What is your overview of the current movements in venture capital in the United Kingdom?
CLARKE: Firstly, in the UK, the VC industry is in decline. I am referring to the private institutional VC industry. The reason for this is the funds themselves have not been returning good numbers for the limited partners. Secondly, they have been trying to make money in the early stage space, and it has not worked. What is happening is the size and the amounts of funds are not growing. Players are tending to move into later stage deals and large deals, leaving behind a gap for the start up and early stage funding. The policy terms in the UK have now become an issue. Our policy makers are trying to address this by providing public and private partnership funds where there is no first loss guarantee for public money from the private. What we are doing now is trying to create more of an equal playing field, so the returns are shared and the money comes out of the public and private funds at the same time. This is an area that the government is intervening in to try and repair the loss of privately funded VC funds.
What funding sources will replace privately funded VC funds going forward?
CLARKE: I see the transition in the UK as very similar to the US. The funds in the US are migrating to larger and later stage deals like they have in the UK. What is happening in the US and UK is that the Angel community is stepping into that void. However, the Angel community has become more organized in the last five years, meaning syndication is very much now the Angel model. It is not uncommon that a million pound syndicate can be formed with Angel investors only. That is the equivalent of an early stage series for a VC fund round.
What sort of impact has this move from VC funds to Angels had on exit strategy?
CLARKE: Ever since the crisis, exits have taken longer to achieve and the liquidity for exits is much harder to find. Particularly since 2007, the IPO market has been very quiet. In the last year or so we have seen large corporations circling and doing deals, particularly for below €25m M&A deals. Angel-backed deals have financed a few projects where the amount of capital is not great. These have been picked up by some of the large corporations. There has been a good return for the Angels without having to go through all of the phases. The lack of capital is there to run the business right forward, maybe to an IPO. The early exit is becoming an interesting phenomenon. I do believe there will be more of that. Microsoft has an enormous amount of cash, Google has as well, and there are many more. These companies are not great at innovation themselves, and they like to buy good innovators to model them. This is an opportunity for the Angels investors.
In your opinion what will be the impact of Facebook’s IPO on future IPO exits and company valuations?
CLARKE: The timing for Facebook’s IPO was unfortunate with all the developments in the macroeconomics, and there were some technical issues with that floatation. However, it still remains a large sum of money for a business. It was unproven in some aspects, but it still encouraged many investors to move into the social network space to look for the new Facebook. In my opinion, it is a success story which we should treat positively. Nevertheless, it shines light on how you can build a business where a 24 year old can achieve such an enormous amount of wealth.
In the UK, the VC industry is in decline. I am referring to the private institutional VC industry. The reason for this is the funds themselves have not been returning good numbers for the limited partners. Secondly, they have been trying to make money in the early stage space, and it has not worked.
What is the impact of the economic crisis in Europe on investments?
CLARKE: Certainly from 2007 and onwards there was a real shortage of new deals being done. Everyone was no longer sure of what prices for deals were or what the future held. We then seemed to have pulled through that, and optimism picked up again. What is happening now is the second wave of the crisis hitting countries and banks in Europe. In some cases it works positively, and we are now talking about growing economies rather than cutting public spending. One of the engines of the economy is building SMEs. Therefore, all of the policy makers are focusing on this space. In the UK, even the Prime Minister is speaking about Angel investments. After I had two sessions with him he launched a showcase on Number 10 Downing Street on why Angel investment is important. A year ago, we would not have spoken about it, and now it is one of the top priorities. In my opinion, it is important that policy makers are becoming more aware on the subject and are looking for solutions to support SMEs. We can see that out of the crisis comes the change of direction by policy makers. Even in a country like Malaysia, they need to take some actions. There are no Angels in Malaysia, and there is no organized system. During my short visit I managed to speak with a few entrepreneurs who are all going to Singapore because there are no available funds in Malaysia. This is a wakeup call to local policy makers, despite the annual growth rate of 5%. It is a very good time to focus on your strategy of building innovation in the next 5 years.