Written evidence submitted by BVCA


Description automatically generatedWhat is Venture Capital and Why Does It Matter?

Venture capital (VC) is investing in a better future for the UK. It powers the new economy, helps reshape society and enables companies to innovate and flourish. It fosters innovation, creates jobs, drives growth and generates long-term value for pension savers, entrepreneurs, universities and communities in all regions and nations of the UK.

Investing in early stage, innovative businesses with high growth potential (businesses which can grow at rates of more than 100% a year), VC provides both funding and operational expertise for entrepreneurs and start-up companies – typically technology companies but also companies that require long term R&D.

VC in the UK also plays a vital role in developing businesses which will help solve society’s biggest issues – and ensuring these are based in the UK. For example, today, UK VCs are investing in sustainable aviation fuel investments in North East England, hydrogen batteries in South East England and biodegradable alternatives to plastic in Cambridge. London also has the most "purpose-driven" tech companies, those that aim to overcome social and environmental challenges, with over 430 companies and is second place in terms of capital invested in these companies.[1]

The UK is the second largest hub for VC investment outside of the USA[2] and the industry has seen exponential growth in recent years. This is an important benefit to the UK – by 2020, more than 21,000 companies were backed by venture capital[3], 96% of those were start-ups employing 50 people or less[4]. However, we know that European states are keen to tempt VCs in the UK to the continent, with President Macron wooing VC’s at the Elysée Palace and floating attractive regulatory and tax benefits.

The size of the prize to the economy can be quantified in recent industry statistics. In 2019, BVCA members raised £2.4bn, treble the £770m figure in 2017[5]. In 2021, despite the uncertainty caused by the pandemic, the VC industry invested a record high of £20bn/$27bn (increasing from £11bn/$15bn in 2020) into UK tech[6], whilst between January – March 2022 alone VC investment came close to $7bn (approximately £5bn), more than 30% of total European investment[7]. VC investment also leads to increased productivity, with research showing that the typical angel and VC-backed business is also 60% more productive per worker than the UK private sector average, contributing £88,100 per annum to UK GDP compared to £54,700 in 2019.[8]

Powering Success in the UK

VCs have already supported some of the UKs most successful start-ups. From Skyscanner, which revolutionised flight bookings by offering real time price comparison across airlines, to Revolut and Wise which have changed the way we bank and transfer money. Beyond the household names, VCs have also backed the technology in your mobile phone which turns text to voice for GPS mapping, the company which made the UK a leader in sequencing Covid variants, and the company that is supplying Nike with their sustainable leather.

And the impact of this success is not simply felt by the companies themselves or their regional or national base. This can be measured in the size of funding rounds, which have also grown rapidly. In 2021, the UK saw 68 “mega rounds” of $100m plus, almost five times more than the 14 rounds of $100m plus in 2017[9].

This is not only happening in London and the South East of England. VCs are great spotters of talent – where it is located, does not matter. Skyscanner was a great Scottish success story, backed by a Scottish VC (Scottish Equity Partners). Cambridge-based IQ Capital is backing Belfast-based Neurovalens who are transforming the treatment for diabetes and other metabolic and neurological diseases – in a non-invasive way without the need for drugs. And Par Equity and Mercia (both major regional VCs) back Nova Pangaea in Redcar in England’s North East, who have created a sustainable aviation fuel with rapid scale-up plans.

And the success is not merely for the companies and their regional or national base. Investors in VC funds are often pension funds or insurance companies, alongside sovereign wealth funds and family offices. Today, defined benefit (DB) pension holders will directly benefit from the success of UK start-ups, via the investment of their pension pots in VC funds. This is not currently possible for the majority of the country, overwhelmingly younger generations, who are in defined contribution (DC) pension schemes. By backing the current movement to enable DC pension schemes to invest into VC, we will ensure younger generations have better pensions, and are supporting the growth of innovative companies in the UK.

The examples above represent just a handful of VC-backed companies, sectors and opportunities, and by

backing the continued growth of venture capital across all corners of the UK, policymakers will be able to accelerate the wider public policy agenda, in particular:

    1. A more balanced and diversified UK economy
    2. Sustained UK economic growth
    3. International competitiveness
    4. Transforming the UK into a science superpower
    5. Decarbonising the UK economy
    6. Creating fairer, more accessible, and more sustainable pension funds

What do we need to grow VCs and VC investment in the UK?

