UK venture capital industry not attracting enough domestic funding, says report

The UK’s venture capital industry is not attracting enough funding from domestic investors compared with the likes of France and Germany, a report from the sector’s industry body has warned.

Venture Capital in the UK, a new annual paper from the British Venture Capital Association (BVCA), found the country’s risk capital sector had shown “resilience” amid the more challenging macro environment of the last two years but raised concerns about the availability of domestic capital.

Over the long-term average, only about 40 per cent of capital raised by UK funds come from domestic venture capital (VC) investors, the report found, compared with over 70 per cent in both France and Germany.

The the finding proves there is significant room for growth in Britain’s VC sector, the paper’s authors said, with Michael More, the BVCA’s chief executive, adding: “Venture capital already makes a huge contribution to the wider economy, and the UK is home to one of the largest hubs for the industry in the world.

“However, firms continue to find fundraising challenging, especially from domestic sources.”

The study will add to growing concern that while the UK retains one of the world’s most vibrant economies for start-ups and scale-ups, its capital markets aren’t sufficiently deep to keep firms from finding additional capital abroad.

Earlier this year, a record-breaking funding round carried out by British autonomous driving firm Wayve triggered fresh fears about the shallowness of the UK’s capital markets, after it was revealed not include any UK VC or private equity firms.

The paper’s authors said the numbers proved the need for venture capital to be enveloped into the package of pension reforms announced by Chancellor Rachel Reeves in her Mansion House speech earlier this month.

Reeves used her speech to commit to one of the most significant shake-ups of the pension system in decades, consolidating nearly a hundred small local government pension schemes into several “megafunds”.

Moore added: “It’s important that the very promising reforms to the UK pensions system outlined by the chancellor in her Mansion House speech increase the opportunity for pension savers to benefit from investing in our vibrant venture capital sector.”

The study also said that there was a growing number of businesses based outside of London and the South East attracting venture capital funding. But London still dominated the sector, with just under half (49 per cent) of venture capital going to firms based in the capital and 80 per cent of all the UK’s VC funds headquartered in the hub.