Capital for Enterprise Ltd: Survey of Fund Managers 2011

Transcription

1 Capital for Enterprise Ltd: Survey of Fund Managers 2011 Final report December 2011 James Halse CfEL Page 1

2 Acknowledgements CfEL would like to thank Daniel van der Schans and Janette King from the Department for Business Innovation and Skills (BIS) for their advice on on-line survey tools, comments on the questionnaire and for undertaking additional analysis of the Small Business Survey 2010 data. CfEL would also like to thank all those fund managers who responded to the survey and those fund managers who contributed to a very useful discussion around the provisional survey results at a session in Sheffield on 23 November Page 1

3 Table of Contents EXECUTIVE SUMMARY 3 1 INTRODUCTION 5 2 STRUCTURE OF THIS REPORT 5 3 METHODOLOGY AND RESPONSE 6 4 SURVEY RESULTS Type of fund managed The equity gap Market trends Fund raising Obstacles faced by portfolio companies Fund managers views on Government policy Structure of Enterprise Capital Funds Views of Fund Performance Views of CfEL Other comments from the survey 20 5 LESSONS LEARNED FOR A FUTURE SURVEY 22 BIBLIOGRAPHY 23 Appendices A Methodology 25 B Questionnaire 27 Page 2

4 Introduction CFEL SURVEY OF FUND MANAGERS EXECUTIVE SUMMARY CfEL conducted its first ever survey of fund managers in November Through its regular contact with managers, CfEL hears plenty of anecdotal evidence about the state of the UK venture capital market. CfEL picks up views about the quality of investment opportunities, the appetite of private investors, difficulties raising follow-on rounds, issues around exit opportunities and so on. One of the problems with this soft information gathering is that when a small number of people make similar claims, especially if those claims are well articulated, one may give them undue weight. The purpose of the survey was to find out whether it would be possible to gather the views of a larger group and to find out what those views are. In many respects, the survey should be viewed as a pilot study. Methodology The research was carried out using an online self-completion survey tool. Out of 64 fund managers invited to take part, 55 responded a healthy 86 per cent response rate. The sample may not have been representative, so it is not possible to draw inferences about the population of managers of publicly backed venture capital funds from the data. However, the results at least provide an indication of how widely held certain views are among a relatively large sample of fund managers. Key findings The findings substantiate research suggesting the boundaries of the equity gap are more complex than a single set of parameters. There was a great variation in where fund managers thought the gap ranged from and to. Views on the equity gap were partially correlated with the type of fund managed. Quality deal flow does not appear to be an issue for most managers. Two fifths of managers thought quality had improved over the past year. It has become more difficult in the past year to find co-investors. This applies to both finding investors for initial funding rounds and finding investors for follow-on rounds. A low risk appetite from investors and the general economic outlook are the biggest challenges to fundraising. The economy in general, obtaining finance, cash flow and a shortage of managerial skills/expertise are the main obstacles identified by fund managers as limiting the success of their portfolio companies. Despite recent studies arguing that publicly backed venture funds need to be larger and not be regionally or even nationally constrained, the majority of respondents believed there was a need for Page 3

5 smaller funds and funds with a regional investment focus. Managers of regional funds, who comprised the majority of respondents, were most likely to agree on the need for funds with a regional focus. Page 4

6 1. Introduction CfEL Survey of Fund Managers CfEL conducted its first ever survey of fund managers in November Through its regular contact with managers, CfEL hears plenty of anecdotal evidence about the state of the UK venture capital market. CfEL picks up views about the quality of investment opportunities, the appetite of private investors, difficulties raising follow-on rounds, issues around exit opportunities and so on. In addition to this soft information gathering, the Department for Business Innovation and Skills (BIS) has commissioned a number of qualitative studies of venture capital in the UK 1. These studies have often included interviews with fund managers. One of the problems with this soft information gathering and qualitative research is that when a small number of people make similar claims, especially if those claims are well articulated, one may give them undue weight. The purpose of the survey was to find out whether it would be possible to gather the views of a larger group and to find out what those views are. In many respects, the survey should be viewed as a pilot study. The results of the survey were presented to a large group of fund managers, many of whom had been invited to take part in the survey, at a seminar in Sheffield on 23 November Structure of this report The next section (section 3) briefly summarises the methodology and responses rates. A full discussion of the methodology is contained in Appendix A. Section 4 looks at the survey results following the order of the questionnaire and provides some commentary on the responses: The equity gap The market for investments, raising follow-on rounds, the market for exits Fund raising Obstacles to the success of portfolio businesses Views on government policies regarding venture capital The structure of Enterprise Capital Funds Views of performance Views of CfEL Other comments Section 5 draws on the learning in carrying out this survey and makes some recommendations for future surveys of survey fund managers drawing on some of the comments made by fund managers at the fund manager seminar on 23 November Recent BIS publications are listed in the bibliography Page 5