To deliver on the opportunities for the UK provided by VCs and VC investment, we are asking the Treasury Select Committee to consider four core areas of policy and regulation – accessing and unlocking new capital; innovation and intellectual capital; talent and people; tax and regulation – as follows:


  1. Accessing and unlocking new capital
    1. Increase levels of later stage funding for UK VC and growth funds: UK companies often look overseas for expansion and growth capital. We must ensure venture and growth capital funds have sufficient scale and expertise to invest in innovative companies so that they remain and grow in the UK (section 1)


    1. Unlock DC pension investment: continue work that will enable DC pension schemes to invest in VC and growth funds by removing well-designed performance fees from the charge cap. This will unlock domestic capital for VC funds to invest in innovative businesses, as well as increase returns to ordinary pension savers not lucky enough to be in DB schemes (section 1 and 6)


    1. Expand the British Business Bank programmes: continue to fund the current British Business Bank programmes, including the ECF and BPC, and expand the BBB’s remit to cover the full continuum of funding needs, including impact and growth funds that make minority and buyout investments, to match the support offered by the European Investment Fund (section 1 and 5)


    1. Reform Solvency II: address the risk rating rules that restrict UK insurers from investing in VC and growth funds and unlock further domestic investment in UK innovation (section 6)


  1. Innovation and intellectual property
    1. Support university spinouts by building more cluster ecosystems: build closer relationships between universities, angel investors and VCs, to ensure that university spinouts can raise capital quickly and have the best funding ecosystem available to scale and grow companies (section 1)


    1. Scale investment into funds that focus on R&D-intensive sectors: improve the investment landscape for companies in areas such as deeptech and life sciences, through further support to the British Business Bank or similar government supported investment scheme (section 8)


    1. Reform the SME definition to allow more companies to claim R&D tax credits: update the EU SME definition so that companies backed by VC funds are not aggregated and therefore lose out on access (section 7)


    1. Support the growing impact investment funds sector: by mobilising capital to help VCs looking to use their investments to address the UK's societal and environmental challenges (e.g. expansion of BBB’s remit, revisiting tax incentives to catalyse capital) (section 1)


  1. Talent and people


    1. Streamline the process for recruiting talent: simplify the visa schemes to reduce costs and increase the speed of overseas recruitment so VCs, and the companies they invest in, can easily access the talent they need to grow companies (section 1)


    1. Address the long-term skills gap for high growth tech and science companies: continue to promote education in STEM, data science and other tech related skills, and promote enterprise and entrepreneurship at all levels of education. The government's recently announced Digital Skills Council is a welcome move and we look forward to working closely with them (section 6)


    1. Drive a diverse pipeline of VC talent and funding outcomes: continue to fund and promote government-supported initiatives such as the Investing in Women Code, Rose Review and women-led high-growth enterprise taskforce, and industry-led initiatives such Diversity VC and Future VC, to ensure more women and people from different backgrounds and ethnicities are represented in VCs and the businesses they back (section 1)


  1. Tax and regulation


    1. Renew the EIS/VCT schemes: the government should state that it intends to renew the schemes as soon as possible to remove uncertainty for EIS and VCT funds and the innovative companies they invest in, which are often outside London and the South East of England. The April 2025 sunset clause is already impacting early-stage funding, and resolving this uncertainty should be a priority for Government (section 3)


    1. Refine the scope of the NSI Act to focus on key policy areas: the mandatory sector definitions need to be clearly defined and additional guidance is needed to ensure the NSI Act does not negatively impact deal making in the UK. The ISU should be properly resourced to deal with increased notifications (section 7)


    1. Enhance the UK’s position as an international destination for IPOs: continue to reform the UK listings rules, which will help improve the competitiveness and environment for innovative companies listing in the UK, and will result in UK markets becoming more competitive against other financial centres (section 7)


    1. Improvements to the regulatory regime for VC fund managers: introduce an improved funds regime, which will help facilitate investment and make the UK a more competitive place for VC managers to establish funds, raise capital and invest in early-stage UK businesses (sections 4 and 6)


The appendix to this submission goes into greater detail on each of these policy areas and we would be happy to present further details on this to the Committee in an oral session.


In addition, we believe that the Committee could helpfully consider the following three areas of government action.

  1. Levelling Up Access to VC. The Government is currently working on plans for “clusters” and “super clusters” across the UK to boost the innovation landscape across the UK. HMT could further support these plans with local tax incentives, rates relief, marketing support and local investment opportunities for venture capital in the nations and regions across the UK. Firms with a  base in these clusters could be entitled to preferential access in bidding for funds available through Government grants and funding schemes, including the Levelling Up Fund, the Transforming Food Production Programme, and all innovation funding programmes advertised through the UK Innovation Funding Service.


  1. To deliver this, we need an integrated strategy for backing venture capital investment across the UK – a strategy which brings together policies and teams from the devolved nations, the Treasury, BEIS, Levelling Up Department and Metro Mayors across England with the shared ambition of making Britain the best place in the world for venture capital. Across national, local and devolved governments, there are many policy levers that are at the disposal of policymakers. To measure the success of this work and the viability of Britain as a home for venture capital funding, we recommend a bi-annual benchmarking programme, assessing UK policies on Capital, Innovation, Talent, Tax and Regulation against other key VC markets across Europe.


  1. Finally, it is important that policymakers also recognise the principle of supporting firms through all stages of their development, as they move from being a start-up with venture capital backing, to a fully-fledged scale-up backed by other types of private capital. Growth capital firms that make minority as well as buyout investments are often – particularly in regions and nations outside London and the South-East – the exit route and next stage for start-ups supported by Venture Capital. They are also crucial to the success of the next generation of high skilled, high wage, high growth and high quality companies that we, as the private capital industry, are determined to nurture.




