Is VC funding for UK SMEs dead?

It's widely believed that the UK lags far behind countries like the US when it comes to embracing the venture capitalist (VC) culture, with three out of five UK entrepreneurs believing that they are less likely to invest in British businesses. However, research by accountancy firm PwC into the Venture Capitalist (VC) funding environment for the UK technology industry has sought to dispel some myths and has challenged certain widely held perceptions of what is preventing investment in early stage and growing companies.

The report examined the views of VC funds, entrepreneurs, banks and other industry players. It found that fear of failure – or the perception of failure – may play as big a part in discouraging entrepreneurial activity as the challenge of competition for funding and skills.

Brian Henderson, director in PwC’s technology team, commented: “The problem with perceptions, especially negative ones, is that they can feed into reality: companies that don’t expect to receive funding may well not even ask for it. This type of vicious circle is exactly what the whole sector needs to avoid.

“VC funding in the UK tech sector is not dead, far from it. For companies that can deliver the attributes that funders want, it’s very much alive.”

Many UK entrepreneurs now believe that funding is more freely available in the US, from investors who are less risk-averse and more tuned-in to the industry, but is this actually true?

Jass Sarai, UK technology leader at PwC, added: “The perception divide between entrepreneurs and VCs has only widened in recent years. Many VCs argue that little has changed, apart from greater competition for funding. The right combination of a compelling idea, sustainable and scalable business model and a strong management team will still win investment. The more savvy entrepreneurs who we spoke to, readily accept that what can look like risk aversion on the part of UK-based investors is actually just sensible risk assessment.”

Examining the current funding environment for growing companies the report found that:

• Three out of five respondents agreed that negative attitudes to failure discourage entrepreneurship in the UK. In contrast, readiness to embrace failure was regarded as being especially strong in Silicon Valley.
• 60 percent of entrepreneurs believed that US investors are more ready and willing to embrace risk than their UK counterparts.
• The UK has yet to match the emergence in the US of a significant community of ‘super-angels’, often former tech entrepreneurs willing to quickly ‘buy into a vision’ and invest in start-ups.
• Only half of respondents agreed that being based in London improves the chances that a technology business will be successful. Many said what really mattered was being within a ‘cluster’ of companies, which can yield benefits around talent recruitment, growth and funding and such clusters are prevalent elsewhere in the UK.
• There was a similarly divided response to whether a US presence was a prerequisite for success, with 51 percent agreeing.

Despite frequent debate, respondents said R&D incentives in the UK are sufficient to encourage earlier stage UK technology businesses to undertake innovative development work.

There was widespread acknowledgement that there are some attractive and beneficial tax breaks and incentives for early stage companies, albeit that some companies find the rules complex and difficult to apply in practice. The stakeholders we spoke to believe that the Government should focus on creating a supportive environment for innovation and entrepreneurship, but should not intervene further.

Brian Henderson, director in PwC’s technology team, added: “Despite the potentially negative attitudes towards failure, most entrepreneurs took the view that technological talent within the UK is as strong as anywhere in the world, but it is the UK’s potential lack of ability to successfully commercialise its technological breakthroughs that results in the market lagging behind that in other territories such as the US.”