- The European Investment Fund has invested billions of euros in UK-based VC firms to date, and is seen as an “anchor” investor in new funds.
Funds including Seedcamp, Hoxton Ventures, and Episode 1 Ventures have been denied funding after the Brexit vote.
- UK VCs are worried that the potential loss of EIF funding will have a “significant” impact on their ability to raise money.
- The EIF said it’s still putting money into UK VCs, but that extra due diligence was needed for new investments.
The European Investment Fund, which provides billions in funding to British venture capitalists, has frozen funding to UK VC firms after the Brexit vote.
Business Insider understands that Seedcamp, Dawn Capital, Hoxton Ventures, and Episode 1 Ventures are among the firms affected.
The shortfall means some of the companies are seeking other investors to build out their new funds.
Two sources said the EIF is not handing funding to anyone who applied, or was in the process of applying, after the UK voted to leave the EU.
But the EIF will honour its existing commitments to UK funds, Business Insider understands.
London-based Episode 1 Ventures is raising a new fund between £50 million and £60 million. It applied to the EIF for funding before the UK referendum, and was rejected after the triggering of Article 50 to leave the EU.
Simon Murdoch, the firm’s managing partner, described the EIF as “a great institution”, and said the slowing of funding was “another great example of the disaster of Brexit.”
He told Business Insider: “Until Theresa May said that we would trigger Article 50 [to leave the EU], in all that time, the EIF engaged with us in a fair and diligent way. Then after meeting them in January, they just went silent. Then we triggered Article 50 and the EIF [said] it wasn’t going ahead with us.”
He added: “We suspect that if [the UK] hadn’t triggered Article 50, we would have had a much better chance. We can’t be sure. But we think leaving the EU and Article 50 was instrumental in us being turned down.”
The EIF has denied pulling out of the UK altogether. A spokesman told Business Insider: “There is no moratorium on lending to UK projects. It is the case that due diligence on them now needs to take into account a wider range of factors.”
Sources said the EIF had privately been giving out mixed messages to VC firms. They said the EIF’s proclaimed changes to its due diligence process allowed it to “obfuscate” the fact it was halting investment.
Take the example of Seedcamp. The pre-seed and seed-stage investor is in the process of raising a new fund, and was undergoing the EIF’s due diligence process. The fund was told this week that that process would now be “indefinite,” a source said. Seedcamp did not comment, but did confirm it was in the due diligence process.
“What might happen is that the EIF will say ‘Maybe, maybe, maybe’, and then Seedcamp will close without them,” one source said. “That’s a nice way to say: ‘We didn’t say no.’ It’s not a yes either.”
Another said that the EIF wouldn’t fund anyone who hadn’t already received a final approval letter.
Dawn Capital and Hoxton Ventures did not comment.
One of the sources said the EIF had decided not to expand a €250 million (£214 million) angel investment scheme to the UK, after the decision to leave the EU. The European Angels Fund is a co-investment scheme where the EIF will match investments by business angels into startups, then allow them to keep the bulk of the profit from the deal. It’s available in seven EU member states and, the source said, was due to expand to the UK this year.
The source said the EIF had planned making €50 million (£43 million) available to British angels for early-stage deals. That “died” after the Brexit vote, the person said.
The EIF is one of the biggest sources of funding to British VCs
The European Investment Fund is seen as an “anchor” investor for British venture capitalists who are raising new funds. It has put €2.3 billion (£1.9 billion) into 144 UK venture capital firms, according to 2015 figures.
VC funds are designed to have a ten-year lifespan, at the end of which investors expect to see a return through an exit. About three to four years through that lifespan, VCs will begin raising a new fund.
And, as multiple sources told Business Insider, it’s hard work. Most investors don’t want to invest in a new fund until it’s already closed.
This is where schemes like the EIF and the UK’s closest equivalent, the British Business Bank, come in. They will often be the “single-largest cheque” to a fund, accounting for up to 40%. Once fund managers have that commitment, they can dredge up funding more easily from other sources.
If the EIF decides not to act as an anchor investor, life for UK VCs becomes much tougher in the medium term. “It’s a significant chunk of UK VC,” as one investor said.
And it won’t just impact smaller scale VCs, but other major UK-based firms like Balderton and Atomico, which also rely on the EIF for funding.
The Conservative manifesto this week pledged to make up for any shortfall in EIF funding to UK VCs. Since the UK contributes to the EIF via the fund’s main shareholder, the European Investment Bank, the Conservative plan is to repatriate those funds and hand them out via the British Business Bank.
This is what UK VCs will have been hoping for. Saul Klein, general partner at investment firm LocalGlobe, said at an event last week that British and institutional investors “will make up the difference” in any EIF shortfall.
Not everyone is convinced that can happen.
“There’s zero chance of that happening,” said Episode 1 Ventures’ Murdoch, who believes the UK’s European Investment Bank assets will have to go towards its EU divorce bill. “The Tories saying this are in cloud cuckoo land.”