VENTURE CAPITAL, THE REGIONS AND PUBLIC POLICY: THE UNITED KINGDOM SINCE THE POST-2000 TECHNOLOGY CRASH

Transcription

1 VENTURE CAPITAL, THE REGIONS AND PUBLIC POLICY: THE UNITED KINGDOM SINCE THE POST-2000 TECHNOLOGY CRASH Colin Mason and Yannis Pierrakis Working Paper November 2009 Hunter Centre for Entrepreneurship, University of Strathclyde Business School University of Strathclyde 14 th Floor, Livingstone Tower, Richmond Street, Glasgow, Scotland, G1 1XH T:

2 F: E: W: VENTURE CAPITAL, THE REGIONS AND PUBLIC POLICY: THE UNITED KINGDOM SINCE THE POST-2000 TECHNOLOGY CRASH Colin Mason* and Yannis Pierrakis+ *Professor of Entrepreneurship, Hunter Centre for Entrepreneurship, University of Strathclyde, Glasgow G1 1XH, Scotland. + Head of Investment Research, NESTA, 1 Plough Lane, London EC4A 1DE, UK and Research Associate, Cardiff Business School, Cardiff University CF10 3EU, Cardiff, Wales. yannis.pierrakis@nesta.org.uk. ABSTRACT. Early stage venture capital investments declined sharply following the post-2000 technology crash. Investment activity began to pick-up by mid-decade, in large measure as a result of increased public sector involvement, but has been brought to a halt by the global financial crisis. At the regional scale, several northern regions now have more than their expected share of early stage venture capital investment. However, deal sizes are small, hence early stage venture capital, measured by the total amount invested, remains over-concentrated in London and the south-east. Moreover, the public sector now dominates much of the investment activity in the midlands and north. The paper argues that public sector venture capital is unable to create entrepreneurial regions and that a regionally-based model of public sector venture capital is ineffective because it lacks scale. A new approach for venture capital-deficient regions is therefore required which gives greater emphasis to the demand-side. Key words: venture capital, regions, regional policy, entrepreneurs JEL: H7, G2, G3, R1, R5 2

3 3

4 1. INTRODUCTION The venture capital industry is widely believed to be in crisis (Mason, 2009a). The tech boom of the late 1990s encouraged a huge inflow of money into venture capital, taking investment activity to new peaks around the globe, both in terms of the amount of money under management and the scale of investing. The subsequent tech bust at the turn of the 21 st century resulted in a collapse in venture capital investing. However, the huge inflow of investment into venture capital in the late 1990s has had a longer term effect by driving down returns (Kedrosky, 2009). Many venture capital funds raised their finance in 1999 and 2000 just before the tech bubble burst. Thus, they were investing when valuations were high, competition for deals was fierce and the bubble environment impaired their cognitive behaviour (Valliere and Peterson, 2004). Their investments suffered high failures rates in the tech crash and because of the 10 year lifespan of most venture capital funds 1 they have been seeking exits when the markets have been depressed. All of this has combined to produce a dismal investment performance. Post-bubble returns remain well below their pre-bubble levels (BVCA, 2009). This, in turn, has had adverse effects on the supply of venture capital. First, it has reduced the attraction of venture capital as an asset class for institutional investors (Buckman, 2009), making it difficult for existing venture capital firms to raise new funds and for new venture capitalists to enter the industry. In the UK the average size of fund has fallen continuously since 2004, and just seven new funds were created 1 Venture capital typically operates on a 10 year closed-fund model. Having raised the finance for a fund, the initial three or four years will be used to make new investments. In the following two or three years the fund will stop making new investments and use its remaining cash to make follow-on investments in some of its existing portfolio. In the final three years of the fund s life the managers will be seeking to harvest its profitable investments (through IPOs and trade sales) and liquidate those investments with little or no value in order to be in a position to distribute the returns to its investments (the limited partners) by year 10. The year in which the fund was raised therefore has a critical influence on its returns (Bygrave and Timmons, 1992). Because of this 10 year investing cycle, the funds that started investing in the late the 1990s were investing when valuations were high, suffered high failure rates in the tech crash and have been looking to harvest their remaining investments in the mid 2000s when markets have been depressed. This combination of factors has depressed their returns. For the same reasons, the lack of new venture capital funds being created in the second half of the 2000s results in a shortage of venture capital in the following three to five years. 4

5 in 2008 compared with two or three times that number in previous years (Pierakkis and Westlake, 2009). Second, existing fund managers have sought to conserve their cash to meet the financial needs of their existing investments and have largely stopped making new investments. This has been reinforced by the lack of exit opportunities which has forced investors to stay involved with their existing businesses for longer, further constraining their ability to make new investments. As a consequence, the availability of venture capital has declined, particularly for start-up and early stage businesses. Moreover, many commentators do not see this as a shortterm problem, arguing that the industry needs to downsize, perhaps by as much as half, in order to improve its returns sufficiently to regain its status as a favoured asset class (Kedrosky, 2009). This, in turn, has prompted government (in both the UK and other countries) to intervene with a profusion of schemes often regionally focused - designed to increase the supply of early stage venture capital. Murray (2007: 174) notes that this is a clear signal of venture capital s status as an important instrument of entrepreneurial and innovation policy. By using a dataset that has not previously been used in academic studies of venture capital the aim of this paper is to provide a novel and original insight into how the combination of these changes in the supply of private sector venture capital and the growth of public sector intervention have combined to significantly change the availability of venture capital both nationally and at the regional level. The key finding is that the supply of venture capital in the Midlands and north of England, along with Scotland, Wales and Northern Ireland is now dominated by the public sector. We question whether regionally-based public sector funds are an effective means of promoting an indigenous entrepreneurial capacity in economically lagging regions and suggest alternative policy approaches. 5

