124
143
104
244
102
397
894
3,202
Medical health
biotech
210
288
697
481
710
213
462
540
1,081
887
5,569
Communications
506
119
510
655
260
382
125
658
576
2,607
6,398
57
63
83
45
23
11
191
299
420
231
1,423
Transport
129
320
127
294
278
79
43
182
618
304
2,374
Construction
101
291
191
356
62
45
9
75
1,119
125
2,374
58
104
64
173
394
236
536
762
668
1,593
4,588
Other Services
502
729
382
323
278
333
1,137
495
1,479
469
6,127
Manufacturing.
Agriculture &
other
918
1,411
714
453
408
708
767
791
846
424
7,440
Energy
Financial
Services
B-2
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Total
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
3,775
6,169
6,371
4,752
4,480
4,074
5,336
6,813
10,227
11,972
63,969
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007
Total investment within industry sectors in the UK by BVCA members, 19982007
Figure B-2: Total investment within industry sectors in the UK by BVCA members, 1998-2007
4,500
4,000
Investment (£m)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1998
1999
2000
2001
2002
2003
Consumer related
Electronics related
Medical health biotech
Energy
Construction
Other services
2004
2005
2006
2007
Computer related
Industrial related
Communications
Transport
Financial Services
Manufacturing, agriculture & other
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007.
Number of companies (deals) by industry sector in the UK, 1998-2007
Table B-4: Number of companies (deals) by industry sector in the UK, 1998-2007
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
Consumer related
115
112
142
161
153
120
119
138
167
218
1,445
Computer related
164
258
242
437
332
351
285
291
276
290
2,926
Electronics related
59
48
73
78
59
76
73
69
46
33
614
Industrial related
168
86
24
58
51
71
111
98
105
164
936
Medical health
biotech
106
133
180
179
216
203
244
246
225
205
1,937
Communications
42
35
232
91
136
106
90
94
111
127
1,064
Energy
16
17
15
13
20
17
24
25
23
41
211
Transport
22
9
24
57
18
19
13
16
11
21
210
Construction
40
31
35
38
19
18
22
27
24
29
283
Financial Services
23
17
35
57
72
46
36
63
75
86
510
126
147
71
92
87
118
123
129
143
27
1,063
Other Services
B-3
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
241
216
109
47
33
129
161
111
112
89
1,248
1,122
1,109
1,182
1,308
1,196
1,274
1,301
1,307
1,318
1,330
12,447
Manufacturing.
Agriculture & other
Total
Source: BVCA & PwC (2007), “Private Equity and Venture Capital Report on Investment Activity”. Figures include MBO/MBI.
Total number of technology companies (deals) - total early stage, 1998-2007
Table B-5: Total number of technology companies (deals) - total early stage, 1998-2007
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
13
12
59
61
33
19
15
12
3
14
241
6
21
5
3
2
3
2
2
-
5
49
12
49
88
35
4
2
7
5
4
9
215
1
16
32
24
9
14
12
13
8
16
145
Software
99
55
155
70
30
44
50
52
91
58
704
Other electronics related
10
7
10
17
9
8
15
17
24
13
130
Biotechnology
31
54
49
39
33
62
45
34
14
33
394
0
6
2
13
6
27
10
25
24
20
133
Pharmaceuticals
14
4
4
26
20
25
22
15
41
31
202
Healthcare
10
4
3
13
7
1
4
63
7
10
122
Other
8
7
86
14
21
18
10
17
11
5
197
Total
204
235
493
315
174
223
192
255
227
214
Communications
Computer hardware
Internet
Semiconductors
Medical instruments
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007.
Table B-6: Total number of companies (deals) by region – total early stage, 1998-2007
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
South East
48
60
82
56
79
98
94
104
90
88
799
London
51
75
126
82
69
66
75
75
104
110
833
8
12
16
19
15
22
29
42
35
29
227
East of England
31
23
53
72
67
66
59
61
50
50
532
West Midlands
9
8
22
23
14
20
21
24
35
32
208
East Midlands
11
9
8
11
5
15
25
22
20
18
144
Yorkshire and The Humber
12
11
14
26
5
13
6
20
10
19
136
North West
21
12
23
34
41
42
61
65
70
77
446
North East
8
6
8
9
16
15
16
16
10
19
123
32
33
41
49
30
22
34
36
40
34
351
5
6
4
16
26
15
14
13
20
17
136
South West
Scotland
Wales
B-4
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Northern Ireland
Total
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
5
5
12
11
31
33
20
13
16
9
155
241
260
409
408
398
427
454
491
500
502
4,090
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity, 2007; SQW
Average investment (deal size) by region – total early stage, 1998-2007
Table B-7: Average investment (deal size) by region – total early stage, 1998-2007 (£m)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
South East
1.4
1.7
1.6
1.5
0.9
0.9
0.7
0.8
1.6
1.5
1.2
London
