VC’s are being penalised even though start up / early stage investment is crucial to driving economic recovery

A NESTA report published earlier this year correctly points out that the future prosperity of the UK depends on its ability to foster and support high growth businesses. It is these high growth businesses and the entrepreneurs behind them that are best positioned to take advantage of new business models and emerging technologies and markets. But, for these entrepreneurs to be successful, they need an accessible pool of capital willing to back their vision and support them over the long term. When running MessageLabs, I experienced firsthand the critical role VC can play in accelerating growth trajectory – very often in tech you just don’t have time for organic growth.

In 2009, there were over 1,093 venture-backed companies in the UK employing over 40,000 people.  From contribution to employment figures, to supporting all innovation that attracts further growth and further investment – there is ample evidence that proves the positive impact of VC funding.

I welcome initiatives that make it easier for investors to back promising entrepreneurs and believe that the government/regulators should balance their priorities to ensure that VC and its related knock on benefits to the economy do not suffer due to policy.

In the last year, the government has made some positive moves to support VC in the UK, most notably the announcement of the UK Innovation Fund, and the awarding of two new Enterprise Capital Funds (ECF’s); these steps are aimed at helping the supply side and allocating much needed capital to high potential start-ups.

Recent figures from Dow Jones confirm that the UK is the favourite destination for VC in Europe and investment is again trending upwards. In Q2 2010, VCs invested €338m in 67 UK companies, a 70% improvement compared with the same time last year. This is an encouraging sign, but more government support will be needed to ensure that the fragile recovery is sustainable.

Despite these positives, the UK is still no way near having an established eco-system that supports entrepreneurs and the investors behind them. It is disappointing that in the recent Budget the Chancellor decided to raise Capital Gains Tax, albeit to a lower extent than previously expected – it serves to deter the investment community from investing in the UK.

Another worrying sign is the impending Europe-wide AIFM Directive which is poised to drastically increase the reporting burden on portfolio companies as well as make it more difficult for funds to raise money from outside Europe; it’s no surprise why this has seen significant pushback from both VC’s and entrepreneurs. At one stage it looked like VC’s were going to be, quite rightly, carved out of this legislation but recent reports suggest otherwise.

As an investor and a strong believer that the UK can create class-leading technology companies and has to in order to drive economic recovery, I’m hopeful that going forward regulators and governments do more to help rather than hinder. It’s early days for the coalition but they have to support growth businesses in growth sectors and that starts with making it more attractive for investors to put their money into them.