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Case Study
Oxford Nanopore Technologies

Oxford Nanopore Technologies developed a new generation of sensing technology that uses nanopores - nano-scale holes - embedded in high-tech electronics, to perform precise molecular analyses. Its genetic sequencing technology has been instrumental in tracking the variants of COVID-19, making the UK a world leader in this field. The company has been supported by a number of VC firms across its lifespan, before listing in 2021. It was the eighth-biggest listing in London that year and the third-largest biotech float globally in 2021, according to Refinitiv.


Case Study

Skyscanner is an online travel technology established in 2002 and headquartered in Edinburgh. Scottish Equity Partners, which first invested in 2016, supported the company’s internationalisation through M&A activity and the opening of 10 global offices across the US, Europe and Asia. Scottish Equity Partners also helped the company with its strategic development and growth and led a number of financing events, including investment from Sequoia and Baillie Gifford. Scottish Equity Partners played a lead role in the company’s exit to NASDAQ-listed The firm’s headcount went from 30 to 800+.


Case Study

Wise enables international money transfers – allowing private individuals and businesses to send money abroad without hidden charges. Seedcamp, investing in 2011, worked very closely with the founders during the critical first days to help with team development and connecting into the UK ecosystem to make the UK the clear choice to set up their HQ. Seedcamp also significantly assisted with further rounds after the company’s pre- seed round, and facilitated introductions during a critical US trip, where the Company met with a16z (its first US institutional VC) and other VCs. Its headcount increased significantly through investment (from four to 2,200) and it has opened offices globally.


Case Study

ELeather, based in Peterborough, takes unused leather offcuts, breaking it down to the fibre level, and then using its pioneering technology to create new sustainable, engineered materials. ELeather’s proprietary, clean manufacturing process, which uses a closed loop recycled water plant, adds to the already impressive environmental credentials. In 2017, the company was able to enter into a long-term strategic partnership with Nike and introduce a new performance material in ‘Nike Flyleather’. The company has been supported by ETF Partners (Europe’s leading sustainable VC firm) since 2014.


Case Study

Revolut is a British Fintech company offering both personal and business Banking services. In 2015 Revolut launched in the UK, offering money transfer and exchange. Today, their customers around the world use dozens of Revolut’s innovative products to make more than 100 million transactions a month. Across personal and business accounts, they help customers improve their financial health, give them more control, and connect people seamlessly across the world. The business has been supported by Seedcamp, among others, since April 2015, helping its headcount go from 5 to more than 2000.


Case Study
Nova Pangaea Technologies

NPT, based in Redcar, Teesside, takes unwanted plant biomass or offcuts – such as sawdust – and converts it into sugars. The sugars can be fermented into bioethanol for sustainable aviation fuels, and the biochar replaces coke within sectors such as the steel industry to create green steel and is considered carbon neutral. NPT has been supported by Par Equity and Mercia Asset Managers, among others,
since 2017.

In Aug 2021, Nova Pangaea was one of eight winners who were chosen to take part in the Department for Transport (DfT) Green Fuels Green Skies project. NPT has since partnered with British Airways and LanzaJet (Project Speedbird) to deliver 113 million litres of sustainable aviation fuels in the UK. Project Speedbird is halfway through the feasibility study, which began in October 2021, will conclude in 2022.


Case Study

Neurovalens, based in Belfast, is a medical device company with the vision to create technology designed to tackle the rapidly increasing global epidemics of metabolic and neurological disease. Current projects include non-invasive technology designed to treat a wide range of diseases by delivering electrical stimulation to deep parts of the brain. Neurovalens has been supported by IQ Capital, a specialist deeptech investor, since 2019.

APPENDIX – feedback on the Terms of Reference


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.


Our key recommendations are:


Current state of the venture capital industry in the UK


The UK venture capital industry has seen exponential growth in recent years. In 2017, BVCA VC members raised £770 million from the UK and by 2019 that figure had more than trebled to £2.4bn[10]. In 2020, in the face of unprecedented and extremely challenging macro-economic conditions caused by the COVID pandemic, UK venture capital demonstrated strong resilience with support from the Future Fund, recording its best ever year with investment reaching £11bn/US$15 billion[11]. Furthermore, VC investment in the UK between January and March 2022 came close to £7bn - or more than 30% of total European investment[12]. The size of funding rounds has also grown rapidly. In 2021, the UK saw 68 “megarounds” of $100m plus, almost five times more than the 14 rounds of $100m plus in 2017.[13]


VC funds are supporting many thousands of UK businesses to scale, innovate and create jobs. By 2020, more than 21,000 companies were backed by venture capital and 96% of these were start-ups employing 50 or fewer people.[14] This includes investment into sectors that are at the frontiers of the new technological revolution – health tech, deeptech, impact and climate solutions, and life sciences.


