Brexit and venture capital | Turning off the tap

Nov 5th 2016

British venture capitalists, it turns out, voted Bremain.

EUROPE has yet to produce a rival to Silicon Valley, but London’s “Silicon Roundabout” by Old Street station is closest. As a funding hub, the city’s venture-capital industry tends to attract more money than rivals in Berlin, Munich or Paris. And more venture capital is invested in Britain, relative to its GDP, than in any other big European economy. Britain’s vote to leave the European Union threatens this lead. Besides unknown risks, there is a prosaic worry: the most important backer of such firms is the European Investment Fund (EIF), an EU institution, whose mandate includes “fostering EU objectives”.

As the biggest investor in European venture funds, the EIF supplied almost a fifth of all commitments last year, with Britain, France and Germany the main recipients. It is also among the largest and earliest investors in any fund. For every pound it pumped into Britain in 2015, the EIF reckons it mobilised another four of private capital. Venture-capital managers debate the extent to which the EIF spurs private investment, but generally accept it is a linchpin of the industry. Nenad Marovac, of DN Capital, a technology investor, says its withdrawal from Britain would be “devastating”. It would exacerbate other difficulties caused by Brexit uncertainty. American institutional investors have “turned off the UK,” says one manager; European family offices are putting their venture allocations on ice, complains another.

At present it is business as usual, at least until there is “some clarity about the relationship between the UK and the EU”, insists the EIF’s Ulrich Grabenwarter. This has reassured firms such as London-based Isomer Capital, which applied for EIF money after the referendum. Yet huge uncertainty remains about what happens once Britain starts the leaving process, expected to be triggered by March. After then, whatever the EIF’s public stance, some fear that British applications will gather dust.

The first to suffer will probably be Britain-focused funds, says Matthias Ummenhofer, formerly of the EIF, and founder of Mojo Capital, a Luxembourg-based venture-capital fund. But British firms that invest at least two-thirds of their capital in the EU might retain a good case for EIF support, he adds. Much will depend on how the Brexit talks go, and on Britain’s future relationship with the European Investment Bank, the EIF’s main shareholder. If Britain stops contributing to the bank, its other members may well direct venture funding elsewhere. If so, the British taxpayer would be asked to plug the gap, perhaps via the state-owned British Business Bank.

British venture-capital managers argue it would make sense for the government to pick up the tab, given the sums involved: the EIF invested €656m ($728m) in Britain last year, of which €295m went directly into venture-capital funds. The Treasury has merely promised consultations to “ensure appropriate investor certainty”. Looking on the bright side, the British Private Equity & Venture Capital Association, a trade body, says Brexit could give a boost to venture-capital trusts and enterprise-investment schemes, tax-advantaged vehicles whose privileges are currently limited by EU state-aid rules. Optimists also note that the EIF does invest outside the EU. But the amounts are smaller and usually limited to multi-country managers.

Rated People, a London-based online marketplace, is the sort of internet company all governments like to foster. Its chief financial officer, Tim Parsons, says that its growth depended on an injection of equity in 2011 from Frog Capital, an EIF-backed fund, that it used to add staff and expand across the country. Other European governments have provided more funds for innovation. Bpifrance, for instance, a sovereign fund, committed €685m to French venture-capital firms last year, compared with just £78m ($120m) from the British Business Bank for its venture-capital firms.

London’s status as a financial hub has kept it just ahead of the venture-capital pack until now. But, like other British business sectors, the venturers are now looking to the government for assurances that, for them, Brexit does not mean Brexit.

This article appeared in the Finance and economics section of the print edition under the headline "Turning off the tap".