The UK government may initiate a rethink on their venture capital investment policy. A recent Financial Times article mentions regional venture capital funds which have marked down £74million worth of investments to £5million!

The article goes on to elaborate that since 2000 the Department of Business has invested close to £338million in more than 800 companies through 28 venture funds of which 189 have been write-offs with just 45 profitable exits. The funds invest alongside private sector investors in small and start-up companies which do not have access to other sources of financing.

One of the reasons highlighted by the evaluation committee for the poor performance is the lack of basic economic and financial objectives for the funds – quite a big one that. Does it mean that the funds have been investing without any targeted return objective!

Interesting and it also brings to mind a question that has been troubling me for a while – the difference between entrepreneurial start-ups and innovative start-ups. 

The latter i.e.innovative start-ups, are firms which are trying to establish a new technology or a new service which involves a change to a pre-established habit or manner of performing an action. Investing in these diverse categories needs two completely different skill sets in the managers – both within the firm as well as the investors providing financing and in some cases operational guidance and support - and it’s hard to imagine a single fund catering to both segments.

Venture capital funds like Accel, Index, Wellington clearly fall into the latter category. Their investments are in nascent technologies and markets which in quite a few cases will develop alongside the invested firms. They may have their write-offs but the constant aim is to invest in ground-breaking technology and firms which can provide the 10x exits helping them reach targeted return objectives for their LPs. At the other end there are firms like Elderstreet Investments which look at investing in firms addressing growth markets, for sure, but also already established markets, where they can excel through focus on stellar operational performance (their investment in Access Intelligence being a prime example).

In summary, the government’s focus to support early stage firms can only be lauded. However they do need to separate their support for small and medium businesses from their support for developing innovation and new technology if they hope to achieve any real results. There is after all a lot of talent and innovation which needs the initial buttress. Perhaps then, we can move away from the constant lament these days about UK’s economy being highly dependent on financial services and see growth in manufacturing and all the other ‘real’ sectors.