The Treasury Committee has criticised the venture capital industry and its failure to invest in firms outside of London and the South East in its latest report.

The report was collated by the cross-party Treasury Committee, which is chaired by Harriet Baldwin. It also found that the venture capital industry is not investing in businesses led by women or ethnic minorities.

Venture capital is a form of investment in early-stage companies, typically in return for a share of the business. Although it is a risky investment, it is seen as crucial for innovative companies with high growth potential. The sector receives Government support through tax reliefs, which are designed to encourage investment in the UK.

The report found that businesses that have all-female founders received just 2% of all venture capital funding in 2021, with less than 2% going to black and ethnic minority-led businesses.

Furthermore, the report found that 80% of all venture capital investment goes to the “golden triangle” of London, Oxford and Cambridge, with London alone receiving almost half of all equity deals, despite only accounting for 19% of all small businesses.

Following the report, the committee has encouraged all venture capital firms to sign up to the Women in Finance Charter and Investing in Women Code, which both require the publication of gender and diversity statistics. Organisations should comply or explain why they are not as a condition of receiving tax relief support.

The committee has also recommended that the Government and British Business Bank consult on creating a fund with the specific purpose of promoting gender diversity in venture capital allocation.

Baldwin said: “The venture capital industry plays a vital role in supporting the growth of the nation’s small businesses, but statistics which show just two pence in every pound of investment goes to all-women led businesses demonstrate a shocking dereliction of duty given the level of Government support for the industry through tax reliefs.

“In the twenty-first century, it shouldn’t come as a surprise to investors that women and those from ethnic minority backgrounds can start successful businesses. Given public funds play a key role in the success of the UK’s venture capital sector, more must be done. Firms must be compelled to reveal their diversity data when applying to these tax reliefs in an effort to increase transparency and drive change. Government incentives could also be tweaked to encourage more regional venture capital investment.

“As a committee, we will continue to keep a close eye on these important topics and will be investigating small business finance and sexism in the City in two new inquiries launched recently.”

Investment manager at Wealth Club, Nicholas Hyett, added: “The Treasury Committee’s venture capital report is a ringing endorsement of the UK’s current tax efficient venture capital schemes. Evidence from across the industry and government shows widespread support for these schemes, which have now received cross party, political endorsement.

“The report does identify diversity in the sector as an area for improvement. And while there has been progress in recent years, there’s still more to do.

“The planned extensions to the age at which companies can raise money under the schemes, and the amounts they can raise, have the potential to help address one of the major challenges facing the UK’s young businesses – transitioning from successful start-ups to global player. In recent times, UK companies have often had to turn to overseas acquirers to grow to global scale – depriving the UK economy of the benefits of a homegrown Apple or Nvidia. It’s a particular problem for companies outside the South East – who often arrive at the venture capital party later, and risk missing out on tax efficient investment under the current rules.”

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