The geography of foreign venture capital investments in the United Kingdom: regional performance and investment patterns Dr Yannis Pierrakis Small Business Research Centre, Kingston Business School, Kingston University London

FVCs and related literature FVCs are referred to investors that invest in companies outside their domiciled home country. Zaheer and Masakowski, (1997) indicates that the presence of a FVCs helps lower the barrier of going public Devigne et al. (2013) discovered that companies backed by FVCs experience accelerated sales growth after few years of operation compared to companies backed by local VCs Cumming et al., (2016) suggest that the presence of an FVC in a private firm decreases their likelihood of being unsuccessful and increases their likelihood of exiting via IPO with higher proceeds

Domestic fund investments by country and year, 2014-2018 Source: Author’s calculations based on Thomson Reuters data

Research objectives Based on these premises the aim of this paper has been twofold: first, to examine the geography of FVC investments in the UK and second, to use deal specific information in order to reveal investment patterns of foreign investors Do all regions benefit from FVCs and if not why? What are the implications for policy makers?

Sample 12,177 transactions 5,932 unique investments in UK 3,279 VC backed companies in the UK 18 different industries 15 years period (2002 – 2017) Source: Thomson One Reuters

FVCs year-on-year trend UK

FVC investments by round, 2002-2017

FVCs in first round only investments

Regional distribution of FVC investments

Breakdown of different types of FVC investments

Proportion of FVC investments by region and year

Share of FVC investments by region and year (UK=100%)

Top FVC fund nations investing in each UK region, 2002-2017

Key findings (I) FVC investments have become a significant, and in later rounds a dominant, supplier of company VC finance in some UK regions The regional heterogeneity of the UK VC market is not limited to the volume of VC investments and public dependency of the local funds, but it extents to the FVC investments. In Northern regions and the Midlands, regions with extensive public sector investment activity, the FVC investment activity is significantly limited

Key findings (II) In several UK regions around half of all FVC investments are stand- alone investments while even when FVC funds co-invest with UK based funds, these funds are often based in London rather than the region where the company is based in This leads to some obvious concluding questions: why FVC funds prefer to invest in London and the South East regions? what are the implications of FVC investments for regional development?

Why FVC funds prefer to invest in London and the South East regions The quality and stock of local companies and the availability of human capital (Aizenman and Kendall, 2012) The strength of the network ties between foreign and London VC funds has the ability to influence credible deal flow information Local funds in Northern regions and the Midlands may have limited ability to establish strong social ties with foreign funds which significantly influences venture financing ( Jaaskalainen and Maula, 2014) These regions are mainly depended on publicly backed funds which may not be as ‘smart’ as their private sector counterparts in terms of adding value (Schäfer and Schilder, 2009) and therefore may not appear as an attractive co-investment partner to FVCs

Implications to regional development (I) Foreign investors, are much larger in size than local funds (Lerner et al. 2011) and consequently, more able to invest larger amounts and follow up their investments. For the host region, this increase in the supply of VC finance has positive impact such as improving employment, innovation and productivity growth (Brander et al. 2015) However, a foreign investor lacks proximity with its portfolio companies and this has implications for both the portfolio company and the region the company is based in

Implications to regional development (II) Foreign funds lack local knowledge and connections and their contribution to the local ecosystem could therefore be questionable Foreign investors may crowd out local investors and this could slow the growth of local VC markets and entrepreneurial ecosystems (Bradley et al., 2019) Local GPs may be considered as second best by the local ‘star entrepreneurs’ and hence they may ‘lose out’ to the foreign investors in their bid to invest in promising local companies (which are arguably limited in numbers in peripheral regions).

Implications to regional development (III) Foreign investor often require that companies relocate to the fund’s country of origin (Mäkelä and Maula, 2005), as often relocations yield higher returns relative to staying in their country of origin (Cumming et al., 2009) This has significant and negative implications to the host region as it results to brain drain and loss of employment However, how much relocation of portfolio companies to their investors’ country of origin actually happens, is largely a function of how strong the domestic ecosystem is (Bradley et al, 2019)

Policy implications and potential responses (I) Since in most UK regions the local investors are mainly publicly backed fund, the role of policy makers is vital in ensuring access to international VC markets through increased volumes of networking opportunities for local investors that can play the role of information conduit between FVC funds and local opportunities Regions with less vibrant ecosystem like East Midlands, Wales and Yorkshire are more vulnerable to the risks associated with FVC investments. The above concerns call for a balanced approached when policy makers at the national and regional level explore ways of encouraging FVC investments

Policy implications and potential responses (II) A coherent policy approach should not be limited to only attracting foreign investors, but it should also seek to strengthen the domestic ecosystem at the same time (Bradley et al., 2019) The efforts of the regional authorities should focus on attracting FVC investments that are closely linked with the regional industrial strengths and aligned with their regional development strategy They should also encourage co-investments with local funds at the expense of stand-alone investments by foreign funds

Policy implications and potential responses (III) There are several ways in which national and regional policy makers could approach this matter: At the national level, the British Bank could encourage industry targeted foreign co-investments with local funds. This can be done either at the fundraising level (e.g. incentives are offered to a foreign GP to raise a fund together with a local GP) or at the deal level (e.g. incentives are offered for local funds to co-invest with high quality foreign funds).

Policy implications and potential responses (IV) In addition, improving the quality of local GPs, which are often publicly backed will minimise the need of foreign funds to choose London based funds as preferred co-investors. At the regional level, authorities may organise networking opportunities to expose local GPs to international counterparts and improve flow of information between local and foreign based funds as the local investor's international social capital facilitates the formation of cross-border syndicates (Mäkelä and Maula, 2008)

Conclusion We argue that policy makers should take a closer look in this fast changing industry that is rapidly becoming globalised and provide policy responses to protect local markets especially in light of Brexit. Brexit may have significant implications to the ability of FVC funds to invest in UK companies and UK funds to invest abroad