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Venture capital needs to venture further, says Treasury Committee

24 July 2023

The Treasury Committee today criticises the venture capital industry’s unacceptable failure to invest in firms outside London and the South East or in businesses led by women and ethnic minorities as it calls for rapid change from Government and the sector.

Venture capital is a form of investment in early-stage companies, typically in return for a share of the business. It is a risky but crucial form of investment for innovative companies with high growth potential. The sector receives Government support through tax reliefs designed to encourage investment in the UK.

However, businesses with all-female founders received just two per cent of all venture capital funding in 2021, while less than two per cent went to black and ethnic minority-led businesses.

In a new report, the cross-party Committee of MPs criticises these unacceptable diversity statistics and calls for rapid change from Government and the industry. Improvements in transparency and diversity data are urgently required.

The Committee highlights the importance of globally competitive tax reliefs designed to promote investment in UK firms. Despite previous calls from the Committee, the Treasury has not provided clarity on when venture capital tax reliefs with expiry dates will be extended. The Government should extend the schemes at the earliest opportunity to provide more certainty to founders and investors.

The Treasury should make collecting and publishing the diversity statistics of venture capital firms and their investments a requirement for eligibility.

The Committee also finds that venture capital investment is unacceptably concentrated in London and the South East.

Eighty per cent of venture capital investment flows to the “Golden Triangle” of London, Oxford and Cambridge, with London alone receiving almost half of all equity deals despite accounting for 19 per cent of all small businesses. Given firms elsewhere in the UK can take longer to become established, the maximum company age limits of seven and 10 years written into the tax reliefs currently hold back economic growth and innovation and should be extended.

The MPs encourage all venture capital firms to sign up to the Women in Finance Charter and Investing in Women Code, both of which require the publication of gender and diversity statistics. Organisations should comply or explain why they are not as a condition of receiving tax relief support.

The Committee also recommends the Government and British Business Bank consult on creating a fund with the specific purpose of promoting gender diversity in venture capital allocation.

Chair comment

Commenting on the report, Harriett Baldwin MP, Chair of the Treasury Committee, said:

“The venture capital industry plays a vital role in supporting the growth of the nation’s small businesses, but statistics which show just two pence in every pound of investment goes to all-women led businesses demonstrate a shocking dereliction of duty given the level of Government support for the industry through tax reliefs.

“In the twenty-first century, it shouldn’t come as a surprise to investors that women and those from ethnic minority backgrounds can start successful businesses. Given public funds play a key role in the success of the UK’s venture capital sector, more must be done. Firms must be compelled to reveal their diversity data when applying to these tax reliefs in an effort to increase transparency and drive change. Government incentives could also be tweaked to encourage more regional venture capital investment.

“As a Committee, we will continue to keep a close eye on these important topics and will be investigating small business finance and sexism in the City in two new inquiries launched recently.”

Further information

Image credit: Tyler Allicock / UK Parliament