Few VC investors will have fared as poorly as the UK government.
The Treasury has invested £338 million in VC-style funds since 2000, from regional venture capital funds (RVCFs), launched in the early years of this decade, to the Capital for Enterprise fund, established this year.
Despite their good intentions, the financial returns of some of these funds make a flutter on US subprime mortgage debt or the Icelandic banking sector look positively attractive.
A report from the National Audit Office reveals that RVCFs, for example, have lost the government more than 90 per cent of its investment since they were set up in 2002 and 2003. Furthermore, ‘The Department [for Business, Innovation and Skills] will only get a return if the individual funds outperform the preferential 10 per cent return to other investors’.
Or take the UK High Technology Fund, set up to ‘demonstrate to investors and the VC industry that commercial returns can be made on early-stage, high technology investments’. Instead, the UKHTF has demonstrated that by investing in such companies you can lose 9.7 per cent a year – even when you get the lucky break of investing most of your money after the dotcom crash.
Admittedly, there are a couple of mitigating factors. First, the performance of private VC funds hardly presents a shining contrast with that of the government-backed vehicles. Returns from early-stage funds over the past ten years are negative, according to figures from the British Venture Capital Association, while over the past five years funds have failed to beat inflation.
Second, government VC funds have other objectives than simply making money. They aim to provide capital in areas where private investors fear to tread, but where successful businesses have the potential to create opportunities that would not otherwise have existed. That is all well and good – but if the companies the funds invested in are now worth a fraction of what they were, who has really benefited?
Certainly not the private co-investors who went along with the government and often provided a large chunk of the funding. For example, the RVCFs have a government commitment of £74.4 million, but raised £226.5 million in total, while the UK High Technology Fund took only £20 million from the government and more than £100 million from other investors.
However badly these funds have done, the government does not need to shoulder the entire blame. After all, the funds have been managed by private VC firms, not by civil servants. What is patently clear is that the involvement of the private sector in managing the money is not enough in itself to ensure good returns for the taxpayer – especially when private firms are working within rigid government guidelines.
The NAO report states that in the case of the RVCFs, their performance ‘was impeded by their design’. Among the problems with these regional funds has been ‘their regional focus’ (quite a fundamental problem then) and the limits placed on the amount that could be invested in any one company. As ever, the more restrictions and objectives government imposes on the people investing the money, the harder it is for them to make a commercial return, particularly in such a tricky area as growth companies.
The appalling returns of government-backed VC funds are all the more worrying at a time when the Treasury is talking about making larger and larger pots of money available for such purposes (the latest effort, the UK Innovation Investment Fund, aims to raise up to £1 billion). No-one is disputing the fact that we need to make sure innovative ventures have the right support, financial and otherwise, to flourish. But sweeping the problem under a carpet of money is not going to be enough to create the world-leading companies of tomorrow.