7 3. Methodology and response CfEL organised a seminar for fund managers to take place in Sheffield in late November. The invitation list to the fund manager event was used as the survey sample frame. In theory, the list contained one investment manager from each fund overseen by Capital for Enterprise. However, in practice some funds had more than one representative while others had none. A total of 64 fund managers were invited to take part. The survey was administered as a self-completion web survey. Insofar as was possible, the survey used Dillman s Tailored Design Method 2 for internet surveys. The invitation to the fund manager event advised managers that they would be receiving an invitation (pre-notification). Managers were invited to take part via a personalised issued on 4 November 2011 containing a unique link to the survey. The explained the reasons for carrying out the survey, assured anonymity, advised that the survey should only take 10 minutes to complete and informed managers that results would be presented at the seminar for fund managers on 23 November. The unique link in the enabled CfEL to track responses, but did not allow CfEL to identify respondents from their responses. The gave a deadline for response by Friday 11 November. Two reminder s were issued to non-respondents only. A total of 55 managers responded a response rate of 86 per cent. 2 of these were partial responses, so the full response rate was 83 per cent. This represents a very high response rate as compared to web surveys in general. 3 Because some funds ended up being overrepresented in the sample compared to others, one cannot draw conclusions about the statistical significance of the results with regards to the population of all managers of all publicly backed venture capital funds. However, the results at least provide an indication of how widely held certain views are among a relatively large sample of fund managers. More detailed information about the methodology can be found in Appendix A. 2 See Dillman (2000) 3 A meta-analysis in Cook et al (2000) estimated an average response rate of 40 per cent based on 68 surveys. Page 6

8 4. Survey results 4.1 Types of funds managed Respondents to the survey managed a wide range of publicly backed funds, with many managing more than one type of fund. Table 1 shows the types of funds managed by respondents. Where managers were managing more than one type of fund, the most common combination was a Regional Venture Capital Fund (RVCF) and a European Regional Development Fund (ERDF) backed fund (8 respondents). Table 1: What type(s) of venture capital fund do you manage? (check all that apply) Respondents Enterprise Capital Fund (ECF) 18 Early Growth Fund (EGF) 10 ERDF supported fund 26 Fund established by Regional Development Agency without ERDF 9 Regional Venture Capital Fund (RVCF) 17 Enterprise Investment Scheme (EIS) 6 Venture Capital Trust (VCT) 7 Private Fund 8 Other publicly backed fund 5 All funds The Equity Gap The current Coalition Government, and the Labour Government that preceded it, believes a thriving small and medium-sized enterprise (SME) sector makes a vital contribution to the economy 4. Moreover, it accepts that the market does not always enable SMEs to grow rapidly because there is an equity gap beyond what banks will lend and beyond the means of most informal investors and business angels, but below the level usually considered for venture capital funding. Governments have devised a range of measures designed to help bridge this finance gap including programmes of venture capital funds targeting the equity gap. Bridging the Finance Gap (2003) suggested this gap was most acute for investments between 250,000 and 1 million. The authors added: it is also severe for businesses seeking up to 2 million and, for some businesses, it may extend even higher. 5 A study commissioned by BIS in 2009 revisiting the equity gap concluded that a structural equity gap remained. Furthermore, the authors noted: 4 See for example HM Treasury/BIS (2010) Financing a private sector recovery and HM Government (2010) Local Growth: realising every place s potential for current government policy and HM Treasury/SBS (2003) Bridging the finance gap for previous government policy. 5 HM Treasury (2003) p. 6 Page 7

9 It is clear that the boundaries of the equity gap are more complex than a single set of parameters. The parameters of the gap are believed to stretch from 250k to at least 2m (with some putting the ceiling at 5m). In the case of sectors requiring complex R&D or large capital expenditure the gap may extend up to 15m. 6 In our survey we asked fund managers whether they thought there is an equity gap. It was the only question in the survey to receive a unanimous response with everyone agreeing that the equity gap exists. We then asked managers what they thought the lower and upper limits of the equity gap were. The results are presented in figures 1 and 2. The responses to the questions on the upper and lower limits of the equity gap reinforce the view that the boundaries are more complex than a single set of parameters. There was little agreement in where the equity gap started with 26 per cent suggesting it was above 500,000, 24 per cent saying it was between 100,000 and 200,000 and 22 per cent saying it was below 100,000. There was slightly more consistency in the responses to the question about the upper limit with 43 per cent suggesting it was about 2 million. However, almost one in five respondents suggested the equity gap extended to around 3 million while a slightly higher proportion thought the upper limit was 5 million or more. Responses covered the full range of possibilities with the narrowest view of the equity gap being between 500,000 and 1 million to the widest at 100k to over 5 million. The most common view of the range was that the equity gap starts somewhere between 100,000 and 200,000 and goes up to about 2 million (8 respondents; 15 per cent; n=54). Some of the discrepancies in the views expressed with regards to the boundaries of the equity gap appeared to be due to type of fund managed. Managers of Enterprise Capital Funds (ECFs) were more likely to suggest a higher starting and end points. Conversely, managers of Early Growth Funds (EGFs) were more likely to suggest lower boundaries. The views expressed tended to reflect the differing average investment sizes between the various programmes. As at end 2010, the average investment size for the ECF programme was about 400,000 while for EGFs it was 80,000. Respondents were invited to provide additional comments on the equity gap and more than two fifths (24 respondents) elected to do so. Among the comments provided, some common themes emerged. Nine respondents suggested the range of the equity gap was sector dependent with some suggesting there was no equity gap in certain sectors. Nine respondents also commented that the equity gap was stage dependent. Among those comments, some managers suggested it was most difficult for early stage pre-revenue companies to raise investment while others felt the equity gap was more of a problem for 6 BIS (2009) The Supply of Equity Finance to SMEs: Revisiting the Equity Gap p. 8 Page 8

