Supplementary memorandum by the EEF
VENTURE CAPITAL
The EEF recognises the benefits of venture capital
as an asset class and its importance as a source of finance for
small and growing businesses. Although the UK's venture capital
market is the most developed in Europe, there is some way to go
before it matches US levels of venture capital financing. As a
percentage of GDP, venture capital investment in the UK is around
half that in the US, furthermore, a greater number of UK investments
are directed at later-stage financing, resulting in what has become
known as the "equity gap". Conversely, a greater proportion
of US venture capital is invested in the creation and early stages
of business development with tangible benefits. Venture capital,
business angels and corporate venturing all play a more significant
role in the creation and early stage development of business in
the US than the UK.
Looking at investment by sector in the UK, there
have been significant swings between sectors over the past decade.
Only a few years ago the engineering sector (FTSE classification)
accounted for over 10 per cent of venture capital investments
and 15 per cent of investee companies. In 2000, the figures were
2 per cent and 5 per cent respectively. [2]The
trend is similar for manufacturing, with the exception of aerospace
and defence, all sectors of manufacturing have lost out in recent
years in terms of the amount invested and the number of companies
receiving venture capital investment. However, it is worth noting
that the most recent figures available are a reflection of the
internet and technology boom of 2000.
Venture capital has formed an important plank
of the UK government's and the European Commission's enterprise
policy, and a particular focus has been on eliminating the equity
gap. A number of measures, including direct funding for Regional
Venture Capital Funds and tax breaks for private investors, have
focussed on increasing the supply of venture capital from private
and institutional investors. However, much less has been done
to increase the take up of venture capital by informing companies
of its benefits and availability. For example, some companies
believe that the manufacturing sector is priced out of the market,
as the returns venture capitalists require on investments are
not achievable, while others are not prepared to hand over a share
of their business in return for capital.
A key policy committee at the EEF recently discussed
the relevance of venture capital to manufacturing and engineering
industries. It concluded that in the current climate it is not
a priority for the EEF at present and there are other, more pressing,
difficulties facing the sector. However, we will remain abreast
of any further tax or regulatory changes in this area and their
impact in member companies.
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