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British Venture Capital Association

Supporting businesses at risk from the recession is more important than ever. Simon Walker, Chief Executive, British Venture Capital Association, explains how putting the emphasis on innovation will help

There can be no more important task in Britain right now than supporting those businesses whose survival is threatened by the recession. We have a chance to emerge from this recession strengthened if we re-calibrate our economy with a greater emphasis on innovation and technology.

The danger the recession presents to these re-focusing efforts is obvious. A severe contraction in revenue leading to a company collapse is the worst-case scenario, but even for the majority of companies which manage to survive the recession, difficult decisions and compromises will need to be made along the way.

Survival for many companies is likely to be reliant on reduced spending across the business. Cost-cutting does not occur in a vacuum, isolated from the realities on the ground. It can have significant and in some cases longterm consequences for a business, many of which are not considering whether to reduce spending, but in which areas and by how much.

Private equity and venture capital-backed businesses will be going through the same analysis and cost considerations as businesses not backed by the sector. Recessions do not discriminate in favour of certain business models; I am realistic about the challenges facing our sector and expect some companies may not survive a deep and prolonged downturn.

While acknowledging the gravity of the economic situation and the difficulties it presents, I do not want to sound defeatist. There are also real grounds for optimism and my confidence in private equity and venture capital is undiminished by recent events. I believe the fortunes of both the UK, as a centre for excellence in innovation, and the private-equity industry, as a backer of innovation, are inextricably bound.

Consider the evidence. A recent study looking over a 10 year period (1996-2006) showed that companies backed by venture capital invested more in R&D than non-venture- backed companies, grew exports 14% per year, compared with the national average of 4%, and increased employment by 6% compared to the national average of 1%. With successful innovation closely tied with research and development, it is encouraging to note that recent data collated by the BVCA showed that the majority of firms spend more than a third of their investment on R&D activities, including people and equipment.

If we are to fashion a revitalised economy based on new technologies, life sciences and renewable energy, we need venture capital to bring its strengths in these areas to bear. However, venture capital alone cannot shape the economy of tomorrow. As an industry we will need the support of a government that focuses resources in the right areas and ensures the optimal regulatory climate for venture capital. For some time, we have been calling on the government to provide a stable tax and regulatory environment and to look again at some of the incentive schemes which are not as effective as they could be in encouraging investment.

For example, the Enterprise Management Incentive is not open to non-executive directors and through the onerous requirements it places on the involvement of academic founders, discourages their involvement. The choice for many founders is either stay with the company or return to academia. This ultimatum sees the industry lose scores of founding academics who, with the appropriate incentives, could make a continuing and hugely important contribution to the development of young companies.

We also want to see small-company tax reliefs extended to venture capital-backed businesses. The current inability of venture capital-owned business to benefit from these reliefs inhibits growth and distorts the market. Alongside reform of the regulatory regime, I would like to see the government explore other avenues to assist venture capital. The BVCA, alongside its venture capital membership, has for some months been discussing with Lord Drayson and the Department of Innovation, Universities and Skills, the most appropriate method of assistance for this sector. We believe the government could act as a catalyst for investment into the sector at a time when many young companies are at a critical stage in their development.

The UK has a stable of innovative technology companies that, with the right capital support, could form the backbone of a new economy, as well as provide a fantastic investment opportunity. The great danger lies in starving these companies of the capital THAT would allow them to fulfill their potential to grow into the global names of tomorrow.

A key component of a new innovation economy will be the establishment of a mature cleantech and renewable energy sector. To educate investors and government in an effort to facilitate this investment, the BVCA has recently launched an Energy, Environment and Technology Group. Investment in renewable energy and clean technologies is essential not only for the environmental future of Britain, but also for its economic one.

Unless we move quickly to put in place the infrastructure which lays the foundation for a renewable energy economy, we risk losing out to those countries that have been quicker in building the platform upon which a selfsustaining renewable energy sector can grow. There is no good argument for waiting for economic recovery before taking these steps. Innovation-intensive businesses will be hugely important to our efforts in charting a path out of recession.

The recession and credit crunch have thrown up challenges which threaten innovation, but rather than dampen our efforts, these challenges can help focus minds and stimulate investment. The long-term nature of private equity and venture capital, and the alignment of interests which the fund model promotes, will ensure that capital and experience from the sector will play an integral role in building an economy with innovation at its heart.

The UK economy can emerge from the recession not merely fit for purpose, but as a model of economic regeneration and restructuring that can serve as an example to economies the world over. Venture capital and private equity drive innovation in many areas of the economy and with their capital, hands-on management skills and experience will be central to economic regeneration and thus play an integral role in the next phase of economic growth.

For more information, contact:
3 Clements Inn
WC2A 2A2
Tel: 0207 025 2950

Added the 31 August 2009 in category Innovation UK Vol5-1

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