The role of UK government hybrid venture capital funds in addressing the finance gap facing innovative SMEs in the post-2007 financial crisis era

This chapter examines how the United Kingdom (UK) government has addressed the equity finance gap since the onset of the recent financial crisis. Drawing on Lerner’s (2010) ‘guiding principles’ for public intervention in the venture capital (VC) market it explores the notion that an equity finance gap may be holding back the growth of innovative small and medium-sized enterprises (SMEs). Using recent demand-side and supply-side research evidence alongside existing literature, the chapter focuses on the following five principles and lessons: (i) government has a justified, catalytic role in addressing the equity finance gap to stimulate research & development (R & D) investment; (ii) the management of funds should be private sector led and governments should resist the temptation to over-engineer; (iii) funds need to recognize the long lead times and investment horizons for sensible exit timescales, sustainability and encouragement for future private VC activity; (iv) government VC funds require the size, scale and flexibility to provide follow-on funding and achieve optimal outcomes for funds and their portfolio businesses; and (v) a global perspective encourages inward investment and foreign VC collaborations opening up overseas markets.

This is a draft chapter/article that has been accepted for publication by Edward Elgar Publishing in the forthcoming book Research Handbook on Entrepreneurial Finance edited by Scott J. and Hussain J., due to be published in 2015.