Establishing a new UK finance escalator for innovative SMEs: the roles of the Enterprise Capital Funds and Angel Co-Investment Fund

Abstract

This paper examines UK public policy addressing the seed and early stage equity finance gap since the global financial crisis (GFC). Drawing on lessons learned from recent studies of UK and international government equity schemes, two contemporary models of government-backed equity finance are examined. The focus is on the Enterprise Capital Funds (ECFs) and the Angel Co-Investment Fund (ACF), the UK government's main schemes operating in the sub-£2m equity finance gap to address the capital requirements for developing the UK's young, potential high growth businesses. The paper highlights the shortcomings of traditional interim fund performance analysis and presents current demand and supply side evidence that establishes that these schemes are making attributable impacts on their portfolio businesses and the wider UK economy. It also demonstrates that they are playing important roles in the establishment of a new post-GFC UK finance escalator. However, whilst these schemes were found to be currently complementary and effective, their future roles within the UK's evolving post-GFC seed and early stage equity markets are also considered.

Keywords::

• government equity schemes
• Venture Capital
• potential high growth SMEs

Acknowledgements

The authors particularly thank the Department for Business Innovation and Skills (BIS) and British Business Bank for their contribution and funding of some of this research. Thanks also to the anonymous reviewers for their valuable contributions. The views of this article are solely those of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

^1. Breedon (2012) estimated the UK business finance gap at more than £84bn between 2012 and 2016.

^2. UK Coalition Government Chancellor of the Exchequer, George Osborne, Autumn Statement 3 December 2014.

^3. EU Joint European Resources for Micro and Medium Enterprises (JEREMIEs) operate funds offering up to the former EU state aid limit of £2m in the North West, Yorkshire and the Humber, North East regions and Wales.

^4. The two main investor tax breaks relate to the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). EIS qualifying SMEs have less than 250 employees and £15m in assets. SEIS qualifying firms have less than 25 employees and £200,000 in assets (Angel Capital 2014; Her Majesty's Revenue and Customs 2014).

^5. In 2011, UK intangible asset investment recovered to £137.5bn, whilst tangible asset investment was flat at £89.8bn (National Endowment for Science Technology and the Arts 2014).

^6. Computer automated telephone interview (CATI) process.

^7. There was an approximate 50/50 split between face-to-face and telephone interviews for both the supply-side and key informant interview survey elements.

^8. Entrepreneur Handbook (2014) www.entrepreneurhandbook.co.uk/business-accelerators/.

^9. In 2011, UK intangible asset investment recovered to £137.5bn, whilst tangible asset investment was flat at £89.8bn (National Endowment for Science Technology and the Arts 2014).

^10. Lead angels are required by the ACF to apply on behalf of their prospective portfolio companies to the scheme for funding and can apply on behalf of more than one company. The survey therefore included a couple of lead angels that had experienced both successful and unsuccessful applications.

^11. The schemes were formerly overseen on behalf of the UK government by Capital for Enterprise Ltd (CfEL), until 2013.

^12. BVCA (2014) membership data suggests that only 41 UK VC funds have been established since 2010 and that the majority of these operate in later stage investments.

^13. Includes two recently established funds not included in the study: the Catalyst Fund which tops up multiple private funds to enable fund raising closure; the IQ Capital Fund 2 announced on 1 December 2014.

^14. The ACF prohibits existing business angel investors in applicant companies from leading syndicates in scheme applications.

^15. Preqin is the alternative assets industry's leading source of global and European market information.

^16. ‘Series A’ refers to the first substantive VC investment at the early commercialisation stage.

^17. Formerly known as the Technology Strategy Board.

^18. Entrepreneur Handbook (2014) www.entrepreneurhandbook.co.uk/business-accelerators/.