1.7
1.6
2.3
1.0
1.4
0.7
1.0
1.4
2.7
1.3
1.6
South West
1.4
1.2
2.0
0.9
0.7
0.4
0.4
0.6
2.6
1.0
1.1
East of England
0.8
1.0
0.9
1.2
0.9
1.1
0.7
1.4
1.9
0.9
1.1
West Midlands
2.3
0.9
1.3
0.5
0.2
0.1
0.2
0.2
0.5
0.2
0.5
East Midlands
0.9
1.2
2.3
0.9
0.4
0.7
0.7
0.9
5.3
1.1
1.5
Yorkshire and The Humber
0.3
1.4
3.1
0.3
0.2
0.2
4.0
0.6
11.3
0.6
1.7
North West
1.0
2.9
1.5
0.8
0.4
0.2
0.3
0.3
0.8
0.3
0.6
North East
0.4
0.3
1.1
0.2
0.1
0.1
0.2
0.1
0.7
0.4
0.3
Scotland
1.2
0.5
1.3
0.9
0.4
0.3
0.4
0.4
0.5
0.4
0.7
Wales
0.2
0.3
1.8
0.6
0.3
0.9
0.3
0.5
0.8
0.4
0.5
Northern Ireland
0.6
1.0
1.2
0.5
0.4
0.3
0.3
0.2
0.3
0.4
0.4
Total
1.2
1.3
1.7
1.0
0.7
0.6
0.6
0.8
1.9
0.9
1.1
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW
Total early stage investment by region divided by the total number of VAT
registered business, 1998-2007
Table B-8: Total early stage investment by region divided by the total number of VAT registered
business, 2001-2007 (£)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
South East
243
361
457
296
257
297
241
270
472
427
334
London
334
443
1,037
301
348
158
254
360
921
453
463
67
84
190
103
66
48
65
147
501
153
145
East of England
145
130
261
495
318
392
219
455
503
229
317
West Midlands
147
48
196
81
20
13
26
25
111
36
70
East Midlands
86
93
150
84
17
82
137
156
801
142
180
Yorkshire and The Humber
32
119
344
55
8
16
185
89
824
86
180
127
209
201
167
101
53
116
124
308
113
152
South West
North West
B-5
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
69
45
201
45
45
45
66
42
145
142
85
297
120
435
359
96
56
111
113
149
102
182
Wales
13
25
88
115
101
177
51
73
191
82
92
Northern Ireland
52
86
237
88
192
156
87
48
63
62
106
168
198
395
221
165
147
157
203
493
222
239
North East
Scotland
Total
Source: BVCA & PwC (2008) Private Equity and Venture Capital Report on Investment Activity 2007; SQW
B-6
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Annex C: List of consultees
Table C-1: Consultee list
Name and title of consultee
Organisation
Umerah Akram, AIM Regulation
London Stock Exchange
Rachel Barbour, Director of Communications
BVCA
Bob Barnsley, Investment Director
Advantage Business Angels
Dr Marina Biniari
Hunter Centre, Strathclyde University
Anthony Clarke, Managing Director
GLE Growth Capital
Ken Cooper, Investment Director
Capital for Enterprise
Dr Marc Cowling
IES, University of Sussex
William Dawson, Investment Manager
Amadeus Capital
Stuart Down, Ventures Team
Scottish and Southern Energy plc
Stephen Edwards, Co-founder
Core Capital LLP
Emma Fau Sebastian
EVCA
Walter Gibson, Lead technologist
Technology Strategy Board
Michelle Giddens, Director
Bridges Community Ventures
Sally Goodsell, Chief Executive
Finance South East
Joan Gordon, Investment team
Scottish Enterprise
David Grahame, Chief Executive
LINC Scotland
Anthea Harrison
NESTA
Richard Hepper, FD
Oxford Capital Partners
Valerie Joliffe, Chief Executive
Javelin Ventures
Henrietta Marsh, AIM Fund Manager
ISIS
David McMeekin
London Technology Fund
Howard Miller, Head of Public Affairs
London Stock Exchange
Alister Minty, Director
Sigma IP Limited
Professor Gordon Murray
Exeter University Business School
Alex McWhirter, RDA Finance Lead
Yorkshire Forward
Claire Munck, General Manager
EBAN
Stuart Nichol, Director
Octopus Investments
Dr Paul Nightingale
University of Sussex
Calum Paterson, Managing Partner
Scottish Equity Partners
Dr Dean Patton
School of Management, University of Southampton
C-1
The Supply of Equity Finance
to SMEs: Revisiting the “Equity Gap”
A report to the Department for Business, Innovation and Skills
Name and title of consultee
Organisation
Scott Sage, Research Project Manager
BVCA
Nick Smailes, Director
SETSquared
Liz Stevenson, Senior Public Affairs manager
London Stock Exchange
Marcus Stuttard, Deputy Head of AIM
London Stock Exchange
Philip Tellwright, MD
SWAIN
Jenny Tooth, Business Development Director
GLE Growth Capital/BBAA
Vivienne Upcott-Gill, Funds Development Manager
YFM
George Whitehead, Business Development Director
NESTA Investments
Adam Workman, Partner
Carbon Trust
Peter Wright, Investment Director
Finance Wales
Anthony Clarke
British Business Angel Association
Table C-2: Business angels attending Oxford focus group
Name of consultee
Chris Baker
John Caines
John Catling
Hugh Pelton
High Smith
Michael Taylor
Table C-3: Business angels attending Leeds focus group
Name of consultee
Peter Ball
David Belford
Graham Davis
Sandy Gillan
Barbara Greaves (Manager of YABA)
Chris Redfearn
C-2