The UK can’t afford to play catch up with scale-ups
Last month saw the launch of the European Tech Champions Initiative (ETCI). This €3.75bn fund of funds is backed by the European Investment Bank and the governments of five European countries.
It will be managed by the European Investment Fund and will invest in 10–15 late-stage VC funds of more than €1bn that participate in funding rounds of more than €50m. The fund has so far secured €1 billion in commitments from Spain, Germany, and France, €150 million from Italy and €100 million from Belgium. The EIB has deployed an additional €500 million.
The ETCI is designed to address the “scale-up gap” and is part of the pan-European Scale-up Initiative. It aims to finance promising companies in their crucial, late-stage development. Reports such as the Lakestar Financing Gap series have shown that while Europe and the UK have made strides to support startups and fund companies to series A, there is a lack of VC funds of sufficient scale to lead larger $100m+ deals to help establish companies at a global level. This means European companies often look to the US for scale-up capital and expertise.
The sheer scale of the measures announced in the Inflation Reduction Act in the US has also focussed minds in Europe. Some VCs believe the ETCI does not go far enough, as it does not secure additional LP investment to truly address the problem. But it is a start, and the hope is that it will encourage European funds to take advantage of more opportunities to create global companies that can compete with the US and China.
So where does that leave the UK? The UK boasts flagship policies for early stage investing, such as the SEIS, EIS & VCT schemes, as well as exciting new projects such as the Advanced Research & Innovation Agency. The British Business Bank has further done a fantastic job in scaling itself and backing UK venture since Brexit. But the government needs to start thinking strategically about building on this success.
The Chancellor provided a long awaited update on the Long Term Investment for Technology & Science (LIFTS) initiative in the recent Spring Budget. One of the last surviving policies left from the short-lived Liz Truss administration, LIFTS will look to establish new investment vehicles to crowd-in investment from defined contribution (DC) pension funds into to the UK’s most innovative science and technology companies.
However, the original LIFTS proposals from October 2022 had £500 million of government support and intended to start deploying funds in Spring this year. The new consultation has reduced this to £250 million and is looking to launch in November. Recent political instability has clearly impacted the timeline, and there are concerns that LIFTS could be too slow to address the current funding issues for UK scale ups.
Others, including the Labour Party and many in the life sciences sector, have argued for a UK version of the French “Tibi” initiative that was launched in 2020. This scheme has already secured over €18 billion of commitments from institutional investors and did not require government support.
In its current form, the LIFTS initiative will only scratch the surface of the levels of capital required to create the world leading companies of the future and will arrive when other countries have schemes up and running. The UK is in a strong position to leverage its big investor base and back funds of sufficient size to grow companies domestically. Especially now that the defined contribution pension scheme charge cap issue is close to a successful resolution. The government has a key role to play to to help ensure this capital is unlocked and deployed in the most effective way to make a real difference.
The one thing for certain is that the UK cannot afford to fall any further behind its competitors.
Chris Elphick
Senior VC Policy Manager, BVCA
This article was originally published on 23 March 2023 on the BVCA website.
