Written evidence submitted by Form Ventures

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

  1. The important role of the British Business Bank must be protected and expanded. The BBB’s Enterprise Capital Fund programme has been crucial to the UK’s VC ecosystem, helping to close the equity gap in emerging manager funding and creating an on-ramp for differentiated, innovative VC funds. The economic case is also strong: every £1 of ECF funding crowds in an additional £2.80 from other investors, while the total value of paid-in ECF capital is approaching 2x. Meanwhile British Patient Capital is providing substantial and much needed LP capital for more established VC managers. Funding for the ECF programme should be guaranteed in the medium term, providing certainty to the UK VC ecosystem.
  2. Barriers to entry, even for the ECF, remain very high, disadvantaging smaller and more diverse fund managers and making it hard to scale - even with a track record. The ECF programme is primarily set up for emerging managers raising a fund of at least £30m, which leaves a significant gap below this. At present, first-time managers primarily succeed either due to significant personal or family wealth, or by spinning out of existing funds. Neither of these routes favour the differentiation necessary for UK VC to continue innovating, while fundraising itself often remains hugely network-driven, entrenching VC’s lack of diversity. We need more routes available for £1m, £5m and £10m funds, which would lower barriers to entry for more diverse fund managers and enable them to build a solid track record, while also encouraging greater innovation within the wider ecosystem.
  3. A wider, more diverse pool of LPs is critical for the UK’s domestic LP ecosystem to reach maturity. The growing focus on unlocking more institutional capital into UK VC (e.g. via pension funds) is welcome, including for example the proposal to reform the pensions charge cap. The UK lacks a strong base of domestic LPs who both invest in, and repeatedly back, UK venture funds and start-ups, with only 4% of LPs investing in more than one fund manager and only 17% providing repeat capital to the same fund manager (Collective Equity, 2021). This relative lack of ‘repeat buyers’, and thus competition among LPs, makes it harder for newer managers to raise long-term institutional LP capital and means the UK VC market is not on a particularly steady footing. In particular, the current downturn in the venture market risks seeing a pullback in the already thin LP ecosystem in the UK.
  4. The fund regulatory regime is a barrier to starting a VC business and should be overhauled. The regulation of funds is a mess of complexity, something which HMT has implicitly acknowledged via various consultations. It is almost impossible to set up even a very vanilla VC fund for less than £100,000 in legal fees, and substantial ongoing regulatory and fund administration costs, and most VC funds involve four or five legal entities. This is a major barrier to entry for new VC managers, and is an avoidable drag on the capital that could otherwise be invested in startups. In addition, the regulatory rules around promoting a fund limit prospective LPs to an ever-narrowing pool of ultra high net worth individuals, or professional/institutional LPs (of which there are very few). We have written before about the challenges of retail investors becoming LPs in funds. HMT, working with the FCA, should take a from-scratch review of how venture capital funds are regulated with a view to making the regime far more proportionate and effective.


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.


June 2022