Covering a £1 bn Equity Gap

Extraordinary - NESTA is talking about a £1bn Government backed fund to invest in early stage UK startups, according to the Grauniad:

The plan, conceived by the National Endowment for Science, Technology and the Arts (Nesta), was fleshed out in discussions at Downing Street last Thursday morning between Gordon Brown, Drayson and Lord Sainsbury.

Many 'pre-revenue firms' are facing a battle for survival as they struggle to get finance. There are fears that the doubling of government funding for scientific research at universities, which has led to an increased number of spin-outs in IT, biotech, nanotech and green technologies, will count for nothing if money is not quickly distributed to them.

There are hopes that the plan will be formalised early in the new year. It could be the most significant direct investment in new technology firms since the post-war Labour government created 3i to provide risk capital to growing businesses

That's 3i who have now exited from funding the small startups they were set up to help, of course....hence the New 3i. And this time it will be different - or will it?

The venture fund will seek to draw in cash from the private sector including private equity, universities and mainstream business. In recent years, private equity, a traditional supporter of early stage firms, has all but pulled out of the sector.

The question of course being that if this lot have been, by and large, fairly unenthusiastic at startup investing in the good times even with all the Government backed 50:50 risk sharing schemes around today, what motivation would there be to invest in the bad times?

The answer, we humbly submit, is to do 3 things:

(i) Make it financially attractive to invest in risky, early stage companies - and this means tipping the tables towards them or Private Equity will sit back and buy nice safe biscuit companies.

(ii) Don't go down the channels that are not working today - pumping more money down these sclerotic pipes is a waste of time, money and hope. Easier said than done, but a New 3i needs to be formed.

(iii) Let 4 million flowers bloom - cover the yawning "equity gap" area between £ 1/4 and £ 1/2m where all the bright, innovative companies struggle. Investing £1/4 m in 4 million startups to get them to a level of Round 1 VC funding will be far more Darwinian in the end than trying to pick far fewer deserving companies for the £2.5m tranches

Also, look wider than the universities for entrepreneurs and ideas. It is sheer intellectual arrogance to think that this is where all creativity stems from.

We shall watch this space with interest....