A new government-backed venture capital fund would boost UK productivity

Christian Stensrud, 2 September 2016

At the first cabinet meeting since the summer recess, Theresa May gave a list of crucial government reforms. Near the top of the list was the need to tackle the UK’s ongoing productivity problem.

Small and medium-sized enterprises (SMEs) will play a crucial role in addressing this problem. In 2015, SMEs accounted for 60 per cent of all private sector employment, 47 per cent of all private sector turnover and 99.9 per cent of all private sector businesses. Because SMEs make up the majority of private sector employment and almost half of private sector turnover, boosting their productivity growth will have a huge impact on the UK’s overall productivity.

But how do you increase an SME’s productivity? According to research, SMEs that engage in international activity are more likely to innovate and improve their performance, including productivity growth. In other words, encouraging an SME’s exports will usually boost its productivity.

There is significant scope within the UK to expand SME exports; in 2015 approximately 110,000 SMEs could have either started exporting or increased exports. However, certain constraints blocked off this possibility. One of the biggest reasons for UK SMEs limited engagement in exporting is their lack of ambition to grow and internationalise. According to the Global Entrepreneurship Monitor, UK SMEs have less desire to grow and internationalise than SMEs in other G8 economies. In the UK 17 per cent of entrepreneurs had growth aspirations compared to 27 per cent in the US.

There are two reasons for this lack of ambition: lack of finance and lack of knowledge regarding how to export. The UK has made vast strides over the last decade concerning SME financing, via the British Business Bank, and policies that have extended knowledge to SMEs, via UK Trade & Investment. But current measures will not solve the SME ‘ambition gap’.

One significant measure that could help solve the ‘ambition gap’ would be to open up venture capital funding to UK SMEs that show export potential. This new venture capital fund, backed by the government, would target SMEs and help them increase their exports.

A venture capital fund should be used because it would solve both the financing and knowledge issues faced by UK SMEs. Concerning financing, a venture capital fund invests in companies who show growth potential, usually taking an equity stake. Concerning knowledge and expertise, a venture capital fund takes a hands-on role within a firm it has invested in, usually seeking board membership. The venture capital fund usually supplies the firm with management expertise, support and access to their contacts. A UK venture capital fund would give UK SMEs both the finance and knowledge they need to boost exports and productivity.

A good model for this new venture capital fund exists just over the Irish Sea: Enterprise Ireland. Enterprise Ireland is a state agency that works with Irish enterprises to help them start, grow, innovate and win export sales in global markets. Whilst Enterprise Ireland offers many services to Irish exporters, venture capital funding plays a key role. In 2015, the combined size of funds established under Enterprise Ireland’s seed and venture capital schemes was €1.5 billion. In  the same year, three such funds, supported by Enterprise Ireland through the Development Capital Fund Scheme, invested over €75 million in mid-sized Irish companies. Last year, Enterprise Ireland financially supported 217 start-ups, trained 290 managers to grow their business and helped 429 companies establish new overseas presences.

SMEs make up a huge part of the UK economy so upcoming SME policy will show just how serious the UK government is about tackling productivity. If the new government is serious, creating a government-backed UK venture capital fund could provide a lot of the support that UK business needs.