10 later funding rounds. Four managers commented that there is more than one equity gap which may explain why different managers identified different stages as having the most prevalent equity gap. The lack of consistency in the responses defining the equity gap reinforces much of published research. The difficulty in defining the equity gap poses a problem for policy makers designing programmes targeting the gap. The BVCA/NESTA thin markets report noted: Separate policies and programmes that focus exclusively on filling narrow funding gaps with the assistance of public money can be counter-productive as they can create artificial barriers between successive rounds of funding. 7 7 Nightingale et al (2009) From funding gaps to thin markets pp.5-6 Page 9

11 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Fig. 1. At about what level do you think the equity gap starts? Below 100k 100k to 199k 200k to 299k 300k to 399k 400k to 499k 500k or above Fig. 2. At about what level do you think is the upper limit of the equity gap? About 1m About 2m About 3m About 4m About 5m Over 5m 4.3 Market trends The next section of the survey asked managers for their views on recent trends in the market for investments, raising follow-on rounds, and the opportunities for exits. Respondents were also invited to opine on what the future might hold. Quality of investment opportunities (Figs 3-4) On the whole, respondents felt that the quality of investment opportunities was either better (39 per cent) or about the same (54 per cent) as it was a year ago (fig 3.). ECF Page 10

12 managers were the most positive with 63 per cent thinking the quality of investment opportunities had improved and none thinking opportunities were worse now compared to a year ago. Expectations for the future quality of investment opportunities were fairly conservative with 85 per cent of respondents expecting the quality of investment opportunities to be about the same in a year s time and 11 per cent expecting an improvement. Finding co-investors for initial funding rounds and follow-on rounds (Figs 5-8) Most respondents reported that they were finding it more difficult to find co-investors for initial investments (61 per cent) and follow-on rounds (58 per cent) compared to a year ago. A small number expected it to be easier to find co-investors in a year s time, with the overwhelming majority expecting the current situation to have remained the same or worsened. There were no strong relationships between type of fund managed and the responses to these questions, with the exception perhaps that ECF managers were most likely to respond that it had become more difficult to raise follow-on rounds compared to a year ago (75 per cent). Exits (Figs 9-10) Most respondents (60 per cent) reported they would rate the exit opportunities for their portfolio companies as being about the same as a year ago, with 17 per cent thinking exit opportunities were better now and 23 per cent thinking they were worse. In terms of future expectations, respondents were slightly more positive with 31 per cent expecting exit opportunities to have improved in a year s time, 46 per cent expecting them to remain about the same and 23 per cent expecting them to worsen. Half of those who rated the exit opportunities for their portfolio companies as being worse now compared to year ago expected these opportunities to have worsened in a year s time. Of those who rated exit opportunities as having improved, two thirds expected them to have improved further. Many government invested funds have been struggling for exits and it will be interesting to see what happens over the next year. Page 11

13 per cent per cent per cent per cent per cent per cent per cent Fig. 3. How does the quality of investment opportunities you are assessing now compare to the quality of those you were assessing this time a year ago? Fig. 4. In a year s time do you expect the quality of investment opportunities to have improved or worsened compared to those you see currently? Better About the same Worse Better About the same Worse Fig. 5. When making initial investments, is it easier or more difficult to find co-investors now compared to this time a year ago? Fig. 6. In a year s time, do you expect it to be easier or more difficult to find co-investors for initial investments? Better About the same Worse Better About the same Worse Fig. 7. How difficult is it to raise follow on funding rounds for your portfolio companies now compared to this time a year ago? Fig. 8. In a year s time, do you expect it to be easier or more difficult to raise follow on funding for your portfolio companies? Better About the same Worse Better About the same Worse Fig. 9. How would you rate the exit opportunities for your portfolio companies now compared to this time a year ago? Fig. 10. Thinking ahead, what are your expectations regarding the exit opportunities for your portfolio companies in a year's time? Page 12 Better About the same Worse Better About the same Worse