6 2. ONE MORE TIME: WHY VENTURE CAPITAL IS IMPORTANT Venture capital s importance in regional and national economic development is based on US evidence of its role in encouraging innovation a key driver of economic growth - by funding the emergence and growth of new technology-based companies. New technology-based firms have significant intangible assets (e.g. patents). They are likely to need funding to cover what may be a lengthy period of negative earnings as they turn these intellectual assets into products in advance of sales. Further substantial funding is also likely to be needed to cross the chasm from early adopters to mainstream customers. Their lack of tangible assets which could be used as collateral and their uncertain prospects of commercial success means that they are unlikely to be able to access bank loans. Venture capital is better able to address these challenges on account of its skills in screening investment opportunities, providing post-investment monitoring and support and structuring investments and because of the equity-based nature of its investments. As a consequence, it is the most appropriate source of finance for new technology-based firms. However, the need for venture capital funds to generate a large return on their investment in a five to seven year time frame through an IPO or acquisition means that only certain types of start-ups are candidates for this type of funding (Bhidé, 2007). Management needs to be capable of rapidly building an enterprise. Venture capitalists normally avoid businesses that are trying to create a market. Rather, VCs tend to wait for evidence of sizeable sales in conjunction with a large number of potential users who have not yet become customers (Bhidé, 2007: 46). They also avoid investing in mature markets. The business also needs a durable competitive advantage. Typically this means that it has technological foundations in the form of their own or 6

7 someone else s patents (usually obtained prior to raising venture capital) and an incipient technological advantage. However, venture capitalists avoid companies that are developing ground-level technologies. Rather, venture capitalists seek to build on, or combine, the high level knowledge that the business has already secured. Finally, venture capitalists look to invest in businesses where rapid expansion has significant payoffs. That said, venture capitalists will make a range of trade-offs amongst these criteria. For example, exceptionally credible founders may lead VCs to suspend their normal criteria for evaluating potential markets or competitive advantages (Bhidé, 2007: 51). There are few, if any, dissenters from the view that venture capital plays a central role in the emergence of new industries by funding and supporting innovative companies which later dominate these industries. Indeed, Lerner and Watson (2008) argue that the venture capital model is more effective in commercialising scientific discoveries than the corporate sector, despite the latter s large expenditure on R&D. Venture capital investment speeds the development of companies, enabling them to transform ideas quickly into marketable products and become industry leaders through first mover advantages (Zhang, 2007). This, in turn, means they are younger when they achieve an IPO compared with companies that were not venture capital backed, and they sustain their success for much longer after their IPO (Gompers and Lerner, 2001). Hellmann and Puri (2000, 2002) show that venture capital-backed companies aim at more radical innovations, are significantly faster in introducing their products to the market and pursue more aggressive market strategies than other start-ups. 7

8 For these reasons, policy-makers view venture capital as playing a central role in both innovation policy facilitating the commercialisation the science base and entrepreneurship policy - facilitating the emergence of high growth businesses - and so will intervene to address gaps in its supply (Murray, 2007). The UK s new White Paper, New Industry, New Jobs, justifies intervention on the grounds that... access to finance is an important barrier for business to develop their full potential and... must be regarded as a serious impediment to the UK s economic success (HM Government, 2009: 10). Concerns about the diminishing volume of early stage venture capital investment has been a recurring theme throughout the post-war era (Mason and Harrison, 1991a). The favoured approach since the Labour Government came into office in 1997, has been hybrid funds involving a combination of public and private investment, with incentives which enhance the returns or lower the risk to attract private sector institutions to invest, and are managed by private sector fund managers (Murray 2007). Examples include the Early Growth Funds, University Challenge Funds; Regional Venture Capital Funds). Many of these funds are regionally focussed. Both the English Regional Development Agencies and the development agencies in Scotland and Wales have also created their own funds. A more recent development has been the creation of publicly-funded co-investment funds which invest alongside private investors in the same deals. These funds are intended to enhance their liquidity of private sector investors so that they can make new investments which in many cases they would not otherwise make. 2 2 There are two main models for co-investment schemes. One model is for the co-investment fund to pre-approve investment partners and automatically match all of their investments that fall within the scheme s rules (e.g. in terms of size, sector). The other main model involves matching investments made by investors who invest in deals from approved sources (e.g. business angel networks). 8

9 3. DATA SOURCES The paper draws on two data sources. The first is the annual reports on investment activity published by the British Venture Capital Association (BVCA). This is based on a survey - undertaken by PriceWaterhouseCoopers - of the Association s members which comprise the vast majority of private equity and venture capital firms. It achieves a very high response rate, often 100%. The main limitation is that the statistics are reported in aggregate form, although are broken down into detailed categories, for example, by stage, industry and region. In order to probe beyond the BVCA s aggregate figures we utilise Library House data (now absorbed into Dow Jones Venture Source) which reports individual investments along with various additional information on the investor and business which enabled customised tables to be generated. 3 It is important to note that Library House s coverage of investment activity is narrower than that of the BVCA, and in particular does not extend to private equity investments. In addition, its database is built up from reported investments and so does not capture all the investments that BVCA reports in its annual investments activity reports. 4 In addition, the amount of information that is provided about each investment in Library House s database is limited, which restricts the amount of disaggregation possible. On the other hand, it does capture some investments, notably those by angel groups and high net worth individuals making large business angel investments, which are not included in BVCA investment statistics. 5 The Library House database disaggregates the type of investments into two categories: 3 This source was also used by Pierrakis and Mason (2008). Some of the figures reported here may differ slightly from those cited by Pierrakis and Mason (2008): (i) the Library House database is live and so is continually being updated; (ii) further cleaning of the data by the authors. However, these changes do not change the observed trends and the argument made by Pierrakis and Mason (2008). 4 Investments of 50,000 or more reported by Library House as a proportion of those in the BVCA statistics have risen from 33% in 2000 to over 50% since However, there is no source which provides a comprehensive coverage of angel investments (Mason and Harrison, 2008) 9

10 Those involving one or more private sector investors. This category primarily captures venture capital firms, but also identifies investments made by some types of business angels, notably investor networks (e.g. angel syndicates), family offices and named and un-named high net worth individuals. On account of their size these investments are much more visible than those of typical business angels. However, a key limitation of the data is that investments by business angels are only identified where they have coinvested with either private or public sector funds. Those involving one or more publicly backed funds (e.g. Regional Venture Capital Funds, University Challenge Funds). These are funds which have received some or all of their capital from the public sector, including central government departments, regional development agencies and the European Union (e.g. ERDF). They are normally managed by independent fund managers. 6 This information has enabled us to classify investments into the following categories: Deals involving solely private sector investors. This includes both venture capital funds and business angels. Deals solely made by publicly-backed funds. Deals - which we term co-investments - in which one or more private sector investors has invested alongside one or more public sector funds. Investments in this category include both ad hoc syndications between public sector funds and private investors and also investments involving Co-Investment Funds that have been established specifically to invest alongside private investors. 6 However, the database does not differentiate between co-investment funds and other public sector funds. So, for example, investments made by the Scottish Co-Investment Fund, Scottish Seed Fund, Scottish Venture Fund and Business Growth Fund are not separately identified but simply classified as Scottish Enterprise. 10

