Mandatory VC diversity policies – what’s the impact on growing businesses?
In a report published over the summer, the Treasury Committee recommended the government take swift action to promote diversity in the UK’s venture capital industry. With the proposed policies directly targeted at driving investment towards female and ethnic minority founders, as well as businesses outside of London, the report forms part of a growing momentum to expand access to venture capital (VC) in the UK.
Before looking at the proposed policies, we ought to consider the following question – what does this announcement mean for growing businesses in the UK?
Whether the government implements the policies set out below, it is clear there is an industry-wide appetite for positive action targeted at regional, scaleup and minority-owned companies.
Such companies should capitalise on this movement by considering how they can best target investors looking to diversify their portfolios, as well as monitoring government responses to the report to stay aware of newly created VC funds and policies, which could make their business more attractive to investors.
What are the policies being endorsed?
VC was described in the report as an “engine of economic modernisation and growth” and is recognised as playing a crucial role in the UK’s economy by the Committee, which urged the government to renew successful state support measures – in particular, tax relief schemes specifically targeted at VC activity – beyond their expiry in 2025.
The benefits of tax relief schemes (specifically, the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs)) was a point of focus in the report, due to the schemes’ ability to attract global investors to the UK over competitor markets. The Committee identified that a further benefit of the schemes’ popularity was their potential to “achieve better diversity and inclusion capital”, with proposed policies to implement from April 2025 including:
- A mandatory requirement for VC firms to disclose the gender and ethnic breakdown of their employees and funding recipients in order to be eligible for EIS, SEIS or VCTs; and
- A “comply or explain” condition of EIS, SEIS or VCT eligibility requiring VC firms to either comply with the Women in Finance Charter and Investing in Women Code or justify why not.
If implemented, the policies would likely incentivise VC firms to diversify their investment portfolio, spelling positive news for female and minority owned startup businesses.
Venturing beyond London
The Committee further recommended using the popularity of EIS, SEIS and VCTs to attract VC investors towards opportunities in the regions and nations outside of London, which it noted only accounts for 19% of the UK’s small to mid-size enterprises.
The report identified potential obstacles in the form of EIS and VCTs’ time limits and funding caps. Although both schemes are available nationwide, part of their criteria is that eligible firms be no older than 7 years from their first commercial sale and are subject to a funding cap of £12 million, or 10 years for “knowledge-intensive companies” with a funding cap of £20 million.
The Committee advised that this disproportionately affects regional firms, who on average take longer to become established in part due to more limited resources. Even for companies within the time limits but further along in their life cycles – as regional companies seeking funding often are – the report noted that the funding caps are limiting, with the amounts on offer geared towards helping companies establish themselves rather than scaling up.
Consequently, further proposed amendments to the tax relief schemes are to:
- Remove the tax relief schemes’ time limits with effect from April 2025; and
- Consult on higher funding limits with the objective of supporting scaleup businesses.
As regional companies who seek VC funding are typically at a later stage in their lifecycle, such policies present an important opportunity for businesses operating outside of traditional investment hubs such as London, Oxford and Cambridge.
Beyond amending the tax relief schemes, the Committee also advised the government to draw upon existing funds to deepen domestic capital markets.
The report highlighted the UK’s available capital for VC investment is somewhat limited, with US VC investments being approximately 1.4x of those in the UK. This was identified as being a significant obstacle to scaleup businesses.
To tackle this, the report recommended:
- Consolidating pension fund assets to encourage pension funds to further partake in VC investments, following successful models in Canada and Australia; and
- That the government consult with the British Business Bank (BBB) to create active funds designed to target areas of the market where VC activity could be improved, such as diversity-focused funds.
A positive step
As mentioned, these proposals, if implemented, present a huge opportunity for businesses with female and ethnic minority founders, and also those outside of London.
And even if the proposals are not implemented or undergo further changes before implementation, the fact that they are being tabled nonetheless represents an industry-wide sea-change. In the long run, this can only be a sign of good things to come for growing businesses in the UK and, hopefully, the UK economy.