14 4.4 Fund raising 68 per cent of respondents had either raised or tried to raise new funds in the last two years, while 85 per cent expected to fund raise within the next two years. Of those who expected to fund raise in the next two years, almost half reported they expected to seek investment from Government, while a third responded that they didn t know whether they would be seeking investment from Government. Respondents who had fund raised in the last two years were asked a follow up question about difficulties they experienced in raising private investment. Those who had not fund raised recently, but who were planning to fund raise in the next two years were asked about the difficulties they expected to experience raising private investment. The majority of both sets of respondents selected Concern about the general economic outlook, Low risk appetite from investors and Poor track record of VC as an asset class over the past 10 years (fig. 11). 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Fig Did any of following/do you expect any of the following to make it difficult to raise private investment? Perceived poor track record of venture capital over the last 10 years Low risk appetite from investors Concern that government funds are overly restrictive Concern about the general economic outlook The target size of the fund Other 4.5 Obstacles faced by portfolio companies Fund managers were asked two questions about the obstacles faced by their portfolio companies. These questions were adapted from the Small Business Survey (SBS). This is a telephone survey of over four thousand SME employers. The telephone interview should take place with the most senior person in day-to-day control of the business. In the SBS, respondents are asked What would you say are now the main obstacles to the success of your business in general? (Q54). The response is coded by the interviewer to a pre-defined Page 13

15 list. The interviewer then asks a follow up question I am going to read you a list of other items and I would like you to tell me which, if any, represent obstacles to the success of your business (Q55). Because the CfEL Survey of Fund Managers is an internet survey, it is not possible to ask the question in the same way. Fund managers were asked one question: What would you say are now the main obstacles to the success of your portfolio companies in general? (mark all that apply). Survey respondents were presented with the following options taken from the code frame for the SBS: The economy; Obtaining finance; Cash flow; Taxation, VAT, PAYE, National Insurance, business rates; Recruiting staff; Retaining staff; Regulations; Availability/cost of suitable premises; Competition in the market; Shortage of managerial skills/expertise; Shortage of skills generally; Pensions; No obstacles; Other (please specify) In the Small Business Survey 2010, the most oft cited obstacles reported by were: the economy (81 per cent of SME employers) competition (58 per cent) taxation, VAT, PAYE, national insurance, business rates (50 per cent) cash flow (49 per cent) regulations (47 per cent) obtaining finance (39 per cent) 8 The economy, obtaining finance (both 74 per cent) and cash flow (57 per cent) were the obstacles most frequently cited by fund managers in the CfEL survey. 32 per cent of respondents identified regulations as an obstacle, with only 21 per cent and 17 per cent identifying competition and taxation respectively. The fourth most cited obstacle by fund managers was Shortage of managerial skills/expertise (47 per cent). This obstacle does not warrant mention in the Small Business Survey report. Analysis of the underlying data reveals that 16 per cent of SME employers recognised this as an obstacle. When it comes to identifying the biggest obstacle, there are some interesting comparisons to be made between the Small Business Survey and the CfEL Fund Managers Survey. Figure 12 shows that both SME employers and fund managers cited The economy as the biggest obstacle to the success of their business/portfolio businesses. Obtaining finance and cash flow (which are related) were much more likely to be identified as obstacles by fund managers. Perhaps most strikingly, 17 per cent of fund managers identified a shortage of managerial skills/expertise as the biggest obstacle to the success of their portfolio businesses compared to just 1 per cent of SME employers. 8 BIS (2011a) Small Business Survey 2010 p.59 Page 14

16 It is difficult to draw meaningful conclusions from the analysis as there are a range of factors that could explain many of the differences between the survey results. Some of the difference may be due to the survey mode (CATI 9 verses internet self-completion) and timing (2010 verses 2011). The main reason for the differences is likely to be that the SMEs in which venture capital funds have invested are very different from the general population of SMEs. Finally, some of the differences could be due to the perspective of the fund manager compared to that of the business owner/director. Unfortunately, it is not possible to identify companies that have received venture capital investment from the Small Business Survey data. It would be interesting to ask the questions about obstacles to the success of the business to a random sample of companies invested by publicly backed venture capital funds to see how much the perspective of the business owner differs from that of the fund manager. 35% Fig What would you say is the biggest obstacle to the success of your [portfolio] business(es) 30% 25% 20% 15% 10% 5% 0% Fund Managers Survey 2011 Small Business Survey 2010 Respondents who indicated that obtaining finance was an obstacle for their portfolio companies were asked a follow up question about the types of finance they struggled to obtain. 62 per cent of fund managers responded that their portfolio companies struggled to 9 Computer Assisted Telephone Interview Page 15