11 Of course, public sector intervention in the early stage venture capital market goes beyond the establishment of public sector funds. Tax-based incentives to encourage private investors to invest in unquoted companies through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are also very significant. However, the Library House database does not identify investments made using the EIS and its coverage of investments by VCTs is very patchy VENTURE CAPITAL TRENDS IN THE UK SINCE Aggregate analysis The UK boasts the largest private equity market in Europe, accounting for one in every three investments. Statistics on investment activity collected by the British Venture Capital Association (BVCA) show a trebling in the value of investments between 2003 and 2007 from 4bn to nearly 12bn, after falling in the immediate aftermath of the tech collapse. However, the value of investments fell by 28% in 2008 as the financial crisis took hold (Figure 1). In contrast, the number of investments has remained fairly stable at around 1300 over the same period. Figure 1. Annual private equity and venture capital investment, ( m) These statistics include all forms of private equity and not just venture capital. Closer examination of the details behind these aggregate statistics indicates that this expansion in 7 Library House only reports the fund managers, not the specific fund. It only separately reports investments by VCTs when they have VCT in their title. 11

12 investment activity has been in private equity rather than venture capital, propelled by a huge increase in funding for management buy-outs and buy-ins (MBOs and MBIs) (Figure 1). This has had the effect of driving up the average (mean) size of investment over the period, peaking at 9m in 2007, more than twice its 2001 value, dropping back to 6.7m in However, reflecting the highly skewed investment size distribution, more than three-quarters of all investments involve amounts of under 2m and around two-thirds are for under 500,000. These proportions have risen since TABLE 1 UK early stage investments Early stage investments have fallen since 2000 in terms of amount invested, apart from the anomalous year of 2006, and their share of total investment activity has been less than 5% in recent years (apart from 2006). Numbers of early stage investments, in contrast, have modestly increased since 2000 (Table 1). Taken in conjunction with trends in the amount invested, this indicates that there has been a decline in the average size of early stage investments. It is also worthy of note that the number of early stage investments remained static in 2008 whereas the amount invested fell by 17% (Table 1). 4.2 Types of investor - Total investments The additional dimension which the Library House database adds is evidence on changes in the supply of venture capital since the turn of the century. Specifically, it reveals that the public sector has become considerably more important as an investor in both absolute and relative terms. Deals involving public sector funds, either investing on their own or co-investing with 12

13 private investors (funds or individuals), have more than trebled between 2001 and 2007, although both fell by 18% in This represents an increase in their share of investments from 19% in 2001 to 44% in 2008 (Figure 2). Meanwhile, free-standing private sector investments although increasing in numerical terms from 2002 until 2006 have declined as a proportion of total investment activity from 81% in 2001 to 56% in These trends two sides of the same coin - underline the growth and current scale of the public sector s involvement in one form or another in the supply of venture capital. Figure 2: Proportion of investments by type of investor, The increasing significance of the public sector has risen on account of its growing use of coinvestment as an investment model. Co-investments accounted for 26% investments in 2008 compared with just 7% of all investments in 2001 (Figure 2). Indeed, public-private coinvestments are now the dominant form of public sector venture capital investment, reaching a peak of 67% of all deals involving the public sector in 2007 compared with 37% in 2001, and since 2005 has exceeded the annual number of free-standing investments by public-sector funds (Figure 3a). One-third of private sector investments were co-investments with public sector funds in 2008 compared with just 8% in 2001 (Figure 3b), underlining that a significant proportion of private venture capital investment activity is now supported by the public sector. Figure 3: Co-investments as a proportion of deals Figure 4: Distribution of deals sizes by type of investor,

14 These trends can be unpacked in two further respects. First, these various types of investors occupy different parts of the funding spectrum (Figure 4). Private investors (funds and individuals) had an average size of 3.7m in 2007 but a very wide size distribution, with 11% of deals below 250,000 but 45% above 5m. The average public-private co-investment is smaller at 1.5m, with 81% of investments at 2m and below. Deals involving only public sector funds were largely confined to 500,000 and under (83%) ( 378,000 average size). Second, wthin the private sector business angels have become more significant in both absolute and relative terms. Their investments increased more than threefold between 2001 and 2007, but then dropped back by over one-quarter in 2008, while their share of private sector investment rose from 13% to over 40% (Figure 5). Moreover, business angels and angel groups have become increasingly prominent as co-investment partners, involved in more than 40% of all deals annually in which public sector funds participated since Figure 5: Number of investments with Business Angel involvement in the UK, Types of investor - Early stage investments We now turn our attention to early stage investments, defined as rounds 1, 2 and 3 investments that are below 2m. This definition is used because the Library House database categorises deals in terms of rounds rather than stage of business development. The increased involvement of the public sector is even more apparent in the early stage venture capital market. The involvement of the public sector in the supply of early stage venture capital has increased significantly to a situation in which it accounts for the majority of such 14

15 investments (Figure 6). In 2001 public sector funds were involved in 36% of investments. By 2003, as the various funds established by the Labour Government came on stream, this had risen to 51% and by 2008 accounted for 68% of all investments. This reflects the growth of coinvestment schemes which have risen from 10% of all investments in 2001 to more than 30% since The proportion of public sector investments which are co-investment deals has risen from 28% in 2001 to peak at 56% in 2007, falling back to 45% in Nevertheless private sector investors remain important, both as free-standing investors and co-investment partners, involved in more than 60% of all investments annually between 2001 and 2008 and in some years this proportion was in excess of 70%. But what has happened, of course, is that an increasing proportion of early stage private sector investments have been co-investments with public sector funds, rising from 13% in 2001 to more than 45% since 2005, while the proportion of independent private sector investments has fallen, accounting for just 32% of all investments in Meanwhile, the composition of the private sector category has changed, with business angels increasingly significant as a source of early stage investment at the expense of private sector funds which have declined. Investments by business angels increased year-on-year between 2001 and 2007, falling back in 2008, accounting for 44% all private sector investments in 2008, compared with 16% in 2001, and from 12% of all early stage deals 2001 to 28% in 2008, after peaking at 32% the year earlier. Figure 6: Early stage investments by year and type of investor Summary 15