These are the sectors that can, and are, making a difference on a global scale, and sectors that are drawing funding from all over the world. UK companies continue to be attractive investments for international investors with 63% of investment into UK tech coming from overseas in 2020, up from 50% in 2016.[15] The UK is also third in the world for investment into impact tech – businesses looking to use their technology to address the world's biggest challenges, e.g. climate change – which has increased 160% since 2018 to $2.6bn[16].





The Global Challenge and Creating Fairer Pensions


Despite the tremendous success of UK VC – and the success of the firms it supports (the rate of tech GVA contribution to the UK economy has grown on average by 7% per year since 2016[17]) – there are still areas where it falls behind its global counterparts. Compared to US VC, the UK industry raises less domestic capital for VC funds. This is, in part, due to current regulation that makes it more challenging for defined contribution (DC) pension funds to invest into long term, illiquid asset classes which generally have higher fees for active management.[18]


UK VC funds deliver very strong returns. VC funds investing since 2011, as included in the BVCA Performance Measurement Survey, collectively generated an annualised return of over 22% return on investment to 31 December 2020[19]. Despite this, the majority of people in work today in UK DC pension schemes are unable to access these funds, in large part because if the returns are too high (i.e. if the fund is “too successful), the variable performance incentives associated with them could breach the charge cap that applies to DC pension schemes subject to auto-enrolment. Similar rules do not apply to many other overseas DC pension funds, which make sizeable returns from their VC investments. The BVCA is working with the Productive Finance Working Group and the DWP to explore the ways in which the charge cap can be changed to exclude well-designed performance fees and carried interest. This will unlock UK DC pension fund investment in VC funds (supported by awareness-raising initiatives like the Productive Finance Working Group (PFWG)), opening up VC returns to the younger generations of UK savers in DC schemes (further details in section 6)


Invested in a Better Future


The types of businesses that VC invests in are high growth businesses that are looking to scale over a 7-12 year period. These companies have different funding requirements as they develop and grow. Sometimes they simply need cash to fund expansion and, at other times, having the right network is key. VC and growth funds always seek to ensure they can bring value to the table – matching their insight and experience to the funding they also provide.  As a result, as a business grows from a start-up to a leading tech company (a unicorn, which is a start-up worth $1bn, and far beyond) its ownership will change to reflect its developing needs – from venture to growth then to private equity (see section 2). This is a natural cycle of business growth, and private capital plays a vital role in this growth until a company is of a size and scope to become quoted on public markets, if its investors and board determine that this is the correct course.


The table below outlines the growth journey of a company with the types of funding that venture and growth capital provide. This chart is illustrative only and firms in different parts of the industry may operate in more than one part of this investment spectrum, depending on their fund strategies. For example, a traditional software tech business can scale much more quickly and raise larger amounts at the earlier stages (2-3 years), but R&D-intensive companies in areas such as deeptech and life sciences can take much longer to reach the later VC and growth stages (7-12 years). The picture is also different in the regions, where the VC ecosystem is more fragmented (see section 8).



Business development

Types of funding

Typical investment


New idea generation

1-3 founders

0-1 years

Bootstrapping (funding from family & friends), angel investors & pre seed capital


Develop prototype and test product/service

2-5 people

1-3 years

Seed capital including SEIS, EIS, funds


Launch product or service, generate revenues

5-10 people

3-4 years

Early stage VC & series A round including VCT funds


Grow revenues, expand team

10-20 people

5-7 years

Late stage VC & series B-C rounds



New product launches, generate profits

20-50 people

7-10 years

Growth capital


New product launches, generate profits, improve processes

c.50 - 300 people

10 years+

Further growth & expansion capital



To illustrate this business development pathway, BVCA members sold all, or part, of 563 businesses in 2020. Of these, 25% were at the venture stage and 43% at the growth stage on the date of first investment.[20]


VC funds act as a bridge between investors seeking high capital growth and innovative companies with high growth potential. Alongside capital investment, VCs also provide operational and strategic guidance for the companies they invest in. The investors at each stage of a company’s growth (as outlined above) are different, and while some investors do reinvest as the companies grow, the initial investors are usually replaced by larger investors who offer different types of expertise. For example:


Each of these investors represent a distinct and valuable part of the VC ecosystem and the pipeline of high growth companies.


Seed & early-stage deals – seed to series A funds


The UK is often rated as one of the best places to start a business in Europe with the largest availability of overall VC funding[21]. However, there have been signs that investment at the seed stage has declined in recent years, with the number of series A deals overtaking seed deals from 2018-2021[22]. Despite being rated as the best place to start a business, if you measure the number of start-ups per capita, then the UK is eighth in Europe in 2020 with 406 companies per 1m of the population, which is a long way behind the Netherlands (507) and Estonia (865)[23]. Investment in seed stage companies has also dropped since the pandemic, with rounds consolidating at later series A rounds but dropping at the earlier stages[24]. This happens when investors look to look to consolidate investments in successful companies at series A and beyond, rather than take more risks at the early stage.


