Special Report on Venture Capital: Seedcorn vital to improve the field: Early stage investment has been neglected in favour of buy- outs. Alison Eadie asks if there is now a change of mood

THE NEGLECT of start-up and early stage investment during the recession has caused some people to question whether the venture capital industry is doing its job.

David Cooksey, chairman of Advent, is concerned about the regeneration of Britain's industrial base. 'Buy-outs make money work more efficiently, but they do not replace the seedcorn.'

Members of the British Venture Capital Association in 1992 invested pounds 82m in 222 start-ups and other early stage businesses, representing only 17 per cent by number and 7 per cent by value of all financings in the UK.

Management buy-outs and buy-ins, by contrast, accounted for 67 per cent by value of all UK venture investment.

3i, the main provider of start-up finance, invested only pounds 15m in 58 start-ups in the year to the end of March 1993 - about half its running average. John Platt, head of UK investment, said there was less demand in a recession, but that as the economy revived so should entrepreneurial appetite. He added that 3i had found it harder in the recession to syndicate start-ups as many venture capital houses had shifted away from the smaller, riskier end of venture financing.

The picture does not appear to be changing. Adrian Beecroft, a director of Apax Partners, said more entrepreneurs were now trying to start businesses, but there was no move in the venture capital industry to return to financing them. Apax has directed 37 per cent of money invested from its 1990 fund into start-ups and early stage, including the launch last year of Virgin

Radio.

It may be too early in the venture cycle to see a resumption of early stage financing, suggests Ron Hollidge, chairman of the BVCA. He said that as competition increases and the supply side diminishes in later stage financing, there will be a move back to early stage.

Institutional pressure for quick returns explains part of the flight from early stage financing.

David Quysner, a director of Abingworth Management, said institutional subservience to quarterly performance figures had turned them away early stage, technology investment. 'If the UK is to be competitive in the future, technology-driven companies hold the key. Unless we can channel institutional money to the sector, we will not succeed.'

He added that the public flotation of a dozen or more early stage technology companies in recent months could change attitudes. A few visible winners might persuade investors that there was money to be made in early stage technology, Mr Quysner said.

However, he added that Stock Exchange rules introduced last this year to allow scientific research based companies to float still required modification. The ban on promoters of such companies selling their shares for two years after the float produced unhealthy volatility. If there was an appetite for shares they were bid up in a narrow market yet after two years could plummet because of the threat of large share sales. 'The market cannot be managed in an orderly way,' he said.