16 Year-on-year trends in early stage venture capital investment since the post-2000 technologycrash have been volatile. Amounts invested have not recovered to their 2000 peak although the number of investments have risen, reflecting an increase in investments of under 500,000. The public sector has become proportionately more significant as an investor, largely on account of the growth of public-private co-investment which is now the dominant way in which the public invests in early stage companies. Private sector investors remain prominent in terms of the number of investments they make, but are now much more likely to investment alongside the public sector in co-investment deals. The composition of early stage private sector investors has also changed, with an increase in the significance of investments by private individuals, including mega angels investing alone, angel syndicates and other forms of organised angel investing, and a decline in the significance of private sector venture capital funds. 5. VENTURE CAPITAL TRENDS IN THE UK REGIONS In the remainder of this paper we extend this analysis by shifting focus from the national to the regional scale. It addresses two empirical questions: 1. Does the geography of venture capital investments in the UK continue to be characterised by regional inequalities, as previous studies have indicated (Mason, 1987; 2007; Mason and Harrison, 1991b; 2002; Martin 1989; 1992; Martin et al, 2005)? 2. What has been the effect of the changes in the supply of venture capital, as described in the previous section, on the geography of venture capital investments? 16

17 Answers to these questions will, in turn, inform a third question: what has been the effect of the increased government intervention in the supply of venture capital, and the forms that this intervention has taken, on the geography of venture capital in the UK in the early 21 st century? It is now well established that venture capital is not equally available in all parts of a country (Mason and Harrison, 2002; Martin et al, 2005; Green, 2004; Florida and Kenney, 1988; Florida and Smith, 1993; Zook, 2002). Indeed, some types of government intervention have specifically focused on the regional equity gap with initiatives designed to increase the supply of venture capital in specific regions and localities (Murray, 1998; Sunley et al, 2005). The uneven geography of venture capital investing is typically explained as an outcome of the clustering of venture capital funds in a small number of cities and the localised nature of venture capital investing as a means of reducing uncertainty and thereby minimising risk (Florida and Kenney, 1988; Sorensen and Stuart, 2001; Mason, 2007). Venture capital firms do make long distance investments, particularly as they mature (Sorensen and Stuart, 2001; De Clercq et al, 2001), but this is normally in the context of syndicated investments with one or more other investors, and where one of the other investors usually the lead investor - is local to the investee business (see Rosiello and Parris, 2009 for this feature in the UK biotechnology sector). 5.1 The regional distribution of venture capital investments: aggregate patterns BVCA statistics on investment activity are disaggregated by region and have been used in previous studies to examine the uneven geography of venture capital investments. There are various ways in which to measure the regional distribution of venture capital investments. Essentially there are three critical decisions. First, are venture capital investments 17

18 measured in terms of number of investments or amount invested? Second, what types of venture capital investments are included? Investment statistics are disaggregated by stage of investment (start-up, other early, expansion and MBO/MBI). Third, should venture capital investment in each region be compared with that region s stock of companies, new firms or employment? Different conclusions may arise depending on the choices made. In what follows we present the regional distribution of venture capital in the form of location quotients which indicate each region s share of early stage (i.e. start-up and other early stage) venture capital investments (both number and amount) as a ratio of that region s share of national business activity (measured by the number of VAT-registered companies). A value of over one indicates that a region has more than its expected share of venture capital investments based on that region s share of the national business population whereas a value of less than one indicates that its share is less than expected. The analysis is presented for four separate time-periods which conform to aggregate investment trends. This also has the advantage of smoothing some of the year-on-year fluctuations in investment activity that are apparent at the regional scale. TABLE 2. Distribution of early stage investments in the UK: number and region TABLE 3. Distribution of early stage investments in the UK: amount invested and region The regional distribution of early stage venture capital investments (Table 2) contrasts sharply with the regional distribution measured in terms of amounts invested (Table 3). For the period , regions with more than their expected share of venture capital investments by number included both the core regions of London, the South East and East of England and also several peripheral regions (North East, North West, Scotland). Regions with fewer than expected 18

19 investments included Yorkshire, the East Midlands, West Midlands, South West, Wales and Northern Ireland. In 2008, when the onset of the financial crisis resulted in a downturn in venture capital activity, London and the South East continued to have more than their expected share of venture capital investments, along with the North West, North East, Scotland and also the West Midlands and Northern Ireland (Table 2). However, a rather different picture emerges when the amount invested is considered. For both the and 2008 periods London and the South East both had more than their expected shares of early stage venture capital. The East of England, East Midlands and Yorkshire also had more than their expected shares of investment activity in the period, but in the latter two regions (which both had lower than expected shares of venture capital investments by number ) this is an outcome of one atypical year and in the other years their location quotients were less than one. 8 In 2008 the regional distribution of early stage venture capital by amount was dominated by London which attracted almost half of the total. Only London and the South East, along with the North East, attracted more than their expected shares of early stage venture capital by amount (Table 3). Several regions therefore have significantly less than expected shares of venture capital investment by value but a greater number of venture capital investments than expected. This group comprises the North East ( only), North West, Northern Ireland, Scotland and West Midlands (2008 only). The greater than expected volume of venture capital investments in these 8 Yorkshire s location quotient was 0.49 in 2005, 1.62 in 2006 and 0.38 in East Midland s location quotient was 2.41 in 2005, 0.57 in 2006 and 0.64 in

20 regions clearly reflects their large numbers of small scale investments, a point that we return to later. How stable is this geographical distribution of venture capital investment over time? Comparing the boom period of the late 1990s, the post 2000 downturn, the mid decade recovery and the onset of the financial crisis (2008) reveals some contrasting trends for different regions: London and the South East have both consistently attracted more than their expected shares of early stage venture capital (both number and amount) across all four periods. However, whereas London s share of early stage venture capital in terms of amount invested has steadily increased over the past 10 years, from 22% in the boom years to 48% in 2008, the South East s share of both the number of investments and amount invested has fallen over the same period. East of England attracted more than its expected investment in the crash (2001-3) and recovery (2005-7) periods Scotland s position has deteriorated over the four periods in terms of its share of venture capital investment by value, having more than its expected investment in the boom of the late 1990s but less than its expected share in subsequent periods. This may be linked to the privatisation of Scottish Enterprise s venture capital division at the turn of the century (Hood, 2000). However, it has consistently had more than its expected share of investments by number, reflecting the active role of Scottish Enterprise in the venture capital market and, in particular, the launch of its very successful co-investment scheme in 2003 (Hayton et al, 2008). 20