Many of the funds that invest at seed to series A have been part of the Enterprise Capital Fund (“ECF”) programme from the BBB, which has traditionally supported first time fund managers who invest in this space. The BBB has been a key driver of attracting capital to early-stage funds, and the ECF programme has successfully produced many of the now well-established VCs in the last 10 years and has continued to invest in them as they grow and generate returns. However, this has left a gap for first time fund managers, so more money should be allocated to new fund managers who invest at the early/seed stage, as noted by the BBB’s interim analysis of the ECF programme[25].


SEIS and EIS investors are also very important, especially in the nations and regions outside London and the South East, where there are fewer early stage funds operating[26]. There are targeted ways to improve the availability of capital at this stage across the UK (see section 8), and the main threat is the EIS/VCT sunset clause (section 3).


Early-stage deals – series A-B funds


The market for series A (the first round of financing a new business undertakes after seed capital) is generally well served in the UK. The number of series A deals has continued to increase in the last decade[27]. The growth and success of this area of investment has been one of the key foundations for the success of UK VC, although the nations and regions of the UK still require further scale to match the rounds seen in London and the South East (see section 8). The main threats to this part of the market, are linked to deal friction caused by new legislation such as the NSI Act (see section 5), and insufficient levels of government funding to meet market demand for the BBB programmes, such as the ECF and regional fund programmes.


Late-stage deals – series B-C & growth funds


In recent years, it has been well understood that the UK has a financing gap at later stage VC and growth rounds, with UK companies reaching series B, C and growth rounds often looking for larger investments from the US and other sources. This is because UK VC funds lack the size to make these investments, which often require the largest rounds to create large-scale, independent, businesses. Since 2018 British Patient Capital (“BPC”), a subsidiary of the BBB, has been fundamental in driving growth in fund sizes in late stage and growth funds in the UK.


Even with the funding provided by BPC since 2018, the UK was still far behind the US in terms of VC invested as a % of GDP in 2020 (UK – 0.46%; US – 0.65%)[28]  and the overall scale up gap for UK VC and growth funds is estimated to be around £15bn a year.[29] Despite the recent increase in late stage deals[30], the UK is still far behind the US in terms of the amount it invests in scale up capital for its most valuable companies, and none of today’s top ten UK companies were founded or truly scaled up in the last 20 years, compared to 7 in the US.[31] UK companies often look overseas for expansion and growth capital, so we must ensure venture and growth capital funds have sufficient scale and expertise to invest in innovative companies so that they remain and grow in the UK. This can be achieved by continuing to support and fund BPC and unlocking institutional capital (from DC pension schemes and insurance companies) for investment into UK funds and later rounds, and addressing issues around investment culture outlined below.


Investment appetite/culture


UK VC funds are underserved by domestic investors, and this is largely down to a lack of investment from domestic pension funds and other institutional investors. This means that the excellent returns being generated by VC funds are going to overseas investors rather than UK institutions, and their beneficiaries. In 2020, the total investment in UK VC funds by domestic pension funds was 0% and only 5% for growth funds, according to BVCA data.[32] We believe that a fundamental change is necessary – in mindset and culture – around investment into industries of the future and the VCs that support them. Part of this is also linked to making regulatory changes (section 6) and updates to the listings rules (section 6). 


Investing in early-stage businesses is riskier than investing at other stages, especially those that are pre-product and pre-revenue (9 out of 10 start-ups end up failing[33]), and VC [funds] plays a key role in de-risking this by spreading investment across multiple companies. When there are economic shocks, VCs can also weather the storm as they are long term investors (who typically invest in a company for 7-10 years, although it is often longer before returns are generated[34]) and can continue to invest and support the company through other ways (as seen during the Covid crisis where financial as well as non-financial support kept many start-ups afloat). Given the nature of the investment and the time taken to generate returns in a new portfolio, institutional investors need to commit capital for longer periods of time compared to other asset classes. Whilst this can be challenging for certain types of investors (specifically those that require more liquidity), longer term asset allocations should be viewed as a central part of the investment strategy for future UK economic growth.


Attracting the Best Talent


The UK VC industry would also benefit from incentives that attract international talent to work with them and in the businesses they support. London is Europe’s leading tech-hub and the leading destination to grow a tech business outside of Silicon Valley[35]. Across the UK, tech clusters have grown with expertise in areas such as EdTech, HealthTech and climate tech[36]. London, Cambridge, Bristol, Edinburgh and Oxford are often listed in the top 20 European cities for tech investment[37]. The development of these clusters supports calls for easy relocation for global talent to set-up and work in UK businesses. This would increase our nation’s competitiveness, attracting the best and the brightest to the UK.


VC firms support businesses across the UK’s nations and regions, and the level of funding that VCs are putting into these businesses is growing. For example, England’s North West is home to six of the UK’s unicorns[38] and VC investment in the North East accounted for 5% of all UK VC investment in 2020[39]. This national and regional development would benefit greatly from an increased talent pool and further incentives to establish businesses in these areas (further details in section 8).


