NESTA welcomes initiative for early-stage venture capital support

29/06/2009

NESTA  has welcomed the Government's initiative to set up a £150 million Innovation Fund, which will leverage private capital ultimately creating a fund worth £1 billion.

Commenting on the Government's announcement, Jonathan Kestenbaum, NESTA's Chief Executive says 'We welcome today's announcement to support the next generation of high-tech growth businesses. These companies are on the verge of collapse owing to an absence of capital. This initiative needs to get capital urgently into the system and must not get snarled up in bureaucracy'.

NESTA has led calls for the Government to inject finance to support early stage high-tech businesses. It first raised concerns about the lack of funding support for high-tech companies in September last year.

In a report to be published today called 'Reshaping the UK Economy' which has been shared over recent weeks with the Government, NESTA has urged the Government to release at least £150 million which would catalyse private sector investment into struggling start-ups.

Research suggests that this would avoid many of the pitfalls of direct intervention that have blighted previous attempts at supporting high growth businesses.

Jonathan Kestenbaum continued 'Past interventions have failed because Governments have become too closely involved with direct investments. The most effective publicly-backed initiatives in the US, Israel and Canada have been commercially focused, and structured with a degree of separation between the Government and the investment vehicles. So a fund of funds, avoiding red tape is the right approach'.

The UK's early stage technology companies have been amongst the worst hit by the recession. As many as 30% of the UK's high tech start-ups faced liquidity problems in early 2009 and many existing venture funds have very little money remaining to invest.

This capital will provide a significant injection to the market which only managed to raise less than £200 million last year compared with over £600 million the year before, and which looks to raise an even lower amount this year.

NESTA's report recommends:

• £150 million of government commitment should be used to leverage £150 million from private investment creating a fund of funds of £300 million

• To attract private sector investors, the government should subordinate its investment position by putting a cap on its investment return, thereby boosting the anticipated return to private sector investor and agreeing to bear 'first losses'

• This fund would invest in two ways with one third of the fund (£100m) used to support existing venture capital backed companies and the remaining £200 million should be used to stimulate new ventures through the creation of six funds that will receive £30 million each. £100 million should be invested this year and the remainder over 4 years.

• In addition to the £30 million, each new fund will attract a further £10 million from private investors bringing the total capital of each fund to approximately £40 million and leveraging the government money by 40/60.

The funds should be directly targeted at investing in early-stage companies that are falling into the 'equity gap'. As such, it should make investments in companies seeking less than £500,000, with a target level for first investment of between £250,000 and £500,000.

Notes to Editors

For further information please contact the NESTA press office: Chani Hirsch on 020 7438 2601/07967 800 494 or Chani.Hirsch@nesta.org.uk and Jan Singleton on 020 7438 2606/ 07748 708 772 or Jan.Singleton@nesta.org.uk

About NESTA

NESTA is the National Endowment for Science, Technology and the Arts, an independent body which works to foster innovation in the UK. With the largest portfolio of pre-revenue high growth businesses in the country, NESTA is a leading authority on how to grow new ideas. www.nesta.org.uk