Select Committee on Trade and Industry Minutes of Evidence


Supplementary memorandum by the EEF

VENTURE CAPITAL

  The EEF recognises the benefits of venture capital as an asset class and its importance as a source of finance for small and growing businesses. Although the UK's venture capital market is the most developed in Europe, there is some way to go before it matches US levels of venture capital financing. As a percentage of GDP, venture capital investment in the UK is around half that in the US, furthermore, a greater number of UK investments are directed at later-stage financing, resulting in what has become known as the "equity gap". Conversely, a greater proportion of US venture capital is invested in the creation and early stages of business development with tangible benefits. Venture capital, business angels and corporate venturing all play a more significant role in the creation and early stage development of business in the US than the UK.

  Looking at investment by sector in the UK, there have been significant swings between sectors over the past decade. Only a few years ago the engineering sector (FTSE classification) accounted for over 10 per cent of venture capital investments and 15 per cent of investee companies. In 2000, the figures were 2 per cent and 5 per cent respectively. [2]The trend is similar for manufacturing, with the exception of aerospace and defence, all sectors of manufacturing have lost out in recent years in terms of the amount invested and the number of companies receiving venture capital investment. However, it is worth noting that the most recent figures available are a reflection of the internet and technology boom of 2000.

  Venture capital has formed an important plank of the UK government's and the European Commission's enterprise policy, and a particular focus has been on eliminating the equity gap. A number of measures, including direct funding for Regional Venture Capital Funds and tax breaks for private investors, have focussed on increasing the supply of venture capital from private and institutional investors. However, much less has been done to increase the take up of venture capital by informing companies of its benefits and availability. For example, some companies believe that the manufacturing sector is priced out of the market, as the returns venture capitalists require on investments are not achievable, while others are not prepared to hand over a share of their business in return for capital.

  A key policy committee at the EEF recently discussed the relevance of venture capital to manufacturing and engineering industries. It concluded that in the current climate it is not a priority for the EEF at present and there are other, more pressing, difficulties facing the sector. However, we will remain abreast of any further tax or regulatory changes in this area and their impact in member companies.



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