Building the science and technology superpower


The UK is well placed to enhance its status as a global science and technology superpower. There has been a significant increase in investment by VCs in R&D intensive companies over the last decade in this sector, although it still makes up a relatively small section of overall VC investment[40][41]. The UK must build on areas where it has long term strengths in R&D, such as life sciences, and capitalise on recent successes in areas such as climate tech and deeptech. The link between universities and VCs and angel investors is often key to the developing companies in this space, but they can also develop outside of universities.


The UK is a leading global hub for life sciences investment, and there has been significant increased investment in innovative companies in areas such as biotech and medtech[42]. The BPC’s Life Sciences Investment Programme has been an excellent way to catalyse investment in the space[43], and it is well served by a pipeline of companies from the UKs leading universities. The majority of R&D and drug development in the UK is now undertaken by start-ups which are often backed by specialist VCs and corporate venture capital funds (CVCs) from larger corporates[44], and although they have longer investment horizons, they have a clear exit route with leading UK and global corporates should trials prove successful. However, to create new companies that can stand alone, and become new global players in this space, the risk appetite and quantum of capital invested in these companies would need to be greatly increased.


Investment in deeptech (companies that look to develop significant scientific advances), is a relatively new area of growth for UK investment[45], but the average investment in deeptech companies in the UK is still on average behind the US and the rest of Europe[46]. Deeptech is well supported in specific clusters in areas such as Cambridge, and deeptech companies can often access funding from seed to series A rounds, but struggle to then push on through later stage rounds, and often look to the US for funding and building the infrastructure necessary to scale. This is for similar reasons outlined earlier in this paper. The strategic importance of deeptech companies for future scientific advancement and growth is also now better understood, and the UK needs to do more to bridge the gap with Europe and the US.


More should also be done to build closer relationships between universities, angel investors, and VCs to ensure that university spinouts can raise capital quickly and have the best funding ecosystem available to scale and grow companies. For example, a recent survey of spinout founders found that they had to wait more than six months to complete an investment, whereas regular seed investment takes around three months, and UK universities take much greater equity stakes in spinouts (19.8%) than Europe (7.3%) and the US (5.9%), making it more difficult to bring in external investors to help scale the company.[47]


The UK is well placed, given the specialist knowledge of investment advisers across the country and in the City of London, to help develop investing expertise in areas such as life sciences, and help bridge the gap between VCs and large institutional investors who have not traditionally invested in this asset class. There is a massive opportunity to build on our inherent strengths in these areas, but if the UK is to create new companies of unicorn or even decacorn size, more must be done to unlock institutional investment to create more growth capital and appropriate risk appetite, as outlined above. The government is also well placed to support these sectors by facilitating investment given the unique criteria required and fostering links between universities and investors.


Enhancing Diversity and Inclusion (D&I)


The VC industry knows that it must improve diversity and inclusion in the sector given the low levels of funding going to female and diverse founders, as well as the low proportion of women and people from different backgrounds and ethnicities in VC investment teams. The BVCA promotes the participation of people from all socioeconomic backgrounds and of all ethnicities, genders and sexual orientation in the VC industry. This includes representation in investment and senior roles. We support and partner with industry groups, including Level 20, Diversity VC, the British Business Bank, the UK Business Angels Association, the Rose Review Council and other organisations to champion as well as deliver meaningful policies to improve diversity in private capital.


The VC industry is involved in relevant government initiatives, most recently the Investing in Women Code (IWC). The IWC commits all financial institutions to the principles of gender equality and transparent reporting of gender funding data. The 2022 progress report on the Rose Review[48] into female entrepreneurship highlighted the significant uptake in VC signatories to the IWC over the past year, from 50 to 90, and the BVCA and British Business Bank have been tasked with increasing this number. The BBB’s Annual Small Business Equity Tracker reported that around 2% and 5% of total VC investment was received by all-female teams in 2019 and 2020, out of record high levels of £8.5 billion and £8.8 billion, respectively, of total annual VC investment. The IWC, alongside other industry initiatives, seeks to improves levels of funding for female and diverse founders. The BBB, BVCA and UKBAA are also working on a pilot to expand the IWC data collection to cover investment into founders from different ethnicities.


In a drive for industry transparency, the BVCA and Level 20 published a survey report[49] in March 2021 after collecting data on diversity across VC and private equity. The report revealed some positive progress on gender diversity but indicated further improvements must still be made. The report was also the first of its kind to gather detailed data from firms on ethnicity and the results indicated that much more progress is needed.


