Friday, November 13, 2009

UK Gov't Outlines Hands-Off Approach to Boosting VC

You thought the VC model was broken? Not according to the UK government, which today provided further detail on its plans to support an innovation-focused fund-of-funds to invest in VC funds covering life sciences, clean-tech and digital tech over a 12-15 year period.

The government is coughing up £150 million ($250 million) to kick things off, but expects the fund to raise at least as much again from the private sector, with the lofty aim of eventually creating "the largest technology fund in Europe," potentially worth up to £1 billion.

There's no denying that the UK--and indeed Europe as a whole--needs a shot in the arm. The UK VC market may be the second largest in the world, but it's still tiny compared to the US: only 4% of investor funds go into VC here in Blighty, vs more than 30% across the pond. The UK Innovation Investment Fund will mark a "step change", says the government, "bringing UK VC closer to the US model in scale and scope."

Hang on, hang on. The £1 billion is a best-case; the "biodollars" figure, so to speak. At a minimum, the fund--which will start investing in January 2010--will be worth £300 million. Or possibly more, since Science and Innovation Minister Lord Drayson declared himself "very happy" with the proposals, including forecast private sums, from prospective fund managers (the lucky winner will be announced next month).

Still, whatever its size, the point of a fund-of-funds structure is that it provides a lever effect, pooling money from a range of investors and spreading risk by investing in a variety of VC funds across a variety of sectors. The idea then is to loosen off the stingy, risk-averse shackles blocking much VC investment today by providing them with a slug of money from a fund with sufficient scale, and an appropriately long-term time-horizon, to help reduce risk and increase the likelihood of a return (including in activities such as drug development).

Drayson also asserted that this fund represents a hands-off approach to boosting the sector (contrary to previous interventions, aimed as much at creating local jobs as facilitating long-term sector growth). "There will be no political intervention," he said, explaining instead that the chosen fund manager will be free to make decisions based purely on expected financial return--and free to maintain their particular investment policy. He also mentioned that strategic investors--Big Pharma, for instance--would be free to invest alongside the IIF.

Investors will of course welcome the government's non-interfering policy, but the downside is the risk--to the UK taxpayer--that their money finds its way not into UK biotech or cleantech, but across the pond (or wherever returns are deemed to be most favorable). Indeed, "this fund will have a global scope," clarified Drayson. "We have to be realistic, and go with the market flow."

That said, there is (of course) some small-print. The government has (legitimately) asked that at least the £150 million from its pocket be invested in UK companies--which includes £25 million each to life sciences and cleantech. And in the request-for-proposals document to aspiring IIF managers, it's clearly stated that "managers able to demonstrate greater levels of investment into UK-based businesses" will be favoured (although the manager him/herself can be domiciled anywhere). Those allocating investments both to late-stage opportunities and early/seed-stage ventures will also gain brownie points in the selection process, as will those who demonstrate a willingness to invest in a balanced fashion across the relevant sectors (to avoid ending up with a £500 million cleantech-only fund in 5 years' time, for instance).

In an attempt to move away from the drip-feed funding philosophy that has blighted the European sector to date, the IIF will--hopefully--be big enough to allow, indeed demand, chunky-sized individual investments, thus increasing the chance of growing blockbuster businesses. (Helpfully, the UK government recently removed a barrier blocking such funds from investing more than £10 million in an individual company.)

It all looks pretty good, then, doesn't it? Even a £300 million fund isn't bad. And if Drayson is right in his claim that 2009 will prove a 'vintage year' for VC investments, not least as the economy emerges (is it really emerging?) from a deep downturn, the total available to help save innovative technologies could be a lot bigger still. Just how big is that 'if'?

image by flikrer HowardLake used under a creative commons license

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