Innovative high-tech start-ups on which the UK depends for half its jobs are being starved of investment, says the National Endowment for Science, Technology and the Arts (Nesta).
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Venture capitalists are having to wait longer to cash out and this has halved the money raised for start-ups in the past two years, Nesta said in its latest research into the venture capital business.
Researchers found that there has been a 40% decline in venture capital activity in the past two years. The business was now less active than during the dotcom bust of 2002, it said.
2009 was a record low, with only £677m raised compared to £930m in 2008.
"The number of exits has fallen by 40% and fundraising dropped by over 50%, both in terms of the number of funds raising new capital and total amounts raised," Nesta said.
The world average time between investment and exit was now was almost seven-and-a-half years, the longest difference in 20 years.
This hamstrung funds' ability to attract new investment, it said.
Nesta said the recession and the banking crisis had both helped to dry up capital. "Current fundraising is considerably lower than levels seen after the dotcom crash and consequently the lowest level seen in the past decade," it said.
Despite this, funds that did manage to cash out did so with good returns.
Nesta believed that many investments made between 2004 and 2007 in new companies were expected bear fruit soon.
Nesta investment fund chairman Mike Lynch said high growth technology start-ups were critical to the UK's recovery.
Just a few of these type of firms provided more than half of UK jobs between 2002 and 2008.
"These businesses depend on venture capital for pre-revenue finance. Our ambition to rebalance the economy must take into account the difficulties of early-stage investment," he said.