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5 Key Takeaways As VC Industry Weighs in on UK Inquiry Into Sector


Britain’s startup scene has long reigned supreme in Europe’s tech ecosystem.

Startups across the UK have secured almost $75 billion from investors over the past five years – twice that of Germany and France, according to data from venture capital firm Atomico. London’s reputation as a global fintech hub remains intact thanks to companies like SoftBank-backed Revolut and the now-public money transfer firm Wise.

But against a backdrop of rising inflation, an economic downturn, and market turmoil, the outlook for Britain’s startup sector looks uncertain. The UK government has launched an inquiry into its domestic venture capital market to evaluate the ability of companies to secure scale-up funding.

The inquiry has drawn almost 300 pages of written evidence from leaders in the country’s VC industry, demanding everything from more capital from pension funds to dropping sunset clauses on tax incentive schemes for investors.

Insider looked through the submissions and identified these 5 key takeaways.

The UK needs a lot of scale-up capital if it wants to be taken seriously as a science and technology superpower.

That’s according to London-based VC Parkwalk Advisors, which focuses on “hard science” companies spun out of universities, which said there was a glaring lack of growth investors in the UK compared to the networks of early-stage backers that already exist in the country.

In its view, this is “a particularly critical issue for deep technology and life science companies,” which often spend a great deal of time in a pre-revenue mode of operations as they hone in on intellectual property, and then struggle to attract capital to commercialize. 

Chilcomb Management Services, a key backer of deep tech startups, noted there was “a much smaller pool of investors” willing to work with such companies, as “making physical products often takes longer and absorbs more capital.”

Moray Wright Parkwalk Advisors

Parkwalk Advisors CEO Moray Wright.

Parkwalk Advisors

One way of doing this is through what many in the VC industry describe as an “unlocking of pension funds.” These institutional investors often serve as limited partners in VC funds but have their hands tied on how much they can invest as a result of regulation.

VCs think participation from domestic pension funds in particular needs to be catalyzed. Lakestar, a VC firm, compared UK institutions’ lagging investments into private startups with the superannuation funds in the US, where pensioners are already benefiting from investing in high-growth industries. 

“A retired teacher from Maryland is benefiting from a larger pension pot because they can invest in innovative UK businesses, but a retired teacher from Middlesbrough or Margate is not,” Lakestar wrote in its submission.

Despite recognition of the opportunity for investment returns, some corners of the pension fund community remain cautious.

The Pensions and Lifetime Savings Association said that while it recognizes “there is a place for riskier, less liquid allocations into asset classes such as VC,” it would caution against assuming pension savings are a resource to be “unlocked” for that purpose.

Several stakeholders believe diversity can no longer be a middling part of the priority list for the industry.

Big Society Capital, a social investment institution, cited data from a British Business Bank subsidiary that found the proportion of total VC investment into female founders was less than 5%. Less than 2% of VC funding went to black entrepreneurs, according to data from Extend Ventures.

For the Council for Investing in Female Entrepreneurs, meeting a government goal of having 600,000 female founders by 2030 requires, among a number of things, an improvement in the gender balance of teams, particularly those that form investment committees.

A “sunset clause” in place on a tax incentive scheme for a significant segment of the VC community is set to be realized in April 2025 – and many VCs want that clause removed.

At present, eligible investors – typically those focused on early-stage companies – can claim a 30% tax relief through state programs such as the Enterprise Investment Scheme (EIS) on investments worth up to £1 million ($1.2 million) per year.

Octopus Group, a holding company managing several billion dollars of funds, wrote that the sunset clause on the EIS and listed investment vehicles known as venture capital trusts is “set to destroy an entire asset class in 2025” by “massively narrowing channels to capital” for businesses.

It’s difficult to blaze a trail with innovation if you’re averse to risk. But when compared to the US, the UK’s VC community feels there is a fundamental lack of risk appetite.

According to the ScaleUp Institute, a non-profit organization, “knowledge gaps and a lack of expertise” are to blame. This lack of knowledge, in its view, has, in turn, amplified an “embedded culture of ‘risk caution’ among institutional investors”.

The institute said investor knowledge is vital if the UK wants more traditional asset allocators like pension funds and insurance companies to plow more money into high-risk startups.

“If left unaddressed, it is likely that institutional money will flow to asset classes that are already well understood by institutional investors – such as infrastructure projects – rather than toward UK-based high growth firms and scaleups,” the institute said. 

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