Policy 11: Encourage the British Business Bank to provide more risk capital
In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.
The government helps startups to grow and scale by providing them with patient capital through the British Business Bank (BBB). This is structurally achieved through two “fund of funds” schemes - British Patient Capital (BPC) and Enterprise Capital Funds (ECF) - which deploy capital to various venture capitalists (VCs) depending on their fund size. In theory this structure should spread capital across a broad range of investors and, therefore, a wide range of innovative companies.
Although the barriers to entry are meant to be lower for VCs applying for ECF access, in practice there is little difference in the functionality of the ECF to BPC. The BPC focuses exclusively on well-established VC managers who have already been successful in raising capital without public help. Whereas the ECF currently writes marginally smaller cheques into marginally less established VC managers operating slightly smaller funds. Since both primarily support funds larger than £30m, neither are helping to nurture new emerging managers or investment diversification.
For the ECF to fulfill its strategic objectives, it must be reformed to become more ambitious in its policy goals, improving diversity and its added value to the VC ecosystem. To do so there needs to be more of a focus on backing genuine emerging fund managers. The BBB should nurture smaller funds of £5m+ through the ECF, with more established fund managers providing mentoring and training programmes for newer fund managers in exchange for their BPC support. These measures would help diversify the VC ecosystem, which would in turn improve the investment pool for startups.
In order for the BBB to provide effective long-term patient capital, it is also vital that it is given the latitude to be genuinely risk taking. This will require the BBB remaining fairly independent from central government to ensure that long-term investment horizons are not subject to political whim and that success is not deemed by an artificial required rate of return. This will help to ensure that the BBB can become a world class state-backed funding vehicle.