Opportunity Knocks (Again) for Venture Capital? Jon Gill, an Associate at Eversheds LLP, the International Law Firm, Specialising in Venture Capital and Private Equity, Considers the Future of Venture Capital in 2012. Jon Is Currently on Secondment to Barclays Ventures, the Private Equity Division of Barclays Bank

Article excerpt

Byline: Jon Gill

Q1 of 2011 saw venture capital invest-t ment hit pounds 414 million, the highest level of venture capital investment since early 2008, leading some industry experts to suggest the year could see record levels of venture capital activ-v ity. By way of example, in Q1 Eversheds was involved in the investment by Catapult and Mercia in Intelligent Orthopaedics, and also advised local funder EV Group and Catapult in providing a pounds 1.1 million package to Biofortuna to launch its first diagnostic genotyping products. However, increasing economic insta-a bility and uncertainty in the markets has continued to hamper deal flow with Q3 deal volumes dropping sharply. Yet, the political agenda largely driven by a need for private sector growth and the difficulties small companies face obtaining debt finance should potentially generate a perfect opportunity for venture and growth capital investment. So, will 2012 finally see the vintage year for the venture capital market that many feel is long over due? Typically venture capital invest-t ment in a company is at the start up stage in a company's growth, after the initial seed capital has been injected into the business often by high net worth individuals or business angels. At this stage a company is often cash hungry but unable to raise debt finance as it is unlikely to have a trading track record. Traditional venture capital investment is an essential part of the growth ladder for a small company, allowing a company to bring its products to market or develop its existing business. The role of venture capital is frequently to take a company from this early stage to maturity, at which point a high growth company may attract invest-t ment from a private equity fund seek-k ing to improve business efficiencies and drive growth.

Venture capital firms frequently assess a company's finance arrangements, the achievability of its business plans and the strength of a company's management team when considering investing in the growth potential of an entrepreneur's bright idea or an innovative young company. The phenomenal success of some venture capital backed companies is well-known, an example from 2011 being the recent sale of Autonomy Corporation, a company which was founded on the basis of technology research at the University of Cambridge in 1996, to Hewlett-Packard for pounds 6.7 billion.

As many funders who were active in the venture capital space have migrated towards larger more established businesses much has been said about the extent of the "equity gap" for small established businesses needing capital to grow. This extent of the equity gaps has been exaggerated by the post credit crunch withdrawal of the availability of bank debt for a lot of these businesses. The UK government appears to recognise the issue and the potential for venture or growth equity capital to help businesses grow rapidly and create employment, acting as a catalyst for wider economic growth. In a bid to encourage entrepreneurial dynamism the government has supported the development of a pounds 2.5 billion bank-backed Business Growth Fund.

To date, the fund, which is aimed at small and medium-sized enterprises with sales between pounds 10 million and pounds 100 million a year, has invested in two companies, employee payment business Benefex and travel management company Statesman Travel Group. …