Startup Finance: A Study of Micro Finance amongst Soft and Hard Companies (CBR project)

Overview

Aims and objectives

The purpose of this NESTA Innovation Policy and Research Fellowship was to investigate the role of early-stage seed funding provided by Micro Funds in the Eastern Region. Micro Funds are small venture capital funds worth £30 million in total or less, investing less than £2 million in total (including follow-up investments) into each of their portfolio companies. Micro Funds are defined principally by their size, but they also typically have 2 other characteristics. First, a proportion of the fund comes from a government source. Second, they specialise in early stage investing, as a function of both their size and government sponsorship.

The research investigated Micro Funds from two perspectives: the recipient businesses; and the firms and organisations acting as Micro Fund managers. The research examined funding models and the factors that influence the choice between them. It also investigated the appropriate role for public sector funding and identified alternative funding models to support businesses at this stage of technology transfer and development.

The research results were published in a NESTA report launched with a policy briefing in May 2009, available to download via the “Output” tab.

Results and dissemination

Major findings include:

• The role of Micro Funds: Micro Funds play a critical role in finance complex technology firms in their early stages, yet the returns on these investments are not in line with commercial expectations of investors in the light of the higher risk of this form of investment.
• Government aims in sponsoring Micro Funds: In sponsoring early stage funds government is seeking to encourage other activities beyond financial returns. It is also interested in non-financial results or ‘spillovers’ including the regional stimulation of pre-commercial investment activity in new technology, the development of serial entrepreneurs, the formation of business angel networks, the support for a new generation of fund managers and the provision of start-up business experience to entrepreneurs and managers.
• Evaluation of government activity: There is no clear definition or explicit expectation of these non-financial returns. Nor is there any mechanism to assess how different funds perform with respect to these activities. Public fund remuneration policy is also not aligned with the achievement of these nonfinancial returns. As a result, the ‘spillover’ experience of these Micro Fund-managed firms and the wider communities that surrounded them varies widely.
• Refinement of the Micro Fund model: The research highlighted a widespread sentiment of conflicting objectives between success for Micro Funds and the support and development of sustainable technology-based businesses. The success of the former does not guarantee the achievement of the latter. In fact, these two objectives are often incompatible. Micro Fund portfolio firms with the greatest potential for commercial success often require significant levels of follow-on investment that dilutes the return to the Micro Funds. On the other hand, those portfolio firms with lower, or slower, success remain in the portfolio.

Project leaders

Andy Cosh
David Connell

NESTA innovation policy and research fellow

Samantha Sharpe

Collaborating institutions

NW Brown Group
EEDA

Project dates

2007-2008

Funding

National Endowment for Science, Technology and the Arts (NESTA)