Venture Capital Trusts driving early stage UK tech funding

Will Fraser-Allen, managing partner at Albion Capital, explains how venture capital trusts are driving growth in UK tech start-ups

As we approach the two-year mark of the Covid-19 pandemic which sent shockwaves through the global economy, the UK tech sector is once again looking forward to the future with optimism off the back of a record year of fundraising which saw it attract £26bn in venture capital funding in 2021.

There are many factors that have provided the fuel for UK tech’s swift bounceback from a tough 2020-21. First and foremost, the pandemic has acted as a fundamental catalyst for much needed digitisation across numerous sectors such as healthcare, financial services and digital security. This in turn has led to a groundswell in demand for new product and software innovation, creating rapid growth and funding within the UK’s digital economy.

British universities are also driving greater levels of tech funding, with several of the country’s leading institutions establishing connected funds which are enabling them to launch more start-ups and provide vital finance for fast growth companies using IP generated through their world leading research programmes. For example, The UCL Technology Fund, a collaboration between Albion Capital and UCLB, which particularly focuses on cell & gene therapy and artificial intelligence. Improved and easier access to funding is proving to be an effective catalyst encouraging entrepreneurial academics to commercialise their research by launching spinout companies. I suspect we will see this success replicated by further research led universities launching connected funds to commercialise their IP through licencing deals and spinout companies.

>See also: UK universities make £61m from spinout exits

The last year has also seen London further strengthen its position as the leading fintech hub in Europe, second only to the US globally, with the capital now home to over 2,100 fintech companies. As start-ups continued to launch and scale increasingly disruptive products in the space, London attracted £8.5bn in funding in the last year, a 217 per cent increase on 2020.

All of this has been underpinned by public policy that continues to be extremely supportive of funding for high growth businesses and innovation across the UK. This is evidenced no more so than by the UK’s Patient Capital Review to unlock £20bn of investment over the next ten years to further strengthen the UK as a place where growing innovative firms can obtain the long-term ‘patient’ finance that they need to scale up.

Venture Capital Trusts (VCT) have played an important role in the provision of ‘patient’ finance, 2021 also saw a record breaking year for funding provided by VCTs with £668m invested, a 55 per cent increase on 2020. VCTs are investment companies listed on the London Stock Exchange enabling UK private investors to invest in a diversified portfolio of small but high growth companies. Unlike more traditional investment funds, VCTs provide investors with a variety of tax reliefs for investments up to £200,000, including up to 30 per cent upfront income tax relief, no income tax to pay on any dividends received and no liability to capital gains tax on disposal. For an investment in a VCT to benefit from these tax breaks the investment must be held for five years and is limited to £200,000 in any tax year.

While VCTs are growing in popularity with investors, they are also seen to be an ideal fit for young, high-growth companies, particularly those at the forefront of sectors such as healthcare and financial services which are experiencing rapid and accelerating digital transformation. VCT funding is providing emerging, innovative businesses with access to capital and support required to grow, expand into new markets and drive new employment.

Two of the biggest healthtech success stories from Albion Capital’s VCT tech fund in the last few years have been Helios, a leading digital provider of mental health, autism and ADHD services for children and young people, and Oviva, a fast-growth digital health business providing medical nutritional counselling through mobile technology solutions that empower dietitians to provide superior care in a highly efficient way. Funding from Albion enabled both companies to scale significantly by hiring the highly skilled employees needed to build their product, grow their customer base and to expand their operations internationally.

Looking ahead, the role of VCTs providing a valuable form of funding for high-growth UK tech businesses looks set to further grow. The momentum generated by VCTs in 2021 has continued into 2022, with private investors continuing to invest in offers from the likes of Mobeus VCTs and Albion Capital both having launched well supported fundraises in the first weeks of the year.

As the UK looks to build back stronger from the pandemic, it must ensure the country is an attractive place to launch a high growth start-up, empowering entrepreneurs to thrive, and continue to create highly skilled jobs across the tech sector. In recent weeks, we’ve also seen heightened focus from the Government’s aim of a greater distribution of skills, knowledge, and productivity across the UK through its newly unveiled levelling-up plan. VCTs, with their national footprint, are ideally positioned to play a central role in ensuring businesses have access to the necessary levels of funding to propel national growth and play an important part unlocking the UK’s regional growth potential.

In addition to supporting the continuing wave of digital acceleration, finance from more patient forms of funding like VCTs will be needed to capitalise on new growth areas of UK tech, including decentralised finance (DeFi), hydrogen power, gene therapy and precision cancer treatment amongst others.

VCTs are on the path to establishing themselves as one of the most effective early-stage sources of funding within tech, and a valuable way for private investors to get exposure to the UK’s increasing number of privately owned high-growth companies. As the industry looks to continue the positive momentum from 2021, VCTs will play an increasingly influential role in helping to realise the huge growth potential across many of the UK’s emerging tech start-ups.

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Will Fraser-Allen

Will Fraser-Allen is a managing partner at Albion Capital Group LLP.

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