The stated aim of the London Co-investment Fund is to enable the start-ups who can raise funds, to raise significantly more, so they have sufficient money, time and resources to prove their business model. The additional resources allow the start-ups to be well equipped for their subsequent funding rounds. The end objective is to empower London’s start-ups to grow into tech giants.
The London Co-Investment Fund invests in funding rounds led by competitively selected co-investment partners. For every £1 that the fund invests, the partners are obligated to directly invest £2.9 or secure the same from their investors.
The London Co-investment fund is a £25 million seed fund for high-growth businesses that are based in London and operating in the digital, science or technology sectors. It operates by investing public money in funding rounds led by competitively selected co-investment partners (in roughly a 1:3 ratio of public to private money), with all investment decisions made by the partners.
The London Co-Investment Fund is founded and managed by Funding London and Capital Enterprise.
Capital List (a service of Capital Enterprise) and the London Co-Investment Fund investment partners review all applications. The successful start-ups are invited to the ‘Green Light Programme‘ a CASTS programme part funded by ERDF. Capital List is committed to work with the start-ups to support their fundraising efforts through their Green Programme, which offers workshops to support sustainable growth within the company, and introductory meetings with the co-investment partners. They also work with the investment partners to identify early stage tech businesses who are eligible for London Co-Investment Fund investments.
This policy tool, as of 2016, had already raised £25m from the Mayor of London’s Growing Places Fund to co-invest in seed rounds between £250,000- £1,000,000, led by selected co-investment partners.
About Equity Investment:
Equity is an important type of funding mechanism for early-stage companies which are potentially high-growth but also high risk, and so less attractive to banks and other loan providers. One advantage of equity financing is that it spreads the risk: if the business fails, the equity investor must accept their loss. However, many entrepreneurs are reluctant to give up equity at it typically involves some loss of control of the business.
Equity finance is available through a number of sources, including business angels, venture capitalists (VCs), stock markets and crowdfunding platforms. Importantly, equity investors need confidence in the ability to exit their investment eventually – that is, to sell their stake to someone else in exchange for cash. Properly functioning primary and secondary markets therefore encourage angel and VC investment.
Historically, there has been a significant gap between European and US VC funds, with total European investment comprising a fraction of the US, as well as underperforming in terms of financial returns (though this gap is closing). There is also evidence of a relationship between fund size and performance, with some of the lower performance of European funds being blamed on their smaller size. In addition, there is a common trend of funds moving to later-stage investment, thus creating recurrent gaps in early-stage investment.
Because of this, public policy typically focuses on incentivising private sector investment, especially at the early stages, as well as increasing fund size. Government agencies have thus become the primary source of new European venture capital in the past decade.
Read more about these types of policy instruments in Nesta's "Digital Entrepreneurship: An ‘Idea Bank’ for Local Policymakers."