To some observers, the news coming out of the UK over the past couple of months has not seemed particularly positive for the country’s large and growing technology industry. The imminent closure of Tech Nation, the re-evaluation of R&D tax credits, and even the failure of Britishvolt have led many commentators to accuse the UK Government of turning its back on a critical industry.
I think it’s important, though, to put these pieces of news into the context of the growth of UK tech over the past three decades. It is plain enough to see that the country has established itself as a dominant hub for digital innovation and entrepreneurship – in its latest analysis of venture capital funding in Europe, Dealroom reported that UK companies had secured $4 billion in the third quarter of 2022, or the equivalent of 20 percent of total VC investment in the region.
When I began my career in venture capital several decades ago, we wouldn’t have dreamed of British early-stage companies raising billions of dollars in a quarter, so what has fuelled this growth?
Clearly, the UK has benefited from the global trends of greater digital innovation, more entrepreneurial activity, and the growth of the venture capital industry. It has, however, ensured that its growth in each of these areas has accelerated faster than in comparable countries around the world.
A key factor in this superior growth rate, I would argue, has been the Venture Capital Trust (VCT) scheme. Attracting less fanfare than it deserves, even within the UK, this policy was introduced by the UK Government in the mid-90s as a strategy for driving greater levels of investment into early-stage companies. Since then, it has played a critical role in building the thriving venture capital ecosystem, supporting innovative, entrepreneurial companies, that the country enjoys today.
How VCTs work
Its premise is simple. It allows private investors across the UK to invest in VCTs – which are publicly listed companies – and their money is in turn put to work in a diversified portfolio of early-stage companies by experienced venture capital investors.
In return, investors receive 30 percent income tax relief from the government. Rather than relying on wealthy individuals to source and manage individual investments in start-ups, it delivers investment at scale, coupled with vital board-level support for the founding team.
VCTs also provide a source of patient, evergreen capital for research-intensive industries. For VCT investors, there is a requirement to lock up the investment for five years to retain the up-front tax relief. In turn, VCT regulations stipulate that money can only be invested in young companies and cannot be used to invest in low-risk, asset-backed businesses.
Through this structure, the scheme has neatly brought together public and private investment to channel funding towards entrepreneurial companies. Today, almost £7 billion is invested in VCTs, providing a vital source of funding to early-stage businesses throughout the UK.
This is particularly critical during periods of downturn. Unlike traditional VC firms that may pull back from the market when times get tough, the evergreen nature of VCTs provides a steady source of investment that can weather turbulent years. Throughout the pandemic, VCTs invested more than £1.2 billion into UK companies to help them trade through an incredibly challenging commercial and economic environment.
This is not to say that VCTs are the only solution. Mainstream venture capital, sourced from institutional investors, now provides the lion’s share of investment into UK start-ups – but this market has been bolstered by the existence and strength of the VCT scheme, as well as its earlier-stage equivalents in the form of EIS and SEIS funding.
So where next for VCTs, particularly at a time when government support of the UK tech sector is being – perfectly justifiably – scrutinised for its value to the national economy?
I would argue that the beauty of a policy intervention like the VCT scheme is its ability to evolve over time to reflect the priorities of the nation. In its early days, the VCT scheme helped to seed a nascent venture capital industry, providing the capital and infrastructure for companies to be backed, funds to be raised, and knowledge to be built. It has since adapted – particularly following the Patient Capital Review in 2017 – to channel greater levels of funding into research-intensive businesses.
We now have an opportunity to shape its growth and development over the coming decade. VCTs already invest in many emerging technologies that have the potential to deliver an outsize return for the UK economy, from cyber security to artificial intelligence or climate tech. VCTs are also supporting businesses at the forefront of sustainability. The ProVen VCTs, which are managed by my firm, Beringea, have a portfolio that features circular economy businesses like MPB and Luxury Promise, alongside AI-enabled companies such as CreativeX and Chattermill.
By working in collaboration, policymakers and VCT managers can ensure that funding is channeled at even greater rates into companies that strengthen the UK economy, help us achieve the UK’s net zero target of 2050, and ensure that more funding is provided to female and minority-led businesses.
Clearly, UK tech is going through a period of change, but there’s plenty to celebrate about its successes from the past few decades and I firmly believe that there is lots of potential for further growth. Bringing together public and private investment through VCTs to support emerging tech businesses can continue to play a key role in achieving this.
Stuart Veale, Former Chair of the Venture Capital Trust Association and Managing Partner of Beringea
Lead image: James Giddins