21 The North East and North West have significantly improved their positions since 2001 in terms of having had more than their expected shares of venture capital investments, but only in terms of numbers of investments. Figure 7. Proportion of different types of investors in early stage deals in the UK regions The regional distribution of venture capital investments: types of investors Using Library House data we are able to decompose the types of venture capital investors in each region (Figure 7). Looking at the entire period, and only considering early stage investments (defined as rounds 1-3 and under 2m), we find that there is a clear distinction between, on the one hand London, the South East and East of England and, on the other hand, the rest of the country in terms of the proportion of deals involving private and public sector investors. Looking at the period as a whole, deals exclusively involving private investors accounted for more than 70% of all investments in London, nearly two-thirds in the South East and 60% in the East of England. In the South West and East Midlands the proportion of freestanding private sector investments was around 40%, dropping to 32% in Scotland, around onequarter in Yorkshire, the North West, North East and Wales, and around 15% in West Midlands and Northern Ireland. This means that in regions north and west of the Humber-Severn axis the public sector is involved in upwards of three-quarters of early stage venture capital investments. Moreover, the proportion of deals involving the public sector has risen over time, reaching over 90% in several regions in 2008 (Figure 8). However, the form of public sector intervention varies. In Northern Ireland, Scotland and the North East co-investments between the public and private sector dominate, accounting for 64%, 52% and 42% respectively of all investments, 21

22 whereas in the other regions with high proportions of public sector involvement notably the West Midlands, Wales, Yorkshire and the North West free-standing public sector investments account for 50% or more of all investments. Figure 8: Proportion of investments involving the public sector by year by region Figure 9: Proportion of early stage deals involving business angels by region The Library House data also provides some insight into regional variations in the relative significance business angels. However, as noted earlier, the data are partial, with business angels only identified in deals where they have invested alongside venture capital funds. With this important caveat, business angels are most prominent in Scotland, accounting for over one-third of early stage investments and the North East where they account for 30%. They are least significant in Yorkshire and The Humber, North West, Northern Ireland and Wales (Figure 9). One way in which to interpret this regional pattern is in terms of the dominant form of public sector intervention (fund or co-investment), discussed in the previous paragraph. There is an association, at least in those regions that are at the extremes of the distribution, between the relative importance of co-investments by the public sector and the relative importance of business angels. It might be that business angels are crowded out in regions where the public sector invests on its own whereas their numbers are boosted in regions with co-investment funds. But based on the Scottish experience it may be that a well-developed angel market is actually a pre-requisite for the successful operation of co-investment funds. The Scottish experience also suggest that the successful operation of a co-investment fund provides a further boost to the development of new angel groups (Hayton et al, 2008). 22

23 6. SUMMARY The aim of this paper has been twofold: first, to update earlier evidence on the uneven geography of venture capital in the UK (Mason and Harrison, 2002) and second, to probe below the aggregate statistics provided by the British Venture Capital Association using deal specific information to highlight regional variations in the composition of venture capital. At the national scale the supply of early stage venture capital recovered during the mid 2000s after its collapse in the wake of the technology crash in 2001 but fell back in 2008 with the onset of the financial crisis. During this period the provision of early stage venture capital has changed, with public sector venture capital funds becoming more important largely as a result of the growth of coinvestment schemes which invest alongside business angels and private sector funds. Both public sector funds investing on their own and private investors investing on their own have declined in both relative and absolute significance since The composition of private sector investors has also changed, with funds declining in significance and various types of business angels (high net worth individuals and angel groups) becoming more important. At the regional scale several northern regions have more than their expected shares of early stage venture capital investments, measured by number of deals. At first glance this appears to be a positive development. However, closer inspection reveals more disquieting features. First, the high level of investment activity is largely a function of the public sector venture capital funds, either investing on their own or in conjunction with private sector investors. Indeed, over the period as a whole the public sector has been involved in more than three-quarters of the early stage investments made in the midlands and north, rising to more than 90% in some regions in 23

24 2008. The proportion of free-standing private sector deals in these regions is correspondingly low. Second, the average size of these investments is small, reflecting the small fund sizes and maximum investment thresholds of public sector schemes. Early stage venture capital, measured in terms of the amount invested, continues to be over-concentrated in core regions of southern England as it always has been (Mason, 1987; Martin, 1989; 1992; Mason and Harrison, 1991b; 2002). So, from a regional perspective the UK now appears to have two early stage venture capital markets. In London, the South East and, to a lesser extent, the East of England, private sector investors dominate investment activity, investing for the most part on their own rather than with public sector co-investors. This contrasts with the remainder of the UK where the early stage venture capital market is under-pinned by extensive public sector involvement. In some regions this takes the form of free-standing investments by public sector funds whereas in other regions it takes the form of co-investments with the private sector. Private investors investing on their own account for only a minority of investments in these regions and have been more likely to invest alongside the public sector in co-investment deals than on their own. Moreover, this gap between London and the South East and the rest of the country has widened since 2001, during periods of both declining and expanding venture capital investment activity. 7. POLICY IMPLICATIONS Northern regions of the UK are increasingly dependent on the public sector to supply venture capital. The key policy question is whether public sector venture capital is an effective means of achieving regional development. Emerging evidence is not encouraging (Nightingale et al, 2009). Companies that have received funding from public sector venture capital funds have not performed significantly better than matched firms which did not receive funding from such 24

25 sources. This finding is open to at least two possible interpretations. From a demand-side perspective it suggests that the UK does not have a large stock of high potential firms that are only being held back by a simple lack of equity funding. This interpretation also allows for the possibility that savvy entrepreneurs positively discriminate in favour of private sector investors when making their choice of financial partner. Alternatively, from a supply side perspective it may reflect the limitations of the public sector venture capital model. First, the focus of such funds on specific geographical areas restricts the supply of suitable investment opportunities, particularly in smaller regions. Second, the investments made by the public sector venture capital funds are small, typically under 500,000. This is primarily because the funds have a maximum investment size, imposed by government to prevent them from undergoing investment drift. However, this is typically too small to meet the funding needs of high-growth firms (SQW, 2009). In addition, the funds are generally too small to have the capacity to make significant follow-on investments. The consequence for the management teams of the investee businesses is that they are forced to spend a disproportionate amount of their time seeking further finance. If follow-on investment is not found this may necessitate the premature sale the company, or even its closure. On the other hand, if follow-on investment is raised there is the risk of friction between the multiple co-investors who sit on their board, for example, in terms of the strategic direction of the business or when to seek an exit (Peters, 2009). However, being unable to participate in the follow-on funding means that the public sector fund is likely to suffer punitive dilution which will significantly erode the value of its investment in the company. The second possible interpretation is that public sector venture capital funds may not be as smart as private sector venture capital in terms of adding value as Shäfer and Shilder (2009) suggest is the case for Germany. Hood s (2000: 337) account of public sector venture capital in Scotland 25

