Opinion: VCs need to overcome their London investment bias
Despite all the talk around “levelling up” and tech innovations coming out of everywhere from Sheffield to Southampton, it’s unsurprising to see that it’s London, not the wider UK, taking the limelight.
According to 2021 data from Dealroom and TechNation, London tech startups raised an astounding $10.8bn in the first six months of the year. That’s just £100m shy of the $10.9bn the capital’s tech businesses raised across the whole of 2020.
While the numbers are impressive, the truth is that a fixation with London’s tech sector is taking investment away from other UK areas.
Much has been made about the investment bias towards London and the attention the City gets from UK and foreign investors – and with good reason.
Research conducted over the last few years for the University of Leeds’ Credit Management Research Centre shows that 75% of all invested funds go to London and South-Eastern companies, while a separate government report shows businesses outside London are up to 50% less likely to secure equity funding.
Yorkshire is just one example of a region that’s achieving exponential success but living in London’s shadow. Yorkshire’s tech sector is the fastest-growing in the UK, and with a government report stating £120m was raised in the first eight months of 2021, the region could even surpass the £159m raised last year.
But, as encouraging as Yorkshire’s success is, the UK’s largest county still pales in comparison to London, which raised significantly more in 2021.
The Autumn Budget addressed this vast funding gap, with the chancellor announcing a £1.4bn Global Britain Investment Fund to attract foreign investors, as well as an additional £150m cash pot for the British Business Bank’s Regional Angels Programme, to enable strategic investments into local businesses.
But what else can be done to even the playing field? For starters, angels and VCs in London need to get more comfortable with investing in businesses outside the M25, following the results of a recent report from the British Business Bank.
Interestingly, it found that in up to 82% of small business equity investment stakes between 2011 and 2020, the investor and investee were located within two hours travel time of each other, highlighting the ongoing issue of investment clusters.
Tackling London investment bias
One step that London VCs can take to help solve this problem is to co-invest in new and exciting tech businesses alongside their regional counterparts, in areas such as the Northern Powerhouse and the aptly named Midlands Engine, which is home to world-leading resources like the National Automotive Innovation Centre.
As well as helping London investors to diversify their portfolio, which can be a way to mitigate risk, it’s no secret that business costs are much lower outside the capital, meaning any investment is likely to go further and have more impact.
Another benefit of co-investing in other regions and alongside regional investors is that VCs or angels who are based outside of the capital are often always closer to the investment scene, whether that’s knowing about local schemes or being involved with startup communities like the University of Leeds’ Nexus incubator.
As for what businesses can do to attract investment, a clear strategy, vision and a compelling company story are all must-haves. Investors who may be shy of investing outside London naturally need more reassurance, making these factors crucial.
An appreciation of these green ticks is what has helped innovative companies like Manchester-based AI company Peak, which could be set for unicorn status, triumph beyond Manchester’s tech scene and attract investment from SoftBank, leading the company to stand shoulder to shoulder with London’s tech stars.
But founders aside, if we’re to level up the UK’s tech investment map, it’s up to investors, politicians and industry spokespeople to work closer together.
We need to ensure that investment is accessible and available to tech companies in all parts of the UK if we’re to finally champion other regions – not just London.
David Foreman is managing director of Praetura Ventures, a Manchester-based venture capital firm that invests in early-stage, high-growth businesses across the UK, with a particular focus on supporting entrepreneurs across the North of England.