Time to recognise the value of Venture Capital Trust funds
This article first appeared in City AM.
Next week, the chancellor will unveil his Budget, with just 18 months to go before the UK leaves the EU. Despite Brexit uncertainty, the UK entrepreneurial scene is thriving, and the investment opportunity ripe for those looking to access the growth potential of early-stage businesses.
This is something the government has recognised, and we expect the chancellor’s red box to include measures to increase the supply of long term capital available to growing businesses.
Earlier this year, the government launched its Patient Capital Review to assess if we had the right amount of long term, “patient” finance to support growing innovative companies in the UK.
It showed that we are lagging behind the US, which has double the amount of venture capital proportionate to Britain, and that American companies get nearly twice the number of rounds of investment before floating.
As a result, the US has 10 times more unicorns than the UK.
Providing more support to these types of companies will mean the benefit will be felt across the UK economy. These businesses drive our nation’s growth – creating thousands of jobs, paying tax, and spurring innovation across the country.
Next week, Philip Hammond will seek to close this finance gap, and we hope he will recognise the critical role that Venture Capital Trusts (VCTs) play.
Earlier this year, the 10 largest VCT funds, representing 75 per cent of the industry and collectively managing £2.9bn, came together to form the Venture Capital Trust Association (VCTA), to champion the sector’s role in supporting the growth of UK startups and small businesses.
Since the first VCTs were established, we have contributed more than £7bn of investment and 27,000 jobs to the UK economy.
This is a vital, but unsung role in the economy. By their nature, VCTs are “patient” capital – on average VCT investments last seven years, and we follow on investment in multiple rounds. The VCTA is committed to investing in high-risk, early-stage ventures that grow into multi-million pound businesses – the very businesses the government is backing for further growth.
Among the success stories, our members are behind are Octopus’ investment in Swiftkey, the world’s leading mobile keyboard based on artificial intelligence technology.
The company grew from 10 members of staff to 150 in six years, before being sold to Microsoft, and its app is installed on over 300m devices.
There’s also Livingbridge’s investment in Fat Face, which saw turnover increase eightfold in five years, with 60 new stores and 700 employees.
Livingbridge’s support went beyond investment – they appointed an experienced chairman, and built the right board, management team, and IT and accounting systems that provided the bedrock for its growth.
Some have argued that VCTs do not sufficiently support high-risk businesses, focusing instead on investing in “capital preservation” models and should therefore be restricted.
This is incorrect. VCTA data shows that over 93 per cent of businesses that we have invested in since the 2015 rule changes are targeted to match the government’s drive for investment in high-risk and innovative businesses – and we will continue to do so.
We hope the government recognises our role is all the more important against the backdrop of Brexit.
We have real reasons to be optimistic as the UK has an entrepreneurial system that is best in class – let’s build on that next week.
For journalists in their professional capacity only. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. Issued by Octopus Investments. Octopus Ventures is part of Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: November 2017.