The role of government venture capital funds: Recent lessons from the U.K. experience

• Date: 01 January 2019
• Published date: 01 January 2019
• Author: David North,Ciaran Mac an Bhaird,Robyn Owen
• DOI: http://doi.org/10.1002/jsc.2247

RESEARCH ARTICLE

The role of government venture capital funds: Recent lessons

from the U.K. experience

*

Robyn Owen

1

| David North

2

| Ciaran Mac an Bhaird

3

1

Centre for Enterprise and Economic

Development Research (CEEDR), Middlesex

University Business School, London, United

Kingdom

2

CEEDR, Middlesex University Business

School, London, United Kingdom

3

Dublin City University, Dublin, Ireland

Correspondence

Robyn Owen, Centre for Enterprise and

Economic Development Research (CEEDR),

Middlesex University Business School, London,

United Kingdom.

Email: r.owen@mdx.ac.uk

Abstract

U.K. Government Venture Capital (GVC)-backed schemes have evolved to provide more effec-

tive targeted funding for high growth potential firms, but policy designers should be cognizant

of the changing external financing ecosystem when designing co-investment schemes. We

investigate the effectiveness of government backed venture capital schemes (GVCs) in funding

early stage entrepreneurial ventures. Addressing fundamental issues of additionality, crowding

out, economic impact, and sustainability, we discover that U.K. GVC-backed schemes have

evolved to provide more effective targeted funding for high growth potential firms. Combining

primary data from a number of sources, we discover positive impacts of increase in turnover

and employment in funded ventures, along with effective targeting of specific funding gaps. Sig-

nificant issues remain, including a lack of liquidity in follow-on funding and a requirement for

longer time horizon in funds, as firms typically fall behind in development schedules. There is,

therefore, a need for greater flexibility in GVC-backed funds. Policy designers should be cogni-

zant of the changing external financing ecosystem when designing co-investment schemes.

1|INTRODUCTION

Many of the most successful venture capital (VC) markets globally are

catalyzed by government support (Lerner, 2009, 2010, 2011). Since

the global financial crisis (GFC), government VC (GVC) scheme invest-

ment has intensified. This has been driven by governments' desire to

support innovation, diversification, and business growth (Lerner,

2010; Mazzucato & Penna, 2014; see U.K. BIS, 2011), by assisting

potential growth businesses and enhancing the “Vital 6%”of busi-

nesses that provide over half of all employment generation (NESTA,

2009). This has required addressing the broken seed and early stage

finance escalator investment gaps created by retrenchment to later

stage funding by bank debt and private VC finance (Cowling, Liu, &

Ledger, 2012; North, Baldock, & Ullah, 2013; Wilson & Silva, 2013). It

also attempts to attract private investment, enhanced by increasing

the ability to attract foreign inward investment in the global

information age (Hopp, 2010; Lerner, 2010; Lerner, Moore, &

Shepherd, 2005).

Within Europe, Colombo, Cumming, and Vismara (2014) high-

light the huge deficit of VC investment when compared to the

United States (in 2010 European VC investment represented 0.03%

of GDP, compared to 0.09% in the United States), pointing out that

this has led to far greater levels of GVC scheme development to

compensate. Indeed, European GVC doubled to €1.6 billion

between 2007 and 2011, increasing its share from 9.9% to 39.1% of

the VC market (EVCA, 2013). In the United Kingdom, since the Dot-

com crisis, the proportion of government funding in seed and early

stage VC increased (Murray, 2007). Mason and Pierrakis (2013)

found a rise from 20% to 68% between 2000 and 2008. This trend

has undoubtedly continued post-GFC, given that British Venture

Capital Association (BVCA, 2013) member seed and early stage VC

investments in 2011 and 2012 were similar (£350 million) to 1999,

prior to the Dotcom bubble. This phenomenon alongside recent

large-scale data which cast questions over the value of GVC

schemes (Grilli and Murtinu, 2014; Munari & Toschi, 2014) makes it

apposite to take a closer look at recent post-GFC developments in

the United Kingdom.

In this article, we focus on GVC supply-side theories to assess

scheme evolution and impact on the U.K. market, utilizing a range of

comparable early and midterm assessments of the main U.K. GVC

funds (GVCFs) operating in this period, namely the Enterprise Capital

Funds (ECF), U.K. Innovation Investment Fund (UKIIF), and Angel Co-

*J.E.L. Classification codes: G24, G28.

DOI: 10.1002/jsc.2247

Strategic Change. 2019;28:69–82. wileyonlinelibrary.com/journal/jsc © 2019 John Wiley & Sons, Ltd. 69