MPs slam ‘unacceptable failure’ of regional venture capital investment record

MPs on the powerful House of Commons Treasury Committee have slammed the venture capital industry’s “unacceptable failure” to invest in regional businesses and attacked a lack of diversity in investee companies. 

Following a six-month enquiry, which included correspondence with industry bodies and the Treasury, and open evidence sessions, the Committee discovered that venture capital investment flows to the “Golden Triangle” of London, Oxford and Cambridge, with London alone receiving almost half of all equity deals despite accounting for 19 per cent of all small businesses. 

In the report, the cross-party Committee of MPs also call for rapid change from Government and the industry on diversity. 

Noting that the sector receives Government support through tax reliefs designed to encourage investment in the UK the committee said “it’s unacceptable that just two per cent of all venture capital funding in 2021, while less than two per cent went to black and ethnic minority-led businesses.”

Commenting on the report, Harriett Baldwin MP, Chair of the Treasury Committee, said: “The venture capital industry plays a vital role in supporting the growth of the nation’s small businesses, but statistics which show just two pence in every pound of investment goes to all-women led businesses demonstrate a shocking dereliction of duty given the level of Government support for the industry through tax reliefs.

“In the twenty-first century, it shouldn’t come as a surprise to investors that women and those from ethnic minority backgrounds can start successful businesses. Given public funds play a key role in the success of the UK’s venture capital sector, more must be done. Firms must be compelled to reveal their diversity data when applying to these tax reliefs in an effort to increase transparency and drive change. Government incentives could also be tweaked to encourage more regional venture capital investment.

“As a Committee, we will continue to keep a close eye on these important topics and will be investigating small business finance and sexism in the City in two new inquiries launched recently.”

The report cites evidence submitted by Mercia chief executive Dr Mark Payton who told them that the funding limits on investments through the EIS and VCTs schemes limit their utility in helping companies grow and scale-up in today’s economy. 

The Committee concluded that the limits need to be raised urgently. 

“Altering these limits presents an opportunity to support domestic business growth through established policy routes. HM Treasury should consult on higher funding limits on the EIS and VCT schemes with the objective of better supporting scale-up businesses.”

The Committee also highlighted the importance of globally competitive tax reliefs designed to promote investment in UK firms. 

Given firms elsewhere in the UK can take longer to become established, the maximum company age limits of seven and 10 years written into the tax reliefs currently hold back economic growth and innovation and should be extended.

“Despite previous calls from the Committee, the Treasury has not provided clarity on when venture capital tax reliefs with expiry dates will be extended. The Government should extend the schemes at the earliest opportunity to provide more certainty to founders and investors,” the report said.

The MPs encourage all venture capital firms to sign up to the Women in Finance Charter and Investing in Women Code, both of which require the publication of gender and diversity statistics. Organisations should comply or explain why they are not as a condition of receiving tax relief support.

The Committee also recommends the Government and British Business Bank consult on creating a fund with the specific purpose of promoting gender diversity in venture capital allocation.

The sentiment in the report appears to be in line with calls in the Invest North report launched last week by TheBusinessDesk.com, which called for moves to “unlock the transformative potential of Britain’s investment capital through a committed programme of policy and regulatory reform and support for Northern Gritstone and comparable funds in order to enable private and local government pension fund investors to back more fast-growing businesses across the North towards reaching scale.”

Scale-up capital, business growth and stock listings will be examined in further detail in an upcoming small and medium-sized enterprise (SME) finance inquiry.

“Our evidence suggests that UK pension funds may be an untapped source for a deeper domestic capital market more inclined to risk investment in high-potential businesses. We welcome the Government’s announcement of work on pension fund consolidation in the autumn. We will scrutinise the details of those proposals closely.”