26 emphasises the necessity to attract, reward and hold together experienced and committed venture capital executives to manage public funds. Without respect in the market place public sector funds will find it difficult to attract private sector investors to co-invest or provide followon investment. This requires that the individuals running public sector funds are highly rewarded and incentivised to make the best possible returns. However, the ability of public sector venture capital funds to attract capable investment managers is constrained by their small size (i.e. funds under management) because the annual management fee is based on a percentage of the committed capital (up to 2%). The capabilities of public sector fund managers are therefore often questioned, both in terms of their ability to make good investments (quality of deal flow, domain knowledge, effectiveness of their due diligence) and to add value to their investee companies (e.g. mentoring skills, strategic insights, networks). On the other hand, Pinch and Sunley (2009) suggest that the ability of private sector venture capitalists to add value may be exaggerated. Policy-makers have introduced programmes to stimulate business angels in the hope that they can fill the gap in the provision of early stage venture capital, both nationally and at the regional level (Mason, 2009b). The angel market is evolving from one that was dominated by individuals and ad hoc groups making small investments, typically under 100,000, and with little capability for follow-on investing, to one in which angels increasingly are investing through organised groups comprising anywhere from 20 to over 100 members. These groups have developed professionalised routines for deal sourcing and evaluation, and have the capability not only to make bigger investments but to make follow-on investments (Mason, 2006). Indeed, with startup costs reduced as a result of falling bandwidth costs, improvements in open source software and the emergence of cloud computing, and exits happening much earlier than in the past (Peters, 26

27 2009), angel groups can fund businesses all the way to an exit. However, there are significant differences across regions in terms of maturity of their angel markets, with the Scottish market being the most developed. Moreover, business angels have limitations. Some are inexperienced and lack competence and may actually hinder their the prospects that their investee businesses can go on to raise venture capital as a result of unsustainable pricing or poor governance structures (Harrison and Mason, 2000). Venture capitalists may decide that a deal which already has several small shareholders is too complicated. Furthermore, angel groups cannot entirely replace venture capital funds, either in terms of the size of investment or their ability to add value. Private sector venture capital funds will always be needed when it may take 20-30m, or more, to build a global company. There is now an emerging consensus that a regionally-based public sector venture capital model is ineffective because of the need for scale in terms of the size of funds (Murray, 1999; 2007; Nightingale et al 2009; Pierrakis and Westlake, 2009) and insufficient volumes of investment opportunities at the regional scale. The latter constraint becomes even more significant as venture capital shifts from being generalist and increasingly adopts a sector focus. Indeed, individual funds appear to follow a natural path of sector specialisation to build up competences as they mature which, in turn, results in geographical diversification (De Clercq et al, 2001; Sorensen and Stuart, 2001; Christensen 2007). The regional dimension is conspicuously lacking in recent calls for the creation of new public sector VC funds (NESTA, 2008; Financial Times, 2009) or in the Government s recent announcement of its intention to create a 150m fund. However, any shift in the provision of public sector venture capital from a regional to a national focus will inevitably raise concerns in the regions that investments will be concentrated 27

28 in southern England and, worse still, that promising companies in the regions might move south to access finance (cf. Zook, 2002; 2005). 9 For example, the Northern Way a consortium of Regional Development Agencies and local authorities in the North of England emphasise the importance of local fund management presence in the regions to stimulate demand and seek out investment opportunities. They argue that although national initiatives bring scale advantages they lack a regional dimension and therefore replicate the geographical imbalance of the private sector market (Deloitte, 2009: 60). However, the importance of proximity in venture capital investing may have been exaggerated (Fritsch and Schilder, 2006; Griffith et al, 2007; Zhang, 2009). Griffith et al (2007) suggest that Silicon Valley venture capitalists have never observed the one hour rule of investing and that locational proximity is likely to become even less important in the future. Venture capital funds with a sector focus typically also place less emphasis on geographical proximity. Moreover, there are examples of technology clusters that have been able to import venture capital from distant locations (e.g. Ottawa: Mason et al, 2002; Mason, 2007). Those regions that are dependent on the public sector for early stage venture capital therefore face two challenges. First, this approach has not proved to be effective in stimulating indigenous entrepreneurship. Second, regionally-based funds will be phased out as the limitations of this approach are absorbed by policy-makers. Indeed, the regional venture capital funds are now 9 Zook (2002; 2005) noted that during the emergent phase of dot-com era many Internet companies moved to Silicon Valley in order to raise venture capital. This reflected two factors. On the supply side venture capitalists in Silicon Valley, having recognised that the Internet was the next big thing, were very receptive to approaches for funding from Internet companies whereas investors in other locations, both in the USA and other countries, either did not know, did not understand or did not believe in the Internet industry and so were likely to reject funding proposals. On the demand side the successes of Netscape and Yahoo! underlined the importance of speed to market to secure first mover advantages, hence the importance of raising venture capital at an early stage to get big fast. Thus, relocating to Silicon Valley because a strategic choice for Internet entrepreneurs because that was where the money was (2005: 61). 28

29 approaching the end of their lifespan and so are no longer making new investments. So under the likely scenario in which venture capital investors are geographically concentrated in and around London, how can other UK regions attract venture capital? We identify three critical requirements. First, on the demand side, there is a need to build investable businesses in the regions. This requires regionally-delivered grant schemes to develop technology to the point that it is commercially viable (and beyond). What we have in mind are programmes which fund promising technologies from the laboratory to the market place, such as the Advanced Technology Programme in the USA (Wessner, 2002; Chang et al, 2002). Human capital interventions are also likely to be required. US evidence suggests that the presence of outstanding scientists is much more significant than local sources of venture capital in explaining the number of venture capital-backed university spin-outs (Zhang, 2009). Attracting prominent scientists and research teams to universities in the regions might therefore be an effective way in which to generate businesses that are attractive to venture capital funds. In similar vein, Krabel et al (2009) find that mobile scientists (regardless of whether they move domestically or internationally) are more likely to become nascent entrepreneurs. Second, on the supply side, there is a need to foster the development of regionally-based angel groups. With traditional venture capital funds facing challenges to their investment model, and opportunities to build companies to an exit much more quickly and cheaply than in the past (Ante, 2009; Peters, 2009), angel groups are now assuming a much more significant role as a source of early stage venture capital. Equally important is that their hands on involvement plays a significant accreditation role and moves their investee businesses to the point where they are potentially investable by venture capital firms (Madill et al (2005). 10 Finally, given the emphasis that venture capitalists place on 10 Bill Wetzel, the pioneer of research on business angels, has spoken of business angels providing venture capital funds with scrubbed and cleaned deals. 29

