Written evidence submitted by Innovate Finance



        Innovate Finance responds on behalf of the UK FinTech sector, where we represent venture capital-backed FinTech companies and venture capital funds

        The UK venture capital market for FinTech had a record year in 2021 and was #2 globally, but this is not a locked-in position

        There are economic headwinds and market gaps that impact the sector as well as continued international competition for Founders and for exit IPOs

        The British Business Bank (BBB) should be empowered further to help the sector to deliver Levelling-up objectives

        There are some clear policy actions needed from Government to improve or extend existing tax-based retail investment schemes (SEIS, EIS, VCTs, EMI), which are vital to early-stage investment within the ecosystem

        Regulation covering equity crowdfunding and ICOs risks stifling these growing, innovation-driven sources of venture capital funding

        There is strong support for pension funds to be enabled to invest more in venture capital

        There is widespread praise for the UK universities, both for the talent produced and the commercial opportunities for venture capital funding, but also concern expressed for the future if the UK is not participating in the Horizon Europe programme


About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Our mission is to accelerate the UK’s leading role in the financial services sector by directly supporting the next generation of technology-led innovators. Innovate Finance has over 200 members encompassing seed stage start-ups, growth stage businesses, late-stage venture capital-backed companies, venture capital firms, global financial institutions, professional services firms, and global FinTech hubs.


Many of our members are financed by venture capital funding and Fintech is one of the largest destinations for venture capital investment in the UK. Therefore the venture capital market is of great relevance to our members, some of whom have provided their views to Innovate Finance in preparing this response.


Response to questions

  1. The current state of the venture capital industry in the United Kingdom, including opportunities and threats, such as the availability of domestic capital to allow firms to scale up in the UK.
    1. Investment in UK FinTech companies increased by 217% to $11.6bn in 2021 versus 2020. The UK ranked No.2 globally behind the US and was equivalent in size to the next 6 European countries. Further details can be found in Innovate Finance’s recent Investment Report. Preliminary data for the first half of 2022 indicates that investment levels have been maintained versus the first half of 2021 however there are fewer but larger deals compared to last year. Anecdotally some members have said that as economic conditions worsen there is likely to be a short term impact on investment deployment
    2. Our members commented that London is the leading hub for start-ups in Europe. However, some members commented that the UK and Europe as a whole lag behind the US for growth stage funding, and data supports this, showing that later stage, larger deals are often led/funded by US venture capital funds[1]
    3. Views from our members regarding availability of earlier stage capital is mixed. Some believe there is adequate capital available for early stage ventures whereas one member commented that demand for Seed and Series A capital far outstrips supply. One difficulty in assessing this is that there is no reliable method of recording early stage proposals that fail to get funding. However the data on funded businesses does reveal capital gaps by implication: for example female founders received only 8% of the total funding in 2021. Either there are very few female founders or, more likely, there are many more female founders that are not receiving venture capital funding and this failure to obtain funding isn’t explicitly recorded anywhere.
    4. In some instances the actions and incentives provided by the French Government (eg visa programme[2]) were cited as being very successful at attracting FinTech businesses, reinforcing the competition that the UK faces internationally
    5. We have received feedback that there is competition from stock exchanges for exit IPOs from the rest of Europe (eg Amsterdam) and from the US (NASDAQ)


  1. The level of co-operation/integration between start-ups and established industry
    1. Our members commented that co-operation varies greatly by industry and country. Big corporates are increasingly willing to collaborate with start-ups although we received some feedback that insurers are more open to adopting technology than banks


  1. The operation and effectiveness of the current tax incentives (such as the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs)) in the venture capital market, including any options for change.

Our members are very supportive of SEIS, EIS, VCT and EMI and acknowledge that these schemes play an important role in attracting founders to the UK and attracting investors to start-ups. For example, VCTs invested £1.2bn in SMEs during the Covid pandemic, and EIS has raised over £30bn for SMEs since inception. VCTs are also an evergreen source of venture capital funding whereby funds received from an exit are reinvested into new businesses.  The importance of these schemes was also set out clearly in the Kalifa Review

    1. SEIS cap – we believe this is an effective incentivisation mechanism for founders. However the £150k per company limit now looks too low and is regarded as insufficient for a founder to prove out the initial business case before raising seed funding. Our recommendation is to increase this to £300k per company
    2. Scheme extensions - EIS and VCTs have been successful schemes for raising significant amounts of early stage venture capital. However, there is a sunset clause in these schemes and without Government action these schemes will cease to provide tax relief to investors for new shares issued after April 2025. If these schemes aren’t extended there will be a significant hole in the UK venture capital ecosystem at the entry point which will have enduring consequences for the whole market. Our recommendation is that the Government states clear policy objectives for the extension of these schemes as soon as possible to avoid potential market disruption arising from uncertainty of continuation as we get closer to 2025
    3. EIS permitted activities - For FinTech platforms originating loans or insurance risk, they are unable to hold these on their balance sheet (to act as principal) if they were funded with EIS capital in the preceding 3 years. This is because lending and insurance are not permitted activities under the EIS rules, whereas broking is a permitted activity. This is a material drawback in building a lending or insurance business using EIS funding because most early stage companies will have raised funding in any 3 year period, and that funding will likely have included EIS investors. In effect it means the business must operate only as a broker and cannot take advantage of the profit on the risks it is originating, and this holds back the growth of the business. This is also relevant given the decline in P2P lending due to the continued tightening of Financial Promotion rules by the FCA which is causing platforms to leave the P2P industry. Our recommendation is that EIS rules are changed to permit lending and insurance risk as permitted activities without the 3 year look-back restriction. This was also one of the recommendations of the Kalifa Review
    4. EMI excluded activities – the EMI rules also exclude, inter alia, lending and insurance as permitted activities. For the same reasons as above for EIS, our recommendation is that EIS rules are changed to permit lending and insurance activities


