The supply of equity finance in the UK: a strategy for closing the equity gap

Developments in the supply of equity capital during the 1980s have reduced the size of the equity gap in the UK. However, such developments have not adequately met the need for smaller amounts of venture capital, especially for firms seeking to raise seed and start-up capital. Moreover, recent initiatives to develop seed capital funds and regionally based venture capital funds appear unlikely to significantly close the equity gap. In this paper we argue that informal venture capital — that is, venture capital provided by private individuals directly to new and growing businesses with which they have had no prior connection — provides a promising solution to closing the equity gap. However, its potential is limited by inefficiencies in the operation of the informal venture capital market. We therefore propose a number of policy initiatives to overcome these inefficiencies.