Funding drought hits young companies

Capital for very early stage UK companies is on the wane says Venture Index, the tracker of small and unquoted companies, posing a serious threat to the future of British business.

The number of investments made in start-up and seed round was just three in Q3 of 2006, less than 1% of all deals completed, a record low. Just £283,000 was raised, which compares unfavourably to September 2005, where 12 seed and start-up investments were made in that month alone, with £1.1m invested.

Modwenna Rees-Mogg, managing director of Venture Index, said: “As the principal barometer of investment activity in the UK smaller company segment, what the latest Venture Index statistics reveal is cause for concern. Seed capital and start up finance, at the highest end of the risk spectrum, have long been the preserve of angel investors and government-backed regional funds. The availability of risk capital is critical to early stage companies growth, but what we can observe is a softening of investor appetite for seed and start-up investment.

“If this trend continues it has major ramifications for growing business in the UK and potentially signals the opening up of a new equity gap. We would urge the UK government to address this issue head on. If the equity markets are moving away, not only from seed and start-up deals, but also from sub £100,000 fundings, the government must call on the banking community to reinforce its efforts to enable such businesses to gain their first meaningful source of start-up capital through debt finance. This is what the Small Firms Loan Guarantee Scheme, should be used for.”

Overall, the Index is quite positive about the smaller end of the venture scene, i.e. sub £1m. UK deal activity in the year to end September 2006 saw a sharp increase to £57.6m invested in 379 deals from £43.8m invested in 317 deals in the previous 12 months. Investment is at record levels, but money is clustering around larger, later stage deals.