  1. The operation and effectiveness of the regulatory regime(s) concerning venture capital
    1. Equity crowdfunding - the FCA’s current proposals for Financial Promotions (CP 22/2) will, if enacted, materially reduce the number of Retail investors who participate through equity crowdfunding platforms. To date platforms such as Seedrs and Crowdcube have funded over £2 billion of early stage venture capital and this is at risk from the FCA’s continued tightening of the rules. It also reduces the likelihood of new market entrants. Our recommendation is that HM Treasury and the FCA coordinate to create a market environment that both protects Retail investors adequately and maximises the opportunity for Retail venture capital funding
    2. Initial Coin Offerings (ICOs) - ICOs are an emerging source of early stage venture capital and their future potential is unknown. They can offer Retail investors fractional exposure to start-ups as well as liquidity compared to traditional venture capital. 3rd party data indicates that the UK ranks 5th globally by funds raised, with 514 companies having raised c.$1.5bn, an average of $2.9m each[3], illustrating the potential of this market. However regulatory reforms for the cryptoassets sector, including CP 22/2[4], will significantly reduce the opportunity for early stage companies to fund their business plan via an ICO in the UK. If other countries provide more attractive rules for ICOs than the UK then there is a risk that start-ups looking to access the ICO market will locate in alternative jurisdictions. We do see benefit in introducing listing rules for ICOs, to establish requirements on disclosure and information for investors at ICO which would, if proportionate and appropriate, provide greater consistency and transparency in the market and ensure a more level playing field for those exchanges who already apply their own screening for crypto asset listings as well as providing protection for investors. Our recommendation is that regulations for crypto assets should avoid stifling the ICO market before it has had the opportunity to develop and that some regulation on listing information would help strengthen confidence, fair competition and transparency in the market.


  1. The role of other key bodies, such as the British Business Bank and the programmes which it oversees (including the Future Fund and British Patient Capital), and the Advanced Research and Invention Agency, and how they can support the venture capital market.
    1. We regard the British Business Bank as pivotal to delivering finance to SMEs, both equity and debt. The Future Fund was accessed by some of our members who raised capital using the programme and some of our VC members whose portfolio companies accessed the programme.
    2. We believe where there are gaps in the venture capital ecosystem the BBB should target providing capital to help fill those gaps. However a different approach may be required to reach under-represented founders, because the venture capital funds claim they can fund all good proposals. This suggests that either (1) good proposals from diverse founders aren’t reaching the venture capital funds, or (2) they are reaching the funds but their risk is considered too high for the funds’ investment mandates. The BBB providing capital to a venture capital fund pari passu with other fund investors doesn’t solve either of these issues. Therefore the BBB should consider how best to deploy capital to meet its objectives.


  1. The merits of policy proposals for strengthening the venture capital industry in the United Kingdom, such as:
    1. Opening new pools of capital for venture capital investment, such as pension funds, retail products (e.g. investment through ISAs)
      1. Our members support initiatives to open up pension funds to more venture capital investment.
    2. Generating home-grown talent through the education system
      1. For illustration, one member commented that the majority of their science team did their PhDs at UK universities and that UK universities are an invaluable source of talent. They commented further that the UK not being part of the Horizon Europe programme is a major concern and that the Government should look to restore the UK’s position in this programme
    3. Attracting international talent through the visa system
      1. This is acknowledged as very important in allowing venture capital-backed businesses to hire talent from overseas, and is viewed as a competitive advantage versus other countries
    4. Any other possible Government or public sector intervention
      1. No response


  1. The effectiveness of any other government or public sector intervention in the venture capital industry.
    1. No response


  1. The effectiveness of government policy around venture capital in meeting wider government objectives (for example: around “levelling-up” and tackling regional inequality, the aim for the UK to be a science and technology “superpower”, net zero).
    1. Members have cited the UK’s universities as a very important part of the UK venture capital system. The universities produce an important supply of companies, projects and products that require venture capital funding and which the venture capital industry is keen to fund.


June 2022

[1] See Kalifa Review of UK FinTech February 2021




[4] See Innovate Finance response to CP 22/2