17 obtain equity finance. This is in line with the responses to the earlier question about the difficulty raising follow-on rounds. Managers also reported that their portfolio companies struggled to obtain short term debt finance (53 per cent) and long term debt finance (49 per cent). The recently published SME finance monitor report showed that for quarter the majority of businesses applying for an overdraft (renewal or new) or a type 1 (i.e. unsecured) loan ended the process with a facility 10. However, factors influencing a decline for an overdraft or a type 1 loan include the SME being less than five years old and the business not making a profit. 11 This description applies to many companies invested by publicly backed venture capital funds. For example, almost half of the companies invested through the ECF programme are less than 5 years old. 4.6 Fund managers views on Government policy In this section of the survey, CfEL took ten statements that had been highlighted in some of the qualitative research with fund managers to see how widely held the views expressed in that research were. The results are shown in fig. 13. The statements over which there was the highest level of consistency in the responses of managers were: Government should not be investing in venture capital funds (85 per cent disagreed or disagreed strongly) It would be extremely difficult to raise a first time fund without Government support (83 per cent agreed or agreed strongly) It is important the Government collects comprehensive information on the performance of the venture capital funds it has contributed funding to (81 per cent agreed or agreed strongly) Follow-on investments Three fifths of managers agreed (two fifths strongly) that the financial performance of their funds was hampered by not being able to follow-on. Interestingly, there was not much difference in the responses to this statement between types of fund managers. One might have expected follow-on to have been more of a problem for managers of ERDF funds that have strict deployment rules that mean there is often little or no money available for followon investments. The fund managers most likely to say agree that inability to follow-on was a problem were the managers of RVCFs. The responses to the statement probably reflect where a particular fund is in its investment lifecycle, with managers of funds in the post investment period most likely to be experiencing issues with follow-on. 10 SME Finance Monitor (2011b), p Ibid. p58-59 Page 16

18 Fund size and geographical focus The responses to statements about the size and geographical focus of funds were surprising. The NESTA thin markets report recommended that government invested venture capital funds should be larger (at least 50 million) and not regionally constrained. The report notes that successful venture capital firms are likely to operate at an increasingly global scale 12. Conversely, 58 per cent of respondents to the survey of fund managers agreed that funds with a regional investment focus are needed to ensure companies outside of London and the South East can access development and growth capital. However, responses varied by type of fund managed with only 29 per cent of ECF managers agreeing with this statement compared to 83 per cent of those managing ERDF funds. Only 11 per cent of respondents agreed that UK Government backed funds should be able to invest outside of the UK. ECF managers were more likely to agree (24 per cent). Finally, although half of respondents agreed that public backed funds should be larger, 74 per cent agreed that there is a need for small funds capable of making small investments. ECF managers were little different from RVCF and ERDF managers in this respect. The point about small funds is an interesting one. It is difficult to interpret as there is no reference size against which to anchor responses. Small might be interpreted as less than 50 million by some and less than 10 million by others. However, the responses were correlated with where respondents thought the equity gap was. For example, 87 per cent of those who thought the lower boundary of equity gap was below 200,000 agreed on the need for small funds compared to 62 per cent who though the lower boundary was 200,000 or above. The results are similar for the upper limit of the equity gap. A 50 million pound fund doing small deals could end up with a very large and potentially unwieldy portfolio. 12 Nightingale et al 2009, p. 5 Page 17

19 Fig. 13. To what extent do you agree or disagree with the following statements about government involvement with venture capital? Government should not be investing in venture capital funds It would be extremely difficult to raise a first time fund without government support The sizes of publicly backed funds should be larger The initial investment limits for government backed funds are too low UK government backed funds should be able to invest outside of the UK The financial performance of the fund(s) I manage is hampered by not being able to follow on It is important the Government collects comprehensive information on the performance of the venture capital funds it has contributed funding to Government's reporting requirements are more onerous than for wholly private sector funds There is a need for small funds capable of making small investments Funds with a regional investment focus are needed to ensure companies outside of the London and the South East can access development and growth capital 0% 20% 40% 60% 80% 100% Agree strongly Agree Neither agree nor disagree Disagree Disgree strongly 4.7 Structure of Enterprise Capital Funds (ECFs) The survey included two questions about the structure of ECFs. ECF managers were asked about the extent to which they agreed or disagreed with the following statements: The prioritised return to government should be reduced Government should be able to commit more than two thirds of the money into an ECF Page 18

