UK VCs react to potential freeze of tech funding from EU

Business man thinking

The UK tech sector has always shown great resilience in the face of adversity, but even more so since 52% of people voted to leave the European Union (EU) last June and entrepreneurs mourned the loss of benefits the common market had afforded them to date.

Over a year later, and still with little clarity on many factors that will inevitably impact UK tech businesses, UK VCs have aired concerns about the European Investment Fund’s (EIF) potential funding withdrawal.

Reports that the EIF had pulled investment first surfaced in May when at least four British VC firms claimed they had been affected by the freeze. Earlier this week, a group of VCs anonymously told Politico they had been notified that financial support from the EIF would cease.

A spokesperson for the European Investment Bank, a majority shareholder in the EIF, disputed the claims, telling UKTN that funding for UK tech had not stopped.

“I can confirm that there is no moratorium on investments into funds in the UK. It is the case that due diligence on them now needs to be more thorough, and take into account a wider range of factors,” they claimed.

“About a third of investment in UK-based venture capital is drawn from the EIF,” said Simon Cook, CEO of Draper Esprit, which went public last year and in so doing is no longer reliant on players such as the EIF.

In fact, statistics published by the EIF, which predominantly provides investment through private banks and funds, show its equity participation in the UK amounted to €655.8m in 2015.

With this in mind, Bruce Macfarlane, managing partner at MMC Ventures, said the potential withdrawal of funding from by the EIF would “certainly be an issue” but he remained largely positive that the right framework was in place to ensure the industry didn’t suffer a major set back.

“The government has indicated it will ensure it plugs any gap left by the EIF withdrawal,” he continued, adding that the British Business Bank, a state-owned economic development bank established by the UK government with the sole aim of increasing the supply of credit to SMEs, was already a major player in UK venture funding.

Nic Brisbourne, managing partner at Forward Partners, said that if EIF investment ceased, the British Business Bank would have to “significantly scaleup its operations to make good the shortfall”.

“Looking at the approach from a governmental level and from a practical perspective, if the EIF is to keep investing in the UK, the UK will have to keep paying into the European Investment Bank (EIB). For this to occur, a mechanism will need to be established and agreed with other member states. The good news is that there are precedents here; Israel has a deal which allows the EIF to invest in their country and Norway has something similar.

“Above all, at this time it’s fundamental that the government are ensuring that this issue is front of mind in Brexit discussions and all sides are working to secure the future growth of our nascent startup ecosystem both here and more widely in Europe.”

Government action

Generally speaking, investors seem to be put at ease by the government’s scaleup fund, which was announced earlier this month and seeks to boost the creation of UK tech unicorns while stepping in if funds from Europe stop coming in.

A statement by the government read: “Currently, British businesses also rely on funding from the European Investment Fund. A new UK based fund would help ensure that firms still have access to the funding they need, should our relationship with the European Investment Fund end when the UK leaves the EU.”

The potential loss of EIF funding also comes as the UK government published its patient capital consultation, which rather worryingly, but unsurprisingly, found a $4bn funding gap between UK and US tech firms.

“It’s currently much harder to scale a UK tech business than it is in the US as the cost of capital is much higher,” Cook added, noting he still believed the UK technology industry could continue to grow if the government intervened. The fund to support UK scaleup companies, he said, constituted the first step in doing so.

The entrepreneurial perspective

Tech entrepreneurs also called out for greater government support. Tom Cape, CEO and co-founder of Grafter, a platform which seeks to connect individuals available for paid local, manual labour, said the EIF’s potential withdrawal would “potentially cause very negative ripple effects through our vibrant tech startup sector, which is the envy of Europe”.

“The government needs to look at alternative funding to keep Britain at the top of this high-growth sector,” he told UKTN.

David Murray-Hundley, a tech investor and advisor, agreed, adding that the potential loss of investment could not only hurt the sector’s prominence in the global arena but also deter companies from setting up base in the UK. 

Tech talent: Still a worry

Being able to access talent, though, continues to be a concern for many.

Cook called out for the government to support entrepreneur’s need to access overseas talent. “Technology startups rely on a highly skilled workforce, and so if free movement of people is removed we need new initiatives to attract the best people to grow the businesses entrepreneurs are building. For us, we see this as a far more challenging problem to solve.”

Entrepreneurs and investors in the UK are right to be concerned if recent research is anything to go by. According to results published by Snap.hr – a platform that combines AI with a team of recruitment experts – some 37% of the UK’s tech talent would consider leaving following Brexit. Perhaps more concerning is that the figure seems to have doubled from 17% when a poll was first conducted prior to the referendum last June.

Although little is known about what the UK will look like for EU nationals post-Brexit, it recently emerged that citizens from the Union will continue to be allowed to visit the country without the need for visas. This, however, doesn’t mean EU citizens will automatically have the right to remain indefinitely and those who wish to work in the UK will have to adhere to new migration restrictions allegedly due to be published later this year.