VCM0038

Written evidence submitted by Lakestar

 

  1. Executive summary

 

        Lakestar is one of Europe’s leading venture capital firms, investing with a long term view across all stages from seed to growth. It invests in technology companies led by exceptional entrepreneurs to support, nurture and grow generation-defining businesses including Spotify, Revolut and Blockchain. Over more than ten years, Lakestar has raised over £1.5bn and invested in more than 130 companies, which have collectively created over 17,000 jobs. Lakestar is one of the few pan-European venture capital firms, with offices across London, Zurich and Berlin, and has invested in and helped to scale some of the most iconic technology companies in the UK and Europe.

 

        On June 6 2022 Lakestar published The UK Financing Gap report.  The report looks at the role of venture financing in the UK and finds that the UK is a key market due to its world-class universities, levels of innovation, entrepreneurs, and strong institutions. The research also calculates the size of the current UK financing gap (£1.5trn over the next two decades), and assesses the impact that closing this gap will have on business growth, job creation and spurring UK GDP growth (link).

 

        The findings of Lakestar’s The UK Financing Gap report are set out below in response to three questions asked by the Treasury Select Committee inquiry into the venture capital market: (1) what are the threats facing the UK venture capital market; (2) what are the opportunities facing the UK venture capital market; and (3) what are the merits of policy proposals that strengthen the venture capital industry, such as opening new pools of capital from pension funds.

 

        Lakestar believes that the Treasury Select Committee should focus on four areas in its inquiry: education, asset allocation, regulation and access. Change is required in each to unlock more capital in order to close the UK’s £1.5trn financing gap.

 

  1. What are the threats facing the UK venture capital market?

 

        The threats facing the UK venture capital market are the same threats the UK economy faces as a whole. These threats include: (1) the UK falling behind international peers in key industries and losing competitive advantage. (2) Failure to commercialise, invest in and scale UK research, technology, and businesses in the UK. Consequently, overseas investors exploit the opportunity and businesses move overseas. (3) Fewer globally competitive businesses being scaled impacting on UK GDP growth. (4) Lower investment resulting in fewer new jobs and less new wealth created for the UK. (5) The UK losing digital sovereignty and governance over sectors of strategic significance. This section outlines in more detail why and how these threats exist, based on Lakestar’s recent research.

 

        Lakestar’s research demonstrates how the UK is now at risk of falling behind. Since 2000, the UK has given away key sectors such as financial services, energy and ICT. The financial crisis brought the UK business model to a head which Brexit threw into sharp relief, while software, technology, and sustainable energy companies gained importance. Hong Kong and Singapore have almost caught up with London as attractive financial centres, with Dubai making great strides. None of today's top ten UK companies was founded or truly scaled up in the last 20 years. This is very different to the dynamism of the US where seven of the ten were created in the last two decades.

 

        Growth companies are fundamentally different today and financing is at much lower levels compared to GDP. In the post-war environment, an average company would have taken decades to scale whereas today’s innovators are seeing much more rapid growth through fast-paced technological leaps. Scaling now happens within 5-10 years and, contrary to past innovations, their focus is now on technology with a high share of intangible assets that traditional banks are unable to finance.

 

        The next wave of economic growth cannot replicate the winning formula of the past. New sources of growth are required. While the UK has the highest number of unicorns in Europe, there is a substantial financing gap that hinders the UK’s ability to commercialise first-class innovation, scale up ventures, and build globally competitive businesses.

 

        Consequently, the world’s most valuable private tech companies are mostly outside of the UK and Europe. When UK unicorns need to raise financing to scale globally they almost always turn to foreign investors. So UK and European ‘superstar companies’ are largely US-governed with an increasing dependence on US infrastructure. This results in the UK losing digital sovereignty and governance over technology, key businesses and important sectors.

 

  1. What are the opportunities facing the UK venture capital market?

 

        Lakestar’s research into the UK financing gap also highlights the significant opportunities that increased venture financing offers to the UK economy. These opportunities include: (1) the ability to scale up 10,000 growth companies, (2) triple UK GDP growth from 1% to 3%, (3) generate 3m new jobs, (4) add £5-£7trn of value to the UK economy, and (5) protect UK digital sovereignty and governance over sectors of strategic significance. This section outlines in more detail how these opportunities can be capitalised on, based on Lakestar’s recent research.

 

        The research shows that by investing £75bn of private sector capital annually by 2040 (£1.5trn in total) into new and emerging industries from digital to biotech, space to decarbonisation, the UK can unlock new sources of growth, and avoid the risk of falling behind in key industries.

 

        The report finds that while the UK is one of the world’s leading economies, and underwent an economic transformation in the 1980s enabled by deregulation and privatisation, the next wave of economic growth cannot replicate the formula of the past. This approach financed new growth companies in the past, but cannot be replicated again to help us scale up another generation of businesses.

 

        New sources of growth are required, and the report calculates that by closing the UK financing gap, the UK would be able to scale up 10,000 new growth businesses by 2040. In turn, this would create £5-7trn of value and triple GDP growth to 2-3%. 

 

        While the UK has the highest number of unicorns, none of today’s top ten UK companies were founded or scaled in the last 20 years. Whereas in the US, seven of the top ten companies were created in the last 20 years. Plugging the financing gap facing the UK by attracting and unlocking new private capital investment is essential for making sure new British businesses scale into globally competitive companies.

 

        Lakestar believes a new wave of private capital must be unlocked not only to scale the companies of the future, but also to make sure the UK retains governance and control over strategic companies, assets and industries within the UK.

 

  1. What are the merits of policy proposals that strengthen the venture capital industry, such as opening new pools of capital from pension funds?

 

        The UK has a strong start-up ecosystem, supported by strong institutions and cutting edge research at world-leading universities. To close the UK financing gap, four key areas need to be explored.

 

        Education: policymakers, government, investors and the public need to realise the size of the potential and benefits of unlocking private capital.

 

        Asset allocation: assets should be shifted from public to private allowing institutional investors in pension funds and insurance firms to benefit from the high growth rates seen in venture capital. In the US, pensioners are already benefiting from investing in high growth industries. In the UK, this is not the case. A retired teacher from Maryland is benefiting from a larger pension pot because they can invest in innovative UK businesses, but a retired teacher from Middlesbrough or Margate is not.

 

        Regulation: regulatory hurdles should be removed to pave the way for new asset allocation.

 

        Access: greater access to venture capital can be secured. This could include allowing lower investment thresholds or creating new models for investment.

 

  1. References 

 

        For more information about Lakestar and its investment portfolio, visit Lakestar’s website (link).

 

        For more information about The UK Financing Gap research, please read the full report (link).

 

 

June 2022

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