30 trusted networks for deal referrals, there is a need to develop funding pipelines (Bathelt et al, 2004) between the key players in the regional entrepreneurial eco-systems (e.g. universities, incubators, angel groups, local venture capital funds) and non-local private sector venture capital sources. REFERENCES Ante, S E (2009) Super angels shake up venture capital, Business Week, 21 May. Bathelt, H, Malmberg, A and Maskell, P (2004) Clusters and knowledge, local buzz, global pipelines and the process of knowledge creation, Progress in Human Geography, 28 (1), Bhidé, A (2007) The Venturesome Economy, Princeton University Press: Princeton. Buckman, R (2009) Venture capital s coming collapse, Forbes, 12 January. BVCA (2009) BVCA Private Equity and Venture Capital Performance Measurement Survey 2008, British Venture Capital Association: London. Bygrave, W D and Timmons, J A (1992) Venture Capital at the Crossroads, Cambridge: MAS, Harvard Business School Press. Chang, C K N, Shipp, S S and Wang, A J (2002) The Advanced Technology Program: a publicprivate partnership for early stage technology development, Venture Capital: an international journal of entrepreneurial finance, 4 (4), Christensen, J L (2007) The development of geographical specialisation of venture capital, European Planning Studies, 15,

31 De Clercq, D, Goulet, P K, Kumpulainen, M and Mäkelä, M (2001) Portfolio investment strategies in the Finnish venture capital industry: a longitudinal study, Venture Capital: an international journal of entrepreneurial finance, 3 (1), Deloitte (2009) Preparing the Ground: Private investment in the regions, in the recovery phase and beyond, The Northern Way: Private Investment Commission. Financial Times (2009) Mandelson urged to create VC fund-of-funds, 19 May. Florida, R. and Kenney, M. (1988) Venture capital, high technology and regional development, Regional Studies, 22 (1), Florida, R. and D.F. Smith jr (1991) Venture capital formation, investment, and regional industrialisation, Annals of the Association of American Geographers, 83, Fritsch, M. and D. Schilder (2006) Does venture capital really require spatial proximity? An empirical investigation, Technical University of Freiberg, Faculty of Economics and Business Administration, unpublished Working Paper. Gompers, P. and J. Lerner (2001) The Money of Invention: How Venture Capital Creates New Wealth, Boston: Harvard Business School Press. Griffith, T L, Yam, P J and Subramaniam, S (2007) Silicon Valleys one hour distance rule and managing return on location, Venture Capital: an international journal of entrepreneurial finance, 9 (2), Harrison, R T and Mason, C M (2000) Venture capital market complementaries: the links between business angels and venture capital funds in the United Kingdom, Venture Capital: an international journal of entrepreneurial finance, 2 (3), Hayton, K, Thom, G, Percy, V, Boyd, C and Latimer, K (2008) Evaluation of the Scottish Co- Investment Fund, A Report to Scottish Enterprise, Glasgow 31

32 Hellmann, T and Puri, M (2000) The interaction between product market and financing strategy: the role of Venture Capital, Review of Financial Studies, 13, Hellman, T and Puri, M (2002) Venture capital and the professionalization of start-ups: Empirical Evidence, Journal of Finance, 57, HM Government (2009) New Industry, New Jobs, Department of Business, Enterprise and Regulatory Reform. Hood, N. (2000) Public venture capital and economic development: the case of Scotland, Venture Capital: an international journal of entrepreneurial finance, 2, Kedrosky, P (2009) Right-sizing the US Venture Capital Industry, Kansas City: Ewing Marion Kauffman Foundation. Krabel, S, Siegel, D S and Slavtchev, V (2009) The Internationalisation of Science and its Influence on Academic Entrepreneurship, Jerusalem Institute for Market Studies, DP Madill, J. J., G. H. Haines, jr. and A.L. Riding (2005) The role of angels in technology SMEs: a link to venture capital, Venture Capital: An International Journal of Entrepreneurial Finance, 7: Martin, R L (1989) The growth and geographical anatomy of venture capital in the United Kingdom, Regional Studies, 23, Martin, R L (1992) Financing regional enterprise: the role of the venture capital market, in R Townroe and R L Martin (eds) Regional Development in the 1990s: The British Isles in Transition, Jessica Kingsley: London, pp

33 Martin, R., C. Berndt, B. Klagge and P. Sunley (2005) Spatial proximity effects and regional equity gaps in the venture capital market: evidence from Germany and the UK, Environment and Planning A, 37, Mason, C M (1987) Venture capital in the United Kingdom: a geographical perspective, National Westminster Bank Quarterly Review, May, Mason, C (2006) Informal sources of venture finance, in S C Parker (ed) The Life Cycle of Entrepreneurial Ventures, New York: Springer: New York, pp Mason, C M (2007) Venture capital: a geographical perspective, in H Landström (ed) Handbook of Research on Venture Capital, Edward Elgar, Cheltenham, pp Mason, C (2009a) Editorial: Venture Capital in Crisis, Venture Capital: an international journal of entrepreneurial finance, 11 (4) forthcoming. Mason, C M (2009b) Public policy support for the informal venture capital market in Europe: a critical review, International Small Business Journal, forthcoming. Mason, C M and Harrison, R T (1991a) The small firm equity gap since Bolton, in J Stanworth and C Gray (eds.) Bolton Twenty Years On: The Small Firm in the 1990s (Paul Chapman Publishing, London) pp Mason, C M and Harrison, R T (1991b) Venture capital, the equity gap and the north-south divide in the UK, in M Green (ed.) Venture Capital: International Comparisons, Routledge, London, pp Mason, C. M. and R.T. Harrison (2002) The geography of venture capital investments in the UK, Transactions of the Institute of British Geographers, 27,