20 Government can invest a maximum of two thirds of the total commitment into an ECF. Because government is committing more money than private investors, ECFs must pay a prioritised return to the Government, equivalent to interest charged on the Government funds drawn down into the ECF. The rate currently applicable is 4.5 per cent per annum. Essentially, the two thirds commitment and the prioritised return are two sides of the same coin. However, some management teams claim the structure makes raising private investment a challenge. Of the 17 ECF managers who responded to the statements, 7 agreed (of which 2 strongly) that the prioritised return should be reduced, with 7 neither agreeing nor disagreeing and 3 disagreeing. 9 ECF managers disagreed that government should be able to commit more than two thirds of the money into an ECF, with 5 agreeing. 4.8 Views of Fund Performance In order to meet the objectives of its wider role to bring greater coherence across Government with regards to the design and operation of venture capital funds, CfEL will be putting in place an information system that will allow it to collect information across the landscape of the publicly-backed SME schemes. This will enable CfEL to improve the understanding of activity and financial performance, benchmarking these measures across schemes to assess performance against objectives and to ensure that interventions are coherent and consistent. As part of the survey, fund managers were asked to provide a self-assessment of their performance compared to other publicly backed funds. This was to assess the extent to which managers themselves had a reasonable idea of how their respective funds were performing relative to their peers. In terms of their self-assessment of the financial performance of their funds, almost half thought they were above average. The same proportion, although not necessarily the same managers, thought their performance as measured in terms of wider economic benefits, such as employment growth and promoting innovation, was above average. At first glance, that does not seem unreasonable half of fund managers might be above average and half below average. However, 34 per cent of managers really couldn t say how the financial performance of their funds compared to their peers. 28 per cent couldn t say about the wider economic performance. Looking at only the results for those fund managers who had a view on the performance of their funds, 71 per cent thought the financial performance was above average, and 66 per cent thought the wider benefits were above average. The fact that many managers cannot say how well their funds are performing relative to their peers may explain some of the enthusiasm for CfEL s project to collect data in order to benchmark across schemes. As noted in section 4.6, the overwhelming majority of Page 19

21 managers agree on the importance of Government collecting comprehensive information on the performance of the venture capital funds it has contributed funding to. 4.9 Views of CfEL Over three quarters of fund managers rated the level of engagement they have with CfEL as good. Good engagement was defined as CfEL provides the right level of support and challenge. Equal numbers thought CfEL was over engaged as under engaged (fig. 13). Fig. 13. How would you rate the level of engagement you have with CfEL? Not applicable - we have had no reason to engage with CfEL Poor engagement - CfEL does not appear interested Good engagement CfEL provides the right level of support and challenge Over engaged CfEL dips too much into the detail 4.10 Other comments from the survey At the end of the survey, there was an opportunity for fund managers to provide additional comments. It was hoped that this section might help identify topics for future surveys. 22 respondents provided comments ranging from brief one line responses to short essays. Among the comments a number of common themes emerged. A number of respondents commented that the 10 year limited partnership model is not necessarily aligned with the current growth environment and that a more permanent style capital structure might be required. Related to this point, a number of respondents reiterated the problems around not having sufficient ability to follow-on. Page 20

22 A few respondents commented on the tax system and suggested this could be better used to encourage investment in venture capital funds, for example giving Enterprise Investment Scheme (EIS) benefits to those who invest in publicly supported venture capital. Some respondents commented that the Government should have a clear objective to make money from the funds it invests in. Setting targets around number of investments or jobs created can be counterproductive. Managers need to invest in business that can grow and deliver a profit. These businesses will create jobs. However, there was some disagreement on this point with others taking the complete opposite view that small early stage investments will never be commercially viable, but are vital to the economy. Therefore the focus should be on job creation and supporting businesses. Funds have been established with very different objectives and both points of view are understandable. By bringing together the performance data on all publicly backed funds, CfEL should be better able to understand the relationship between financial performance and wider economic benefits. Page 21

23 5. Lessons learned for a future survey The high response rate achieved by the survey and the detailed additional comments provided by many respondents suggest the survey is an exercise worth repeating. Many managers of publicly backed funds are keen to share their views. If CfEL is to repeat the survey, it should draw on the lessons learned from this pilot study. At the fund manager event, there was an opportunity for managers to not only discuss the survey results, but also the survey itself. This section draws on many of the comments made. Web self-completion or CATI? An interviewer administered telephone survey has a number of advantages over web selfcompletion. Guidance notes given to interviewers can help clarify questions. This is not so easy with a web tool. Another advantage of telephone surveys is that there is greater opportunity to use free text responses that interviews can code in real time rather than a list of response choices that potentially force respondents down a certain route. However, a number of managers expressed a strong preference for the web self-completion mode as opposed to a telephone interview and nobody spoke out in favour of a telephone survey. If response rates for a future survey are not as good, it might be worth considering a telephone follow-up of non-respondents to the web survey. Survey length The survey length was kept down to ten minutes to encourage response. Many fund managers agreed that the fact the survey was supposed to take ten minutes to complete was a factor in their participation. Another key factor in encouraging survey response is salience. The fact that many managers thought the survey was interesting and would be worthwhile encouraged them to participate. A number of managers suggested that they would have responded if the survey had been longer. Consideration should be given to increasing the length of the survey, or perhaps issuing a slightly longer survey to random sample of respondents. The risk of sending a longer survey to everyone is that more might be lost than gained if increased length results in a lower response rate or response bias. Questionnaire A number of managers, especially those managing more than one fund, felt that they weren t sure how to respond to some questions as the answer depended on the fund. There was also some confusion as to whether they were being asked for their views as an individual or to give a corporate view. A future survey should make this clear. Ideally, a small sample of managers (perhaps 4 or 5) should be asked to help with cognitive testing of the survey. This would be a good way of checking how the target audience interpreted the questions and should lead to better question wording. Page 22

