- A major source of UK startup funding was threatened by Brexit
- British venture capital firms reported in May that the European Investment Fund, which has funnelled £2 billion into the UK, had “frozen” its funding after the referendum result
- Now VCs are turning to a home investor, the British Business Bank, to make up some of the shortfall
- Sources suggest the European Investment Fund will eventually resume funding
UK venture capital firms that were scared that a major source of funding would be cut off after Brexit have already turned to a home investor, the state-owned British Business Bank.
Business Insider understands that early stage startup investor and accelerator Seedcamp, which is currently raising its fourth fund, is seeking a bigger share of investment from the bank.
That could go some way to making up any shortfall in funding from the European Investment Fund (EIF), which sources said froze its activity in the UK after Brexit. Seedcamp had been undergoing due diligence with the EIF, but that process now looks “indefinite”, the sources said.
Another fund manager said they had successfully increased the British Business Bank’s share of investment in their fund.
Chancellor Philip Hammond gave the British Business Bank licence to invest more in VCs
This has only become possible in the last few weeks, after chancellor Philip Hammond increased the amount the British Business Bank could invest in an individual fund. Up until now, the bank could only supply up to 33% of a fund’s cash. It’s now gone up to 50%, effective immediately.
For venture capitalists raising new funds, this is good news. The EIF has been a major source of funding, committing almost £2 billion across more than 60 British venture capital firms, including Balderton Capital, Connect Ventures, and Atomico.
When venture capitalists are looking to raise a fund, the EIF has been an early port of call and is what’s known as a “cornerstone” investor. It can commit as much as 40% of a new fund’s cash, and will often prompt other investors to join the fund.
Although sources told Business Insider in May that the EIF suddenly froze activity after the referendum result, the fund’s official line is that it hasn’t stopped funding — it just needs to do more due diligence on its UK investments.
In the meantime, the British Business Bank can hand out more money through its VC Catalyst Fund. This technically focuses on later stage funds of at least £50 million, but it has invested in some early stage funds too.
A British Business Bank spokesman said there was some “flexibility” on the size and type of fund the VC Catalyst would invest in. Reading between the lines, if you’re a smaller, early stage fund, you might benefit from the VC Catalyst fund even though it’s not really meant for you.
The bank has so far invested £83.8 million across eight VC firms: Notion Capital, Dawn Capital, MVM, Frog Capital, Nauta Capital, Alpina Partners, and Panoramic Growth Equity. Some of these, like Dawn, bill themselves as early stage funds.
Business Insider understands that the Treasury is negotiating with the EIF to keep money flowing to the UK. At least one VC thinks the EIF will “unpause” funding to the UK once Brexit negotiations are over.
A source with knowledge of the matter told Business Insider that the Treasury was aware that the EIF was carrying out more due diligence, and was trying to speed the process up.
Chancellor Philip Hammond hinted as much in his speech in June. He said: “In the long-term, it may be mutually beneficial to maintain a relationship between the UK and the EIB after we leave the EU.”