Entrepreneurs are calling on the government to do more to support UK innovators by imitating the US startup approach.

Venture capital funding for the development of early-stage technology companies is being hindered by a lack of viable commercial opportunities.

The point is reflected in the numbers: investment at the proof-of-concept stage dropped from £402m in 2006 to £303m in 2007, according to research group Library House.

Private investors are reluctant to invest in specialised technologies because of the low turnover rate and the risks involved.

And the lack of funding is leading UK entrepreneurs to set up their businesses in the US, according to Walter Herriot, managing director of Cambridge-based incubator St John’s Innovation Centre.

“It is easier to raise finance in the US, as there are more flexible options,” he said.

“There is more private equity in people’s hands, which they are prepared to invest in early-stage business.”

But it is not just private investors who are luring UK business ideas abroad.

The US Small Business Innovation Research (SBIR) programme is a nationwide scheme that reserves a small percentage of government research budgets for contracts and grants to small businesses. SBIR underwrites much of the risk that usually discourages venture capitalists.

UK entrepreneurs are already moving abroad to take advantage of SBIR. But there is no reason that the government could not implement similar initiatives in this country, according to Library House chairman Doug Richard.

An SBIR-like programme would encourage government departments to act as entrepreneurial purchasers, providing funding through a steady supply of custom.

The UK public spends about £14bn per year on technology, so even a small proportion could have a significant effect.

Another possibility is for government to encourage private sector corporations to form relationships with new firms.

UK startups have a hard time selling to larger businesses, said Richard.
“The challenge lies with large companies that will not open the door to small business purchases,” he said.

“Why shouldn’t the UK government force large corporations to act as entrepreneurial purchasers? It wouldn’t cost a penny to mandate.

“If the government continues to neglect the interests of startups, we will continue to have a country that suffers from a lack of growth in its small businesses.”

Herriot and Richard were speaking at a debate in Cambridge.