The UK government has invested $100m (£70m) in a venture capital fund run by Silicon Valley-based Top Tier Capital Partners, which it says will support UK technology and healthcare sectors. In recent years, the state has become a major VC investor in UK tech, reflecting the government’s hopes for the sector post-Brexit. But, given the high failure rate among start-ups, this strategy also represents a risky use of public money.
The state-owned British Business Investments (BBI), an arm of the British Business Bank (BBB), announced last week it was putting the investment into Top Tier’s fund. BBI, alongside its delivery partners, funds programmes that supply either debt or equity finance.
“I think [the Top Tier Capital Partners investment] is consistent with a series of investments that we’ve seen from British Business Investments over the past couple of years,” says Russ Shaw, founder of Tech London Advocates. He says this investment ramped up after the European Investment Fund, which ploughs a substantial amount of money into venture capital and private equity funds across the European markets, began to back away from the UK post-Brexit.
“Even though we hadn’t left the EU… if you speak to any VC, they would say the funding from the European Investment Fund basically stopped six to 12 months after the referendum,” says Shaw. “That put a lot more pressure on the UK government to fill the void.” He sees this latest investment as part of the government’s efforts to do so.
British Business Investments: the Future Fund and beyond
BBI currently has five programmes, two of which are fully invested (the Business Finance Partnership and the UK Innovation Investment Fund) and three that are still investing (the Investment Programme, Managed Funds Programme and Regional Angels Programme). The three operational programmes provided their highest level of new commitments in 2019–20, according to records on Companies House. Since inception, BBI has made 59 investments in 48 delivery partners.
The BBB has typically put money into VC funds as an investor through BBI, as is the case with this Top Tier investment. But the pandemic marked a shift to directly funding start-ups and SMEs under the Future Fund. Although most of the Treasury’s Covid-19 support money was parcelled out into grants or loan schemes, the Future Fund was pitched at pre-revenue or pre-profit businesses that typically rely on equity investment. To date, the UK government has handed out more than £1.1bn of convertible loan agreements to 1,140 companies, but has sparked controversy by refusing to name which companies.
Funding from the European Investment Fund basically stopped six to 12 months after the referendum. That put a lot more pressure on the UK government to fill the void.
Russ Shaw, Tech London Advocates
UK Chancellor of the Exchequer Rishi Sunak announced a £375m successor scheme to the Future Fund called Future Fund: Breakthrough in the January 2021 budget. This fund is focused on backing later-stage high-tech companies with minimum investment round sizes of £20m. Like the original Future Fund, Sunak’s new vehicle will involve government funds being matched by private sector venture capital, reflecting his penchant for private-public co-investment schemes.
This is a high-risk strategy to pursue with taxpayer money, given most start-ups fail and only a few go on to become major successes. Shaw notes that there were “some mixed reactions” to the first Future Fund. “I think there was a lot of pressure on the Treasury and the chancellor to say ‘Look, this is a very unique situation. This is a part of the value chain that’s really struggling, and we need to do something.’ Part of that something meant directly investing in tech start-ups.”
Which sectors will benefit from UK government tech investment?
The Top Tier investment indicates that the government, “building on the Future Fund, is looking at new, more direct ways to channel investment into the tech sector,” says Antony Walker, techUK deputy CEO. “However, alongside novel new investment schemes, the government needs to continue to work with the sector to address the numerous other challenges that UK tech faces, such as uneven access to capital and talent across the nations and regions of the UK, and providing more support for start-ups and SMEs to scale.”
In addition to its other tech investments, the UK government also plans to set up an £800m agency called Aria (based on the US’s Darpa) to back ‘high-risk, high-reward’ scientific research. Taken together, this funding represents “a belief that the UK tech sector is growing, it’s doing well, and it’s a critical part of our future,” says Shaw.
He believes it will be important to look out for where the government-backed funds invest their money over the long term. “My sense is, you’re going to see much more of a focus on areas like quantum computing, AI, life sciences, biotech, medtech, energy tech, climate tech, green tech.” Shaw predicts the areas attracting the most investment are likely to closely align with the 17 strategic sectors highlighted by the National Security and Investment Bill, which is currently making its way through Parliament.