U.K. Business Bank Increases Direct Investment in Startups

U.K. Business Bank Increases Direct Investment in Startups

The U.K.’s innovation sector is attracting more venture capital (VC) than most of Europe. However, there are still gaps in funding, especially for businesses moving from early seed stages to Series A, or when they need money to grow. This week, the British Business Bank (BBB) said it is changing its approach to invest more directly in growing companies, while also encouraging private investors, like VCs and pension funds, to join in.

Founded in 2014 to support smaller businesses, the BBB acts like Britain’s economic development bank. Earlier this year, the government gave the bank £4 billion to invest in young companies in sectors vital to the U.K.’s future, plus another £2.6 billion for promising startups in any industry.

The bank is also changing how it invests. Instead of only putting money through VC funds, it has started investing directly alongside VCs since 2021. This week, it announced that it has reached a milestone of £250 million invested directly across 33 tech and life sciences companies. The BBB plans to continue increasing direct investments in businesses leading in innovation and growth.

What This Means for the U.K.

I spoke with the bank’s Chief Investment Officer, Leandros Kalisperas, to learn more.

So far, the £250 million invested directly is only 5% of the BBB’s total investment. But this percentage is expected to grow as more money from the government’s Modern Industrial Strategy is used. Kalisperas says, “I could see up to 25% of the Industrial Strategy capital being invested alongside other investors.”

This raises questions about how the BBB will choose which companies to support directly. Will it try to pick the next big winners? Kalisperas explains it’s more careful than that. The bank will focus on two things: first, if it has already invested in a business through a VC fund, it may add more money to help the company before future funding rounds.

Focusing on Successful Companies

“The power law shows that most returns come from a few breakout companies. So, our first approach is to invest in later rounds of companies we already see performing well in our funds program,” he says.

Supporting Research-Heavy Companies

The bank also wants to support research-heavy companies that need money to develop their products, such as those in deep tech or life sciences. This helps fill gaps in the UK investment landscape, giving these companies the time and funds to bring products to market.

So far, about half of the 33 deals made by the bank have gone to university spinouts working on advanced technologies.

However, Kalisperas emphasizes that the state-funded bank won’t invest public money alone. It will work alongside venture capitalists, so it’s more accurate to call it co-investing rather than direct investing.

Attracting Pension Fund Investment

The BBB has also expanded its team to make smart investment decisions. This is part of the British Growth Partnership, a new initiative where the bank sets up a fund to invest in growth-stage companies on behalf of institutional investors, like pension funds.

“The fund will highlight the best UK companies and offer them to pension funds as a curated investment,” says Kalisperas. “Since the fund manages third-party money, it’s important to do it right.”

The BBB is close to finalizing its first Growth Partnership fund, with institutions such as NatWest Cushion, Aegon, and London CIV committing money. Pension funds have agreed to invest more in British companies, including scaleups. But since venture capital is new to many of them, they need time to plan and learn. Meanwhile, the Growth Partnership gives them options.

Overall, the bank aims to use public money to attract private investment, helping growth-stage companies get the funding they need.

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