24 If CfEL decides to run a survey annually, it might be worth designing the survey so that there is a set of core questions asked every year and rotating a series of additional questions. Core questions would focus on the state of the market and other time variant factors. Rotating additional questions would enable CfEL to keep the survey length down, but still cover a broader range of topics, albeit on a less frequent basis. Sampling Proper thought needs to be given to defining the sample. For a future survey, CfEL could sample one member of the investment team of each fund, or invite each member of the investment team to respond. Either way, it needs to make sure it has up to date contact details for the full team. If CfEL can draw the sample from the known population of fund managers, it can be much more confident in the results. Some thought will need to be given to the sampling of individuals managing more than one fund. It is unlikely that they will want to complete two surveys. Consideration should be given to expanding the survey beyond publicly backed funds and seeking the views of other venture capitalists. It might be worth exploring the possibility of commissioning a joint survey with the British Venture Capitalist Association (BVCA). Linking to other data Many of the responses to the 2011 survey may well be explained by the current position of the fund(s) managed by the respondent. For example, views on the equity gap appeared to vary by type of fund managed. Even within a programme, there can be variety in fund size, average deal size, number of portfolio companies, vintage of fund and internal rate of return. It may be informative to look at the relationship between this data and some of the survey responses. Fund managers could be asked in the survey whether they would be happy for CfEL to link their responses to data we hold about the funds they manage. The risk is that it then becomes relatively easy for CfEL to identify respondents. CfEL would ensure that individuals would not be identifiable from published reports. It could also ensure that only those responsible for survey analysis had access to the linked data if confidentiality was a concern. Page 23

25 Bibliography BIS (2009) The Supply of Equity Finance to SMEs: Revisiting the Equity Gap, SQW Consulting, URN 09/1573 BIS (2010a) RVCF and EGF Interim Evaluation: Recipient Business and Stakeholder Surveys CI Research, URN 10/603 BIS (2010b) Early Assessment of the Impact of BIS Equity Fund Initiatives, Centre for Enterprise and Economic Development Research (CEEDR) Middlesex University, URN 10/1037 BIS (2011a) Small Business Survey 2010, IFF Research, URN 11/P74 BIS (2011b) BIS Equity Finance Schemes: Survey of Fund Investors, Ekosgen BIS (2011c) BIS Equity Finance Programmes: Qualitative Reviews of: a) UKHTF and b) The Bridges Fund, Ekosgen BVCA/Populus Venture Capital Outlook Survey 2009 Capital for Enterprise Ltd (2011) Summary Business Plan Cook, C., Heath, F. and Thompson, R.L. (2000) A Meta-Analysis of Response Rates in Web- or Internet-Based Surveys, Educational and Psychological Measurement; 60; 821 Dillman, D.A. (2000) Mail and internet surveys: The tailored design method, New York: John Wiley & Sons. HM Government (2010) Local growth: realising every place s potential, White Paper HM Treasury/Small Business Service (2003) Bridging the finance gap: next steps in improving access to growth capital for small businesses HM Treasury/BIS (2010) Financing a private sector recovery Nightingale et al (2009) From funding gaps to thin markets: UK Government support for early-stage venture capital BVCA and NESTA research report SME Finance Monitor (2011a) To what extent have SMEs had issues accessing bank finance? BDRC Continental SME Finance Monitor (2011b) Q3 2011: Developing a deeper understanding BDRC Continental SQW Consulting (2010) Improving the coherence, co-ordination and consistency of publicly backed national and regional venture capital provision Report to the Department for Business Innovation and Skills, URN 10/1300 Page 24

