UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
The British Business Bank is a government- backed economic development bank that seeks (among other things) to stimulate growth in early-stage businesses and the UK economy more widely, and is a big investor in VC funds. At the International Investment Summit in Octo - ber 2024, the British Business Bank revealed the establishment of the British Growth Partnership. This initiative seeks to promote increased pen - sion fund investment in innovative businesses within the UK and aims to unlock several hun - dred million pounds of capital by the end of 2025. The UK VC market also has a burgeoning com - munity of impact investors with an investment mission focused not only on generating returns but also on having a positive environmental and/ or social impact. Many impact strategies are focused on SMEs or start-ups that are seek - ing to bring an idea to market in order to effect positive societal change in their communities, which means there is often an overlap between VC and impact investments. The UK has been a significant contributor to the growth of impact strategies, including through initiatives driven by British International Investment (formerly CDC), the UK government’s development finance insti - tution. 3. Investments in Venture Capital Portfolio Companies 3.1 Due Diligence Due diligence is an important part of the ven - ture capital investment process and must be distinguished from due diligence in mergers and acquisitions. “lighter-touch” approach is generally adopted in VC, although intensity and standards do change with rapid shifts in eco - nomic conditions. It is important to remember
that many ventures vying for seed and early- stage financing may not have been trading for very long, so the scrutiny of previous activity and corporate structure can be limited. Investors will initially assess the investment opportunity’s business model and conduct mar - ket analysis to understand the venture’s industry, market potential, competitors and sustainable growth prospects. As a venture capital invest - ment is quite often viewed as an investment in the founders, the management team will also be closely checked to evaluate their experience and expertise. With seed level investments, founders may often be asked to provide warranty cover - age to the investors, although this practice is waning. Due to the sectors on which venture capital investment tends to be focused, the ven - ture’s intellectual property (IP) position will also typically be a key area of due diligence scrutiny. Risk management is crucial, and involves assess - ing the company’s legal and regulatory compli - ance, financial health and IP protection. Financial statements, contracts, licences, assets, policies and IP rights will be reviewed to identify poten - tial legal risks and liabilities. Detailed IP due dili - gence is crucial for life sciences and technology venture companies, most of the worth of which lies in intangible assets. Depending on the sec - tor, ESG considerations will be prevalent at all stages to address a company’s adherence and commitment to ESG standards. Disclosure is essential and complementary to the due diligence process by drawing out mate - rial information that will provide a full picture of the business. Companies that produce a detailed and thorough disclosure letter to inves - tors, as required by the subscription agreement, will be viewed in a positive light and have higher chances of passing the due diligence checks
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