The Future of the VC Industry: Is it Time for an Extended Strategic Role and New Partnerships?

After some economic highs and lows during the past decades and the more recent financial “credit crunch”, the UK urgently needs to secure its global position amongst other leading knowledge-intensive economies. To achieve this goal, the UK Government would need to support the re-alignment of a segment of the financial industry that has been in constant change since its first conception five or six decades ago. More than ever, the UK is facing important challenges in terms of shifting investment patterns and uncertain future demand of Venture Capital (VC) due to the globalization of high-tech industries - mostly due to the current economic expansion of India and China. This is compounded by the relatively rapid obsolescence of technical knowledge and skills due to the shortening of innovation cycles.

An issue subject to recent debate in policy and business forums is how to promote the survival, growth and profitability of small-sized firms in high-tech sectors in the UK. On the one hand, the supply of scientific entrepreneurs and spin-off firms appears not to be enough to cope with the potential demand. Although the UK has a good record in basic research and patenting, the level of business exploitation of the know-how and expertise embedded in individual scientists and their social academic and industrial networks has been low in comparison to other countries such as the US for example. On the other hand, the financial results of high-tech start-ups backed by venture capital at the early stages has been particularly disappointing in terms of the returns of investment at the later stages - in contrast to non high-tech sectors, such as services and retail.

Foresight North believes that the UK needs to focus on high-value, knowledge-intensive sectors in order to secure its global position, but only the concerted collaboration of key public and private actors, including technology firms, financial institutions, industry associations, universities, and government, will ensure success at facing these new global challenges and opportunities.

Foresight North advocates that an innovation ecosystem should be assessed on the basis of how effectively financial, strategic, entrepreneurial, and technological resources and capabilities are being acquired, developed, shared, and mobilized. But what are then the underlying structural, strategic, and entrepreneurial factors and policies that could have a direct and positive effect on the functioning of our innovation ecosystems.

On the financial sphere, practices have evolved, from no risk funding available back in the 1990s, to government sponsored venture trusts in 2000, to the first private venture capital investments in 2005, which now account for more than two thirds of risk-based investment in the North West. Technology-based business is high risk, with one out of five investments making some return, one out of ten making it attractive for investors (with ROIs higher than bank saving rates), and one out of fifty becoming incredibly profitable. The high risk nature of this type of investment has promoted investment practices to shift from single-VC to syndication, which is the bundling of investment funding from various investors into one start-up. This has now become the norm for larger investments, particularly in the pharmaceutical and biotechnology sectors, with lower capital requirements in the Internet technology and digital media sectors.

An extended strategic role of the VC industry would foster the creation of sustainablle successful innovation ecosystems, and help secure UK's global competitive position. While significant effort has been spent trying to understand the impact of investment portfolio decisions (e.g., by stage and sector) on the economic returns when exiting from capital investments, considerably less attention has been paid to how effectively our venture capital industry actually supports the collective of startup companies before and after investments have been made.

Some questions for our discussion:

What should be the new strategic role of the VC industry within resource-constrained innovation ecosystems facing growing global competition?

What are the key entrepreneurial and innovation capabilities that need to be developed and nurtured in each phase of the start up cycle? How can start up cycles be accelerated? How can investors reduce the uncertainty of picking winners at an early stage?

What are the most effective financial and innovation strategies, and how can these be aligned with the characteristics and strengths of our particular ecosystems?

Feel free to join our online discussion and pose your own questions and comments...