The VC industry participates in forums (including via the BVCA and Diversity VC) to share intelligence on new and topical areas to assist their efforts. We host regular face-to-face and digital networking events which are designed to be inclusive and provide a convivial and open environment to exchange experiences, share best practice, debate the issues in our industry and showcase what firms are doing to improve D&I. In 2021 we published best practice guidelines to help increase investment in under-represented founders and drive diversity and returns across the investment sector. The guidance focussed on four key areas:

1)       Talent acquisition, retention and development;

2)       Internal education, culture and policy;

3)       Outreach, access to deal flow, and unconscious investment bias; and

4)       Influence, external guidance and portfolio management.


Further details can be found on the BVCA website[50]. Measures to enable change inside venture capital firms can include: demystifying the process of seeking investment and collaborating with early-stage investors (as this attracts a more diverse pipeline); expanding networks to facilitate more ‘warm’ introductions; setting ambitious diversity targets; incorporating D&I into VC investment term sheets; and appointing senior champions of this work.


The government should continue to fund and promote government-supported initiatives such as the Rose Review, Investing in Women Code and women-led high-growth enterprise taskforce, and industry-led initiatives such Diversity VC and Future VC.


Climate and sustainability


For the VC industry, the desire to invest sustainably, tackle climate change and support national governments to reach Net Zero is no new thing. VCs such as Environmental Technology Fund Partners (ETF Partners) were set up in the early 2000s, at a time when the concept of delivering investment returns alongside environmental aims was hotly disputed.


VCs are and will remain key to global and national efforts to reach Net Zero. We need the innovations and ideas which venture capital, and the wider private capital lifecycle, will nurture and scale to national and global applications. Ideas such as the next generation of electric batteries for cars (such as those developed by Advanced Electric Machines, backed by Northstar Ventures), or the methods to scale hydrogen fuel cells flexibly and at low cost for ordinary consumers and manufacturers (such as those developed by Bramble Energy, backed by BGF).


Furthermore, the long-term view taken by the VC industry helps to support existing business to tackle their impact on climate change – be that funding investment in new infrastructure or technology, fundamentally restructuring a business, or creating the trajectory for certain assets to be decommissioned. It takes the time, patience and expertise, found at the heart of VC investment, to address these difficult questions.


Through the prism of VC investment, we can see an exciting future for the UK as a possible home of the global greentech and climatetech sectors. Today, UK VCs are investing in the low carbon energy solutions we know work (such as technology for offshore wind), low carbon energy solutions we know we need (such as next generation battery technology), as well as new low carbon energy solutions we need to make work (such as hydrogen technology). They are backing the companies who are leading the way for sustainable consumer products across the globe and adapting urban transport with sustainability at its heart. With transparency in mind, VCs are also transforming the effectiveness of carbon offsetting, as well as working together to set a path for the industry to do more to support the companies they back on their own sustainability journey. Supporting UK VCs to grow and flourish, as set out in this document, will help drive the very real solutions we need to tackle climate change.


Growing start-ups with ESG at their core


Not only does the VC industry have a leading role to play in funding climate solutions, but it also has a responsibility to create companies, from the ground up, which have ESG considerations at their heart. A company with one founder and a reliance on energy-intensive technology may not have the best governance, diversity or sustainability credentials today, but it is the responsibility of VC backers to ensure that company has the plans and the capability to grow in a way which is mindful of diversity and sustainability challenges and has the highest standards of governance. This is not only good for the VC – ensuring that the business will be future-proofed to tackle ESG requirements as it scales; but it is also a requirement of many VC investors, who themselves have high standards for ESG, which they expect all their investments to adhere to. Many VCs have adopted and report under existing ESG-related initiatives (including being signatories to UNPRI) or provide bespoke ESG reporting to investors.


As the VC industry is inherently collaborative, a number of initiatives have been built from the ground up to help VCs to work with their founders and fledgling companies to set a path to be fit for the ESG challenges of today and tomorrow. Initiatives such as ESG_VC and VentureESG provide free-to-use tools to assess ESG practices within companies today and plans to improve ESG practices in the future. This allows data to be aggregated and standards to be set to encourage best practice and help identify what good looks like for start-ups. Alongside the BVCA, these initiatives also help to train people and investors in making ESG plans a reality and provide a forum for continual learning and sharing best practice.


Impact investment


Impact investors intentionally seek to achieve positive, measurable, social and environmental impact. For UK VCs, this is a fast-growing investment approach. The VC ownership model is uniquely positioned to provide the capital, strategic insight and operational support that will help this new generation of businesses succeed at scale – allowing them to achieve tangible social and/or environmental benefits alongside attractive financial returns.


The government should facilitate investment in the UK’s growing impact investment funds industry as fundraising continues to be challenging for smaller VC impact funds. Smaller funds are less able to raise large amounts from institutional investors because ticket sizes for smaller funds are typically below the minimum level at which it is viable for larger institutional investors to commit. The British Business Bank could have a broader mandate to invest in impact investment as this is an area the European Investment Fund had previously invested in.


The Social Investment Tax Relief (SITR) had significant potential to unlock private capital for social good, but take-up was limited. We would encourage further investigation to understand what changes could be made to support greater investment via the SITR


The BVCA also hosts forums with the impact investment firms to share best practices and promote the sector to investors in the broader private capital industry.


