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Unchaining Investment: Barriers to US venture investment in UK digital businesses

Author: Marston, L., Collins, L., Bravo-Biosca, A., Lane, H.
Date: June 2013

This report examines why venture capital investment in the UK still lags behind the US, and which factors encourage US funds to back UK start-ups.

Key Findings:

  • It appears that the slower, less profitable UK exits may be both driving down performance of UK funds, and persuading the best UK companies to incorporate in the US to take best advantage of more favourable iPo markets.
  • US returns have started to improve in the last few years, and although this has started to widen the gap again with the UK, london in particular is viewed very positively as a location with significant potential for further start–up investment.
  • Regulation is necessary and important, not least in these rapid areas of technological change. there are few that argue that we need no protection from abuses of privacy or stealing intellectual property. a balance is needed to encourage innovation and exploration.

Venture capital investment in the UK was $2.3 billion in 2012, compared to $41 billion in the US. When measured as a proportion of GDP, UK venture capital is less than half the size of the US industry.

Returns of UK venture funds are also worse than those of their US counterparts. Nesta’s Atlantic Drift report, published in 2010, showed that this gap had narrowed in the 2000s. However, as this new report shows, the gap is starting to widen again.

This report sets out some of the reasons behind the UK-US performance gap. It also examines which factors influence US funds' decisions to back UK start-ups, with a particular focus on the role regulation might play in encouraging US venture investments in the UK.

Geography: UK, USA

Type of study: Consulting research

Relevant for: VC, LPs, Fund of funds, Associate

Source: NESTA