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A boost for Britain

As one of the largest-ever technology funds in Europe, the Innovation Investment Fund is giving the UK's venture capital industry a shot in the arm

Forming part of the government?s strategy for Building Britain?s Future, the UK Innovation Investment Fund was set up back in June to invest in technology-based businesses with high-growth potential. The new fund will focus on investing in growing small businesses, start-ups and spin-outs, in digital and life sciences, clean technology and advanced manufacturing.

The Department for Business, Innovation and Skills, along with the Department of Energy and Climate Change and the Department of Health, will invest £150m alongside private-sector investment on an equal basis known as pari-passu.

It is the government?s belief that this could leverage enough private investment to build a fund of up to £1bn over the next 10 years. Announcing the fund, Prime Minister Gordon Brown said: ?This fund will help build Britain?s future by investing in key sectors. It will provide crucial support for our most promising start-ups and existing small companies just when they need it most.

Venture capital finance is the lifeblood of innovation and crucial to ensuring the commercialisation of the discoveries coming out of our research base. The fund will boost future UK competitiveness.?

Fund Structure

A Fund of Funds structure proved most attractive to institutional investors, as it creates a portfolio approach that spreads the investment risk across a number of different technology fund management teams. The government will seek to appoint an experienced Fund of Funds manager with a proven track record in technology investment. They will be regulated by the Financial Services Authority (FSA), and will require the necessary authorisations to operate in the UK.

The Fund of Funds approach also enables the government to support the growth of the market without distorting or competing with existing fund managers and ensures that the fund complements existing public-sector interventions such as Enterprise Capital Funds, RDA European Development VC Funds as well as tax measures.

This is not a novel approach and builds upon the previous UK High Technology Fund structure that was announced in 1998. This was £125m ?fund of funds? and invested in a number of specialised technology funds such as Advent, Amadeus, MTI and Scottish Equity Partners. The government provided an investment of £20m and the Fund Manager was able to leverage an additional £105m from the European Investment Fund, UK pension funds and a French bank.

The UK Innovation Investment Fund will be one of the largest ever technology funds in Europe. Lord Mandelson, Secretary of State for Business, says: ?In our New Industry New Jobs strategy we identified access to venture capital as one of the critical factors in developing innovative new companies in Britain. The UK Innovation Investment Fund will be a shot in the arm for the British venture capital industry. It is also a challenge to UK venture capitalists to follow the government?s lead in backing British entrepreneurs in building exciting new companies, investing in new technologies and creating jobs.?

Science and Innovation Minister Lord Drayson, who has been spearheading the fund, adds: We must safeguard the government?s record investment in the science and research base over the past decade. We cannot afford to lose out on the wealth this investment can yield and we will need this wealth to continue our sustained investment in research.?

The Fund has also been welcomed by Simon Walker, CEO of the British Venture Capital Association (BVCA), who says: ?The BVCA is immensely encouraged by this venture-capital initiative. The model that has been adopted is one which we have championed in our work with the government leading up to this announcement. The UK Innovation Investment Fund offers an exciting economic incentive for more than a thousand young venture-backed companies and the ideas and jobs which they represent.?

The UK Innovation Investment Fund will operate on a Fund of Funds structure, which means it will not invest directly in companies, but rather invest in a small number of specialist technology funds that have the expertise and track record to invest directly in companies. The fund will provide a cost-effective solution that provides a market return to both private-sector investors and HM government.

The Capital for Enterprise Ltd will release the Request for Proposals (RFP) for prospective Fund of Fund managers for the UK IIF. The RFP is a key milestone in delivering the fund as it sets out the parameters for the fund and details the information expected from prospective Fund of Fund managers.

The RFP will ask potential Fund Managers to target the sectors of the future, such as life sciences, low carbon, digital and advanced manufacturing.

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Facts and figures

  • There are about 1,093 venture capital-backed technology companies in the UK employing over 40,000 highly skilled people.
  • Venture capital-backed companies significantly out perform other companies.
  • UK employment increased by 6% compared to a national average of 1%.
  • Sales grew by 12% pa compared to 5% for FTSE mid-250 companies.
  • Increased R&D expenditure of 12% compared to 1% pa.
  • Value of exports from the UK increased by 14% compared with 4% nationally.
  • 69% of venture-backed companies introduced new products or services.
  • Household names such as Google, Vodafone, eBay, SKYPE, Amazon, Microsoft and Apple were backed at an early stage by venture capital.

Added the 03 October 2009 in category Innovation UK Vol5-2

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