Form Ventures is an early stage, UK based VC fund investing in start-ups building in regulated markets (e.g. fintech, health, energy) and markets where public policy is just taking shape (e.g. alternative proteins, online safety, carbon offsetting). Backed by the British Business Bank’s Enterprise Capital Funds (ECF) programme, we are investing out of a £30m Fund II. Form is a relatively new business, so we have first-hand and recent experience of starting a fund management business from scratch. Much of our response speaks to this experience and our suggestions on how the many barriers to entry can be lowered for prospective new market entrants.
The UK venture ecosystem has grown significantly over the last decade, but there are still substantial barriers to starting a new VC business. In particular, the UK VC market still lacks a mature, deep LP ecosystem (Limited Partner, those who invest in VC funds). We need to not only to establish a stronger base of institutional LPs committed to repeatedly backing UK venture funds, but also to improve innovation and diversity among VC fund managers.
In the US, which remains well ahead of the UK, significant innovation has come from improved on-ramps into VC for smaller, highly-differentiated, and more diverse fund managers. This has improved competition, standards and accountability, making private capital markets more effective and better meeting start-ups’ needs. But equivalent routes in the UK are few and far between. The British Business Bank, for its part, plays an outsized role both in providing its own capital and in de-risking other LPs’ capital via its extensive, market-leading diligence process and funding structures. But gaps remain, both for smaller funds to get established and for ECF-funded managers to scale beyond the programme.
Priorities for establishing a more diverse, sustainable venture ecosystem
What success would look like
Venture capital is a specific type of financing that can play a crucial role in enabling and empowering the UK’s leading tech sector. A well-developed VC ecosystem in the UK would:
● Ensure there is a sufficiently deep and differentiated pool of capital to finance all high potential tech companies, regardless of sector. For example, biotech financing requires a different level of financing, expertise and support compared to consumer tech. A diverse mix of well-capitalised investors, targeting different sectors and business models, would ensure the widest range of companies could access VC funding.
● Enable people from all types of background are supported to build high-growth businesses in the UK. Entrepreneurship is critical to the UK economy, but brings significant personal and financial risks. A healthy, diverse venture capital market in the UK would see anyone, no matter their personal circumstances or geographical location, able to take on these risks and build large businesses.
● Be comprised of a rich, talented and diverse pool of domestic investors so that UK VC becomes more diverse and remains internationally competitive. Building on the points set out above, a mature UK VC ecosystem would see those investors with the best strategies raise capital – not those who happen to have access to capital or pre-existing networks. There would be few barriers to starting a VC fund beyond merit.
● Ensure that both UK citizens (including retail investors) and taxpayers more generally benefit financially from a high-performing VC market, by providing LP capital that generates direct returns, as well as creating highly skilled jobs and increasing UK tax receipts.