34 Mason, C M and Harrison, R T (2008) Measuring business angel investment activity in the United Kingdom: a review of potential data sources, Venture Capital: an international journal of entrepreneurial finance, 10, Mason, C., S. Cooper and R. Harrison (2002) Venture capital and high technology clusters: the case of Ottawa, in R. Oakey, W. During and S. Kauser (eds.) New Technology-Based Firms in the New Millennium, Volume II Oxford: Pergammon, pp Murray, G C (1998) A policy response to regional disparities in the supply of risk capital to new technology-based firms in the European Union, Regional Studies, 32, Murray, G. (1999) Seed Capital Funds and The Effect Of Scale Economies. Venture Capital: An International Journal of Entrepreneurial Finance, 1 (4) Murray, G C (2007) Venture capital and government policy, in H Landström (ed) Handbook of Research on Venture Capital, Cheltenham: Edward Elgar, pp NESTA (2008) Stimulating Venture Capital: the need for a new 1bn fund, NESTA: London. NESTA (2009) Venture Capital Fundraising Activity Slows in 2008, NESTA: London. Nightingale, P et al (2009) From Funding Gaps to Thin Markets: Designing Hybrid VC Schemes for the 21 st century, SPRU, University of Sussex for BVCA and NESTA. Peters, B (2009) Early Exits, MeteorBytes Data Management Corporation Pierrakis, Y and Mason, C (2008) Shifting Sands: The Changing Nature of the Early Stage Venture Capital Market in the UK, Research Report, NESTA, London. Pierrakis, Y and Westlake, S (2009) Reshaping the UK Economy: the role of public investment in financing growth, Research Report 91, NESTA: London Pinch, S and Sunley, P (2009) Understanding the role of venture capitalists in knowledge dissemination in high-technology agglomerations: a case study of the University of 34

35 Southampton spin-off cluster, Venture Capital: an international journal of entrepreneurial finance, 11 (4) in press. Roseillo, A and Parris, S (2009) The patterns of venture capital investment in the UK biohealthcare sector: the role of proximity, cumulative learning and specialisation, Venture Capital: an international journal of entrepreneurial finance, 11 (3), Schäfer and Schilder, D (2009) Smart capital in German start-ups: an empirical analysis, Venture Capital: an international journal of entrepreneurial finance, 11 (2) Sorsenson, O. and T.E. Stuart (2001) Syndication networks and the spatial distribution of venture capital investments, American Journal of Sociology, 106 (6), SQW Consulting (2009) The Supply of Equity Finance to SMEs: Revisiting the Equity Gap, Report to the Department of Business, Enterprise and Regulatory Reform and Department for Innovation, University and Skills. Sunley, P, Klagge, B, Berndt and Martin, R (2005) Venture capital programmes in the UK and Germany: in what sense regional policies? Regional Studies, 39 (2), Valliere, D and Peterson, R (2004) Inflating the bubble: examining dot-com investor behaviour, Venture Capital: an international journal of entrepreneurial finance, 6, Wessner, C W (2002) Entrepreneurial finance and the new economy, Venture Capital: an international journal of entrepreneurial finance, 4 (4), Zhang, J (2007) Access to venture capital and the performance of venture capital-backed star-ups in Silicon Valley, Economic Development Quarterly, 21, Zhang, J (2009) Why do some US universities generate more venture capital-backed academic entrepreneurs than others? Venture Capital: an international journal of entrepreneurial finance, 11 (2),

36 Zook, M.A. (2002) Grounded capital: venture financing and the geography of the Internet industry, , Journal of Economic Geography, 2 (2), Zook, M.A. (2005) The Geography of the Internet Industry, Oxford: Blackwell Publishing. 36

37 Figure 1. Annual private equity and venture capital investment, ( m) MBO/MBI Expansion Early stage Source: BVCA Report on Investment Activity (various years) 37

38 TABLE 1 UK early stage investments (a) Amount invested ( m) Finance stage Start-up Other early stage Total early stage Early stage as a % of total investment Source: BVCA Report on Investment Activity (various years) (b) Number of companies Finance stage Start-up Other early stage Total early stage Early stage as a % of total investment Source: BVCA Report on Investment Activity (various years) 38

39 Figure 2: Proportion of investments by type of investor, % 90% 80% 70% 60% 50% 40% 30% 20% Deals made by private & other funds Public/private co-investment deals Freestanding deals made by publicly backed funds 10% 0% Source: calculated using data from Library House database 39

40 Figure 3: Co-investments as a proportion of deals (a) Public private co-investments deals as a proportion of all deals involving public sector 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Freestanding deals made by publicly backed funds Public/private co-investment deals (b) Public private co-investments deals as a proportion of all deals involving private sector 100% 90% 80% 70% 60% 50% 40% 30% Deals made by private & other funds Public/private co-investment deals 20% 10% 0% Source: calculated using data from Library House database 40

41 Number of deals Figure 4: Distribution of deals sizes by type of investor, Freestanding deals made by publicly backed funds Deals made by private & other funds Public/private co-investments deals Amounts ( 000) 41

42 Figure 5: Number of investments with Business Angels involvement in the UK, Source: calculated using data from Library House database 42

43 Figure 6: Early stage investments by year and type of investor % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Deals made by private & other funds Public/private co-investment deals Freestanding deals made by publicly backed funds Source: calculated using data from Library House database 43

44 TABLE 2. Distribution of early stage investments in the UK: number and region region ( boom years ) ( crash years ) ( recovery years ) 2008 ( financial crisis ) No. % LQ* No. % LQ no. % LQ No. % LQ London South East South West East of England West Midlands East Midlands Yorkshire & The Humber North West North East Scotland Wales N Ireland TOTAL TABLE 3. Distribution of early stage investments in the UK: amount invested and region region ( boom years ) ( crash years ) ( recovery years ) ( financial crisis ) m % LQ* m % LQ m % LQ m % LQ London South East South West East of England West Midlands East Midlands Yorkshire & The Humber North West North East Scotland

45 London South East East of England South West East Midlands North West Yorkshire Wales North East Northern Ireland Scotland West Midlands Wales N Ireland TOTAL Figure 7. Proportion of different types of investors in early stage deals in the UK regions % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Deals made by private & other funds Public/private co-investment deals Freestanding deals made by publicly backed funds Source: calculated using data from Library House database 45

46 Figure 8: Proportion of investments involving the public sector by year by region 46

47 47

48 Source: calculated using data from Library House database Figure 9: Proportion of early stage deals involving business angels by region 48

49 Source: calculated using data from Library House database 49