Rising foreign investment in UK boosts venture industry

At a time when a thriving start-up market and a focus on entrepreneurialism is demanded to boost economic recovery, it is crucial that regulation is supportive of the industry. This was made clear in a recent Silicon Valley Bank survey, Startup Outlook 2013. The survey of 125 new technology businesses found that 56% of executives feel there should be more access to government grants and funds designed to help start-ups. Around 52% of respondents believe the government should be focusing on tax reform and introducing more initiatives such as the R&D tax credit allowance.

When it comes to employment law, 31% of those surveyed want easier access to employment visas, and 25% think government should focus its efforts on improving employment law through proposals such as the owner-employee initiative.

However, the latest figures from UK Trade and Investment (UKTI), detailed in the Inward Investment Report 2012/2013, finds that the UK attracted $62bn in foreign direct investment, an increase on 2012's inflows and the highest level received in Europe.

Interestingly, a trend has emerged for UK FDI in recent years, moving away from M&A and towards other forms of direct investment, such as funding for specific projects. According to the United Nations Conference on Trade and Development (UNCTAD), the value of M&A deals by foreign companies throughout 2012 fell by 22% to just $35bn.

For the venture capital industry specifically, the Inward Investment report highlights the UKTI's ‘Global Entrepreneur Programme', designed to attract international entrepreneurs into the UK. Over the past 12 months, 60 business ventures have been set up through the initiative, and around £1bn of venture capital has been raised by entrepreneurs looking to set up shop in the UK. Indeed, according to Dushy Sivanithy, principal at Pantheon: "There are some US entrepreneurs funding and mentoring new groups. They can see the opportunity in Europe but they can't access it themselves, but are willing to fund some of the more interesting London-based groups."

The technology sector seems to be the main attraction and cause of increasing foreign interest in UK start-ups. Joanna Shields, CEO of Tech City and UK business ambassador for digital industries, believes the UK is the location of choice for international technology entrepreneurs. Shields cites the recent introduction of ambitious policy packages, business incentives, tax credits, tax rate reduction and visa support as key drivers in boosting the UK's reputation. For example, the Entrepreneur Visa provides access for residents outside of the European Union to set up a business in the UK.

Another incentive is the Seed Enterprise Investment Scheme, the most generous early-stage tax break, offering 50% tax relief for the first £100,000 of seed investment.

More recently, the government introduced the Patent Box scheme, which rewards the development and exploitation of patents by reducing corporation tax to 10% of profits.

Tech City, a 2011 government initiative, has given rise to numerous start-ups, providing fertile ground for venture investors seeking new opportunities. For example, Transferwise, the innovative approach to money transfer, has received backing from Valar Ventures, based in the US, IA Ventures, also from the States and UK investor Index Ventures.

Another notable Tech City start-up is Huddle, which through two rounds of funding has attracted investment from US and Asian venture firm Matrix Partners alongside UK investor Eden Ventures.

Two or three years ago, the prospect of setting up a tech business in the UK sounded preposterous, and for entrepreneurs looking for state and investor support, the US West Coast was the only destination.

Despite a continued demand for more government initiatives to support the start-up industry, the UKTI figures show schemes already underway are attracting not only foreign investors but also successful entrepreneurs from outside the EU. However, while the government has clearly improved start-up funding, incentives for follow-on funding are near non-existent, and herein lays one of the biggest constraints to a truly thriving UK venture capital market.

The recent surge in foreign direct investment could boost UK venture

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