26 Appendix A - Methodology Appendix A - Methodology Sampling CfEL organised a seminar for equity fund managers to take place in Sheffield in late November. The invitation list to the fund manager event was used as the survey sample frame. The intention was to invite a representative from each fund overseen by CfEL to the seminar. In theory, the invitee list contained one investment manager from each fund overseen by Capital for Enterprise. However, in practice some funds had more than one representative while others had none. Furthermore, some managers invited to take part had responsibility for more than one fund. Representatives from the three English JEREMIE 13 holding companies (North East Finance, North West Business Finance and Finance Yorkshire) were also invited to take part. The survey invitation was issued to a total of 64 fund managers representing approximately 60 funds and holding funds. Ideally, each member of the population of interest (in this case, managers of publicly backed equity funds) should have a known probability of selection. Because the CfEL survey violated this core principle, one should not make inferences from the survey results to the population of fund managers. Fieldwork The survey was administered as a self-completion web survey. With the exception of sampling mentioned above, the survey used Dillman s Tailored Design Method 14 for internet surveys. Dillman s methodological research on mail and internet surveys concentrates on how best to design surveys to increase response rates and minimise non-response bias. Dillman argues that designing a quality survey begins with 2 key assumptions. The first is that responding to a self-administered questionnaire requires motivation as well as cognition. The second is that multiple attempts are essential to achieving satisfactory response rates 15. Fund managers received up to four pieces of communication regarding the survey. The invitation to the fund manager event advised managers that they would be receiving an invitation (prenotification contact 1). Managers were invited to take part via a personalised issued on 4 November 2011 containing a unique link to the survey (contact 2). The gave a deadline for response by Friday 11 November. A reminder was issued to non-respondents only on Wednesday 9 November (contact 3). A final reminder was sent to the remaining non respondents on Friday 11 November (contact 4). The invitation explained the reasons for carrying out the survey, assured anonymity, advised that the survey should only take 10 minutes to complete and informed fund managers that results would be presented at the seminar for fund managers on 23 November. The reason for addressing these factors in the communications was that much of the research suggests salience, guaranteeing anonymity and feedback are positively correlated with response, while questionnaire length is negatively correlated. The unique link in the enabled CfEL to track responses, but did not allow 13 Joint European Resources for Micro to Medium Enterprises 14 See Dillman (2000). 15 Ibid. p.13 Page 25

27 Appendix A - Methodology CfEL to identify respondents from their responses. This meant that follow up communications could be tailored to non-respondents. Response rates A total of 55 managers responded a response rate of 86 per cent. 2 of these were partial responses, so the full response rate was 83 per cent. 33 fund managers responded after the first invite; 16 after the first reminder and 6 after the final reminder. The 55 respondents covered about 50 funds between them. Page 26

28 Appendix B - Questionnaire Appendix B - Questionnaire Thank you for taking the time to complete the Capital for Enterprise Survey of Fund Managers. Your responses to the questions in this survey will help CfEL provide advice and understanding to Government and improve the quality of Government policy initiatives. Your responses will be kept anonymous so please be as frank as possible. We will only present aggregated findings from which it will not be possible to identify you. The survey should take no longer than 10 minutes to complete. Section 1 Your business 1. What type(s) of venture capital fund do you manage? (check all that apply) a. An Enterprise Capital Fund (ECF) b. An Early Growth Fund (EGF) c. A European Regional Development Fund (ERDF) supported venture capital or loan fund d. A venture capital or loan fund established by a Regional Development Agency without ERDF e. A Regional Venture Capital Fund (RVCF)# f. Enterprise Investment Scheme g. Venture Capital Trust h. Private venture capital fund i. Other publicly backed fund (Please state ) Section 2 The equity gap 2. Do you believe that some Small and Medium Sized Enterprises (SMEs) face an equity gap where debt finance is inappropriate or unavailable and the amount of risk capital required is below what many venture capitalists will invest? (Yes/No) {If 2=Yes} 3. At what level approximately do you think the equity gap starts? a. Below 100,000 b. Between 100,000 and 199,999 c. Between 200,000 and 299,999 d. Between 300,000 and 399,999 e. Between 400,000 and 499,999 f. 500,000 or above 4. What do you think is the upper limit of the equity gap? a. About 1m b. About 2m c. About 3m Page 27

29 Appendix B - Questionnaire d. About 4m e. About 5m f. Higher than 5m (please specify) {Ask all} 5. If you have any comments on the equity gap, please enter them in the box below Section 3 the venture capital market {Ask all} 6. Thinking about the quality of investment opportunities you are currently assessing, how do these opportunities compare to those you were assessing this time a year ago? a. The quality of investment opportunities has improved compared to a year ago b. The quality of investment opportunities is about the same as a year ago c. Investment opportunities now are worse than a year ago d. I am not looking at new investment opportunities 7. Thinking about your future expectations, in a year s time do you expect the quality of investment opportunities to have improved or worsened compared to those you see currently a. I expect the quality of investment opportunities to have improved b. I expect the quality to be about the same c. I expect the quality to be worse d. I am not looking at new investment opportunities 8. When making initial investments, is it easier or more difficult to find co-investors now as compared to this time a year ago? a. It is easier to find co-investors now than a year ago b. It is neither easier nor more difficult c. It is more difficult to find co-investors now than a year ago d. I have not tried to find co-investors 9. In a year s time, do you expect it to be easier or more difficult to find co-investors for initial investments a. I expect it to be easier to find co-investors in a year s time b. I expect it to be neither easier nor more difficult c. I expect it to be more difficult to find co-investors in a year s time d. Not applicable 10. How difficult is it to raise follow on funding rounds for your portfolio companies now compared to a year ago? [variation on BVCA question in credit crunch survey] a. It is easier to raise follow on rounds now than it was a year ago b. It is neither easier nor more difficult c. It is more difficult to raise follow on funding now than it was a year ago d. I have not tried to raise follow on funding Page 28