Last updated: July 3, 2009 8:56 pm

UK venture capital

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Nothing ventured, nothing gained. The UK government’s recent decision to invest £150m in a new venture fund is the latest attempt to help British start-ups navigate a death zone formed by a lack of mid- to late-stage funding. Its goal – to drum up £1bn of public and private funding for start-ups over 10 years – is laudable. But it is unlikely to make much difference.

Anyone familiar with the reality show Dragons’ Den can attest that the UK does not suffer from a lack of boffins with interesting ideas. Yet in spite of decades of government-backed schemes, the UK has yet to develop the vibrant start-up ecosystem of the US or, more recently, Israel. The problem goes well beyond the financial crisis, which has hit start-ups and their backers everywhere.

One reason may be entrepreneurial energy tends to feed off itself. In Silicon Valley, successful start-ups – think Google, Amazon, Microsoft – have gone on to acquire the next generation of minnows, giving risk capital an incentive to enter the market. Founders become serial entrepreneurs, or join venture capital groups, helping to attract yet more talent. In the UK, start-ups are more likely to sell to a global powerhouse than to become one. Acquisitive venture-backed successes, such as Autonomy, the business software company, are the exception.

A modestly sized VC fund would have to turn £300m into £1.5bn over its 10-year life to make the returns limited partners want. That needs good ideas and seasoned managers with experience of turning start-ups into thriving, stand-alone companies. If government is serious about nurturing a UK start-up culture, to attract such talent should be a priority. A 50p top tax rate will not help.

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