As explained above, VC firms are well placed and incentivised to integrate climate and broader sustainability considerations (including diversity) into their operations. UK sustainability regulation for private capital investment must be proportionate (e.g. Sustainability Disclosure Requirements), whilst being compatible with international frameworks.


2. The level of co-operation/integration between start-ups and established industry


Established industry and private equity (PE) investors, along with other routes such as IPOs, are a key source of exits for VC investments. There is also a level of vertical integration, as they are also directly investing at the VC stage via CVCs investing on behalf of large companies and PE firms setting up growth funds that invest in minority stakes at a much earlier stage. This is driven in part by the improved returns of VC more generally, to help create deal flow, and as a way to integrate technology and IP into larger companies.


The connections with established industry are more important in the regions and nations of the UK outside London and the South East, where established industry is often the most likely customer and exit route for local start-ups (see section 8).[51] We are also seeing larger PE firms investing more in the VC space and buying out VCs in strategic areas such as life sciences[52], which will provide these funds with larger pools of capital to invest in R&D-intensive businesses.


3. 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 key recommendations are:


Further detail is set out below.


EIS and VCT schemes - the sunset clause


The combination of EIS, SEIS and VCTs are a vital part of the early-stage and growth investment ecosystem. SEIS facilitates for very early-stage investments, EIS provides for a further advance in maturity and VCTs for further growth and scale up capital. All of these reliefs play a critical role for a range of smaller, entrepreneurial companies in securing the funding that they need. We support the recommendations of the EISA and VCTA for changes that can help improve the effectiveness of the regimes.


As a condition for EU state-aid approval, the 2015 Finance Bill contained a sunset clause that would restrict EIS/VCT tax relief to shares issued before 6 April 2025. Anecdotally, the BVCA understands that the sunset clause is now being used by advisers as a possible risk for future EIS and VCT investments, and this is expected to have a knock on effect on investment. We urge HMT to renew the EIS, SEIS and VCT schemes and state its position as soon as possible to avoid creating further creating uncertainty in a sector that is vitally important to the UK SME and start-up sector, particularly outside London and the South East.


For further recommendations, we refer the Committee to the submissions made by the EIS Association and VCT Association.


Incentives for impact investment


The Social Investment Tax Relief (SITR) had significant potential to unlock private capital for social good, but take-up was limited. We would need to investigate further what changes could be made to support greater investment as it has been some time since it was reviewed. Factors that have inhibited its growth:[53] a lack of awareness of the relief; widespread belief that SITR was too similar to EIS and not targeting the specific needs of the social investment sector; slow administrative processes around the relief; unclear or insufficient guidance on its use; and complex eligibility restrictions.[54]


4. The operation and effectiveness of the regulatory regime(s) concerning venture capital.


Our key recommendations are:


Further detail is set out below.


Improving the UK regime for VC vehicles


To facilitate more investment in UK VC, and enhance the UK VC ecosystem, the Government should consider improving the existing regime for VC managers and fund vehicles to make the UK a more competitive place for VC managers to establish funds, raise capital and invest in early-stage UK businesses.


We believe it is not necessary to introduce a new type of vehicle to achieve this. Instead, this can be achieved by improving the regime which the UK inherited from the EU (known as EuVECA). The onshored UK version is the Registered Venture Capital fund (RVECA) regime.  There has been low take up of this vehicle due to its rigidity, for example its strict limitations on debt finance and the fact that successful portfolio companies can threaten the fund’s RVECA status if they grow too much and too quickly (the very outcome that venture capital support is designed to achieve). Amendments should seek to remove unnecessary investment barriers and ease inherited administrative and organisational burdens on VC managers, while maintaining high regulatory standards. Examples are set out in the next paragraph.


The current RVECA regime limits investments in early-stage UK businesses to equity or quasi equity only, while those UK businesses actually need investment at all levels of their balance sheet. In addition, several operational and organisational requirements, and the high regulatory capital requirement, make the regime less attractive to UK VC managers than those of other jurisdictions.


With a few amendments, the RVECA, or a similar new VC-focussed regime, could be a significant driver of increased investment in early-stage UK businesses, supporting more VC managers and VC funds to set up in the UK, and enhancing the UK VC ecosystem.


Improving speed to market


The time taken to complete regulatory application and notification processes is a key consideration for investment firms when considering where to locate. This can be the difference between success and failure for start-ups and early-stage businesses where speed to market can be critical.


While we fully recognise the importance of the FCA maintaining robust and high standards, the lengthy waits of up to and beyond 12 months for new manager authorisations and regular delays of several months experienced by our VC members regarding relatively straightforward approvals are frustrating and disruptive to industry. To address these issues, we recommend more case workers at the FCA to assess applications and notifications, automation of low-risk processes and proportionality to simplify certain processes. For example, change of control notifications for portfolio companies is currently the same as that would apply when acquiring a controlling stake in a large banking group.