Don’t confuse small with beautiful

Indeed, the tax benefits give a clue about the potential problems. Venture capital has become an intensely political area. The Government is backing it for ideological reasons more than economic ones.

Venture capital is seen as a way of promoting a more entrepreneurial and innovative economy. The Government also hopes that by providing incentives to new businesses, it will help create jobs.

All of these are laudable aims. But the way New Labour is trying to achieve them is questionable.

The reality of small business is much more mundane than the Government assumes. For every potential Bill Gates or Richard Branson there are literally many millions of people who are just trying to get by. Few meet the model of cutting-edge entrepreneurs working in Silicon Valley-type conditions.

Of course, everyone needs at least a basic income to survive. Many people set up sandwich shops or painting and decorating businesses as a way of earning a living. Often they are men over 50 who are frustrated by the youth-obsessed jobs market. However, survival should not be confused with innovation.

By blurring this distinction the Government underestimates the difficulty of creating genuine entrepreneurship. Developing a culture where businesses are creating innovative products or new ways of doing things is difficult.

This is particularly true in today’s conservative climate. Even in such areas as music or film the culture is increasingly derivative. The world is awash with remakes and sequels – often cloaked in post-modern irony in an attempt to make up for their creator’s limited imagination.

What is true of movies is equally true of businesses. Only a tiny minority are even trying to create genuinely new products. That is unless you count the advent of 57,000 varieties of mobile phone ringtone as a genuine advance for humanity.

The maxim that investors should not invest for tax benefits alone is particularly true of venture capital. It is certainly possible for a good VCT manager to assemble an attractive portfolio of firms. But it would be a mistake to assume that venture capital is an attractive asset class by its nature alone.