Closing the regional equity gap? A critique of the Department of Trade and Industry's regional venture capital funds initiative

The UK Labour Government has provided support for the establishment of regional venture capital funds in each of the English regions as part of its drive to create an entrepreneurially led knowledge- based economy. This initiative is a response to persistent gaps in the provision of start-up and early stage venture capital. In this paper we question the likely effectiveness of the initiative on four counts. First, there is a lack of early stage venture capital skills available to manage the funds. Second, the small size of the funds will make it difficult for them to achieve financial viability. Third, the funds are targeting the wrong problem. The maximum investment that they are allowed to make is pound250,000; they may subsequently provide up to an additional pound250,000 in follow-on financing. However, the main funding gap in the UK is in the pound250,000 to pound1 million range. Finally, the proposal ignores the role of demand-side constraints in contributing to the equity gap. The paper concludes that a more comprehensive approach is required to address equity capital gaps at the regional level.