A yawning “performance gap” between British and US venture capital investment is beginning to grow again, leaving innovative UK start-ups starved of funds.
UK venture capital returns continue to lag those of US funds, and the “investment gap is widening rather than narrowing”, according to a report from Nesta, a British foundation that encourages innovation.
For funds raised just before and during the “dotcom bubble” before 2000, average returns on both sides of the Atlantic have been poor, but they are around 4pc lower on average for UK venture capital firms.
Nesta said the UK-US performance gap had been slowly closing for much of the 2000s, but it had started to diverge again.
This was probably down to a resurgence of tech flotations in the US and increasing cash balances of internet giants, the report said, leading to more trade sales.
Nesta warned that “slower, less profitable UK exits may be both driving down performance of UK funds, and persuading the best
UK companies to incorporate in the US to take best advantage of more favourable IPO markets”.
Venture capital investment in the UK was $2.3bn (£1.5bn) in 2012, compared with $41bn in the US. When measured as a proportion of GDP, UK venture capital is less than half the size of the US industry, Nesta said. UK venture capital has “acquired a reputation for poor returns that has been hard to shake,” the report said.
“The UK venture market has struggled for years with the perception of being a smaller, less successful cousin to the US market.
“The UK and Europe missed out on the outsized returns of the late 1990s but participated fully in the excesses of the bubble.” Louise Marston, Nesta’s director of innovation and economic growth, said: “Venture capital funding is vital to innovation. There are questions about how the UK can create a wider environment for start-ups that supports growth.”
However, the study found some “early signs” of improvement in the UK venture capital market. London is being viewed “very positively” as a hunting ground for overseas start-up and growth company investors.
The rise of East Coast funds, especially those in New York, could be helpful in providing an overseas source of investment that is “closer in both geography and temperament to London” than Silicon Valley is, Nesta added.