Michael Moore sounds like a politician as he lists the travails that have made the past few years the worst of times for VCs. The pandemic, the invasion of Ukraine and the energy crisis that came with it, and the windswept economic landscape – all to blame. 

That’s not surprising since the head of the trade body for venture capital (and private equity) is a former Liberal Democrat MP – and Scottish Secretary – in the coalition government. And he has a point.   

“It changed the reality on the ground for everybody – whether they were fundraising, building businesses or looking to exit,” says Moore, chief executive of the British Private Equity and Venture Capital Association. 

“It’s been tougher to raise funds, no one is kidding themselves on that. But the industry sits on record amounts of, in our lovely jargon, dry powder – capital commitments that are available to deploy. I’m very positive about the industry because I think it has grown out of all recognition in the past decade.” 

The challenges facing the VC sector 

Yet while Moore sees progress on spinouts, regional investment and the possibility of pension cash going into fast-growing companies, there remain questions. These include concerns around how much of the investing pie is shared outside London and whether the UK can ever match the scalability, patient capital or skills of the US, as well as how much is invested in businesses led by women and ethnic minorities. Last, the Commons Treasury committee accused the industry of an “unacceptable failure” on the first and third points. 

And then there’s the economy. Steven Dunne, senior partner at Frog Capital, doesn’t sugarcoat VCs’ predicament. There has been a shakeout, he says.

“There were a lot of deals done and a lot of firms apparently doing very well in a rising market, which came to an end at the end of 2021,” he says. “Since then, we’ve seen a lot of retrenching and people disappearing from the new deal market because they’ve got so many issues in their own portfolio. 

“Now, we’re seeing the issues with a lot of VCs being behind the curve in terms of exits because they haven’t got things they can exit at good values – and don’t want to exit at poor values.”  

Frog backs software firms providing consumer, financial and businesses services, and its operating partners are often to be found working within its investments. According to Dunne, it has avoided having to provide emergency funding for its businesses. “We’ve always invested around fundamentals,” he says. 

There are also some concerns around the political landscape, given this is an election year and that drives some uncertainty. Tim Mills, managing partner of ACF Investors, holds a portfolio of almost 120 companies across the UK, of which Gousto, the meal kit supplier, is perhaps the best known.

“The story of consistency and support is a positive one,” says Mills. “But it’s always concerning going into an election year that there’s no guarantee that the story is going to continue.” 

He explains: “We’re in the game of making investments that might take seven to 12 years to reach maturity and exit. Any kind of change within that period can fundamentally change the dynamic of those investments, which isn’t something that all politicians really appreciate.” 

How VCs are changing 

Ken Cooper is a VC’s fairy godmother. As managing director of venture solutions at the British Business Bank he oversees the Enterprise Capital Funds programme. It invests up to 60 per cent of a fund, making it a “very attractive programme for first-time fund managers,” Cooper explains.  

He adds: “We also won’t take 60 per cent of the profit, so that makes it easier for those managers to attract other investors who will then get a share of the profit that would otherwise be ours.”

In March, the British Business Bank launched a second Northern Powerhouse Investment Fund, providing £600m to cover the north of England, to be managed by nine fund managers and offer loans and equity deals.

Another investor making waves in the north of England is Northern Gritstone, which focuses on spinouts from the universities of Manchester, Leeds and Sheffield, particularly in life sciences. Duncan Johnson, the chief executive, likens his company to an investment trust.

“We have a very different funding breakdown, some 70 per cent of our money comes from pension funds,” he says. These include L&G, M&G, Phoenix and Lansdowne Partners, as well as local authority funds from Manchester, West Yorkshire, South Yorkshire and East Riding. 

“It gives us that ability to keep following our money rather than having a typical structure where you’ve got five years to invest, five years to get it back and you might get two one-year extensions.” 

Making UK VC fit for purpose 

With changes in the sector, is venture capital now fit for purpose? “No,” says Johnson. “But that does not mean it can’t be.” 

He adds: “If you say fit for purpose equals what it looks like in Boston around [the innovation district] Kendall Square or the [San Francisco] Bay Area, we are on a journey to get there. The clever people in this space will go and look at those markets and say: which bits can I bring back that mean it doesn’t take us 30 years to get there, only 10?”    

Johnson attributes this to “the American pioneering spirit: failure is seen as success because you’ve learned something and you’re going be better at what you do because you did fail. In the UK I still don’t think we’re anywhere close to having that attitude. You fail – you fail.” 

Veteran investor Luke Johnson, who works at Risk Capital Partners, agrees: “Look at the successes like Amazon or Tesla. America has the world’s biggest capital markets, so they can fund the billions of losses which Amazon suffered over 10 or more years before it broke into profit. They have patient capital and liquidity that we will never get close to. 

“I don’t think that the ecosystem is bad in this country. We complain, but we like to complain about everything. Could it be better? Of course.” 

Cooper would also prefer a bolder attitude. “The US just has a scale that the UK doesn’t,” he says. “We’re never going to replicate that scale, but we can replicate the way investments are made – the entrepreneurial nature, the risk-taking.” 

One newer player, Science Creates Ventures, is emulating the American model of exited founders turning to investment. Alex Davies, chief executive of Wealth Club, a platform for investing in fast-growing private companies, says: “When you see something like Science Creates, it’s encouraging because they have a specialism and it’s all they’re doing.” 

As a founder and a former Goldman Sachs banker, Thang Vo-Ta has seen venture capital from both sides. He is currently chief executive of femtech start-up Calla Lily Clinical Care. “The Americans are more likely to rely on the outliers, the unicorns that will lift the fund. In the UK they look more at overall spread and expect the return to be more shared out,” he says. 

Thang also sees a philosophical difference in approaches. “You’re looking for such a large multiple return that it has to be a movement that you’re investing in. Something ahead of its time or dramatically different. British VC firms are more thematic and want to see a bit more evidence at the risk of being a bit slower and later to the game.” 

Finally, there’s no sign that the charge that VCs don’t support women founders or those from ethnic minorities enough its likely to be dropped soon. The Treasury committee report cited the British Business Bank as saying that “for every £1 of equity investment in the UK in 2021, all-female founder teams received 2p”.

No wonder Giovanna Forte, chief executive of Forte Medical, which is crowdfunding to provide reliable urine specimen collection, has little time for VCs.

“They claim they’re going to support female-led businesses, femtech and health tech. Then they won’t even dignify your application with a reply. Or they say that they’re taking a risk. Well, we’ve already taken a risk. We’ve put our necks on the line to grow businesses from nothing,” she says.