Widely reported today that the government has announced a new £1 billion venture capital fund.
“LONDON, Nov 27 (Reuters) – The government on Friday pledged 150 million pounds ($246 million) to a new venture capital fund, planned as Europe’s largest, as it looks to kick start British technology investment and the ailing business sector.” Reuters
This is excellent news as it means that the government has now launched four such funds this year so there should be £4billion floating around for early stage ventures. Except life isn’t quite like that is it?
Of course the four funds are simply re announcements of the same idea which was initially launched at the beginning of the year to help innovation based companies see their way through the recession. In fact, it is now hoped that the fund of funds (this will be a fund that invests in other venture funds) will not have a manager appointed until next month. The manager can then start deciding where to invest the fund and then do due diligence on those funds before transferring money to them so they can invest, do due diligence on the potential investments that they want to make and then, sometime after midnight on May 10th next year (by total coincidence the latest possible date for a general election), firms may see the money. (Or there may be some more announcements about the fund).
How this money is supposed to be spent is as yet unclear. Many of the largest, top quartile, (most successful) funds – already have money. Others are struggling to raise funds, but their past track record, both in terms of performance and in terms of investing in innovation are less clear – if they cannot raise money from other limited partners, why should they get some government cash – the fund after all is supposed to be a fully commercial fund of funds? Many of the smaller funds, including many of the regional venture capital funds, have ‘interesting’ returns and have found it impossible to raise meaningful money outside of the public sector.
It may well be that the money will be raised and will be used to do something imaginative like backing successful angels and entrepreneurs through side-car funds or some similar mechanism. There are some interesting possibilities here that could make sure that the money is spent to ‘kick start British Technology investment’. But putting it into established funds, particularly ones without decent track records, will just create fund managers who are doing it for the management fees, won’t take the kind of risks that are needed and don’t have the experience to make success happen. Oh and it could create a false market.
The one thing that I have seen time and time again in the past ten years, is the most successful companies typically have investors behind them that have had lots of experience running their own successful companies. ‘Professional’ venture fund managers, can rarely compete with that experience. I would love to see some imagination in action here.