Overview

The UK venture capital industry is the largest and most developed in Europe, accounting for 49 percent of total annual venture capital investment. Venture capital has existed in this country since the 18th century, but became much more common towards the end of the late 1970s. Today there are over 100 venture capital firms in the UK. Increasingly, large IT firms such as Cisco, Dell, Sun, IBM and Hewlett-Packard have also entered the arena, allocating funds for high-tech projects or using their investment as a means of creating new customers by tying the new firm into the company's products and services.

Until the 1980s, technology startups found it very hard to attract venture capital funding, though there were some success stories, such as Cisco and PeopleSoft, that would not have happened without it. The Internet boom has changed that: venture capitalists are actively on the lookout for good technology ideas, whether from startups or existing firms wishing to develop their business by, for example, setting up an e- commerce venture.

According to the British Venture Capital Association (BVCA), funding is available to anyone who wants to start up, spin off, expand or buy into a business.

Venture capital funding is essential to the growth of the new economy, and the UK has the second largest venture capital industry in the world. Today, venture capitalism is a global business. American investors are looking for European firms in which to invest, while UK firms also invest abroad. The London-based VC firm's percentage of investments in Internet or communications has grown from 10 % five years ago to almost 50%.

Now more than ever, the UK venture capital industry is willing to pour money into new business ideas. The term "venture capital" in Europe comprises early- and growth-stage investments and, unlike in the United States, money from banks used to restructure an established organization. Under the European definition of VC, English VC firms, according to BVCA dish out almost half of Europe’s annual venture capital investment. But England ranks third, behind Germany and France, in early-stage investments made in Europe, according to the EVCA.

In the United States, it is common for industry veterans and newbies alike to sign on with startups. In the UK, entrepreneurialism in the technology field is maturing faster than in the rest of Europe because the country has closer business ties to the United States. Now the UK's college graduates are opting for careers in private startup companies with stock options rather than the corporate business world, much like their U.S. counterparts have been doing for the past several years.
Only a couple years ago, venture capitalists and investment banks shied away from investing seed money in startups because new businesses typically failed. Instead, large UK investors, such as Cinven and Candover that focus on arranging mergers and acquisitions among established companies have dominated the business scene.

However, in the past year investment banks and VCs have become more willing to step in as early-stage investors have. Indeed, investments made by UK venture capitalists in startups jumped 91 percent to $177 million in 1998, according to the most recent statistics from the BVCA. Early-stage investments increased 75 percent to $283 million.

How do firms find extra funding for new projects if internal funds are lacking? Increasingly, they are turning to venture capital funds as well as the incubator funds of leading IT firms. Venture capital is available for all sorts of IT projects, ranging from network management software to IT services. And venture capital does not only go to startups, it is available to existing companies that want to expand by setting up, say, an Internet business.

Investors pumped $1.1 billion into the high-tech industry in 1998. VC firms have begun to see their investments pay off. Five years ago, ECI invested $8 million in Guardian iT Group (London Stock Exchange: GRD), an international disaster recovery computer services firm. The company went public in 1998, and now ECI's investment is worth $185 million.

In February, the 3i portfolio company, Paragon Software agreed to be acquired by U.S.-based Phone.com (Nasdaq: PHCM) for approximately $500 million. Paragon makes software that transfers personal and calendar information from PCs to mobile devices such as cellular phones, and Phone.com makes a browser designed specifically for cellular phones. 3i was Paragon's founding investor and contributed a total of $4 million to the software company in its three rounds of financing. With Paragon's sale, 3i's investment turned into $72 million in just over two years, a stunning 1,800% return.

--    The UK industry is the largest, most developed in Europe accounting for 49% of total annual venture capital investment, and is second to the USA in world importance.
 -- The UK venture capital industry has invested over £35 billion (£29 billion in the UK) in close to 19,000 companies since 1983.
-- A record £7.8 billion was invested in 1999, in over 1,300 companies, of which £6.1 billion was invested in the UK.
 -- Almost 50% of venture capital financing is for expansion – specifically to help existing businesses to grow and compete.
 -- Over £1 billion was invested in UK high tech companies in 1999.
 -- In 1999 over £1 billion of new funds were raised for future investments in high tech companies.
-- Research proves venture backed management buy-ins and buy-outs add significant value to the UK economy.
 
 

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