Data from Venture Index, which tracks investment in small unquoted companies, shows that in the quarter which ended in September 2006, seed funding in the UK amounted to just £283,000 in three companies.

This compares badly with previous years, in September 2005 alone £1.1m was invested in 12 companies, Venture Index say.

There appears to be a trend amongst investors away from early stage ‘high risk’ deals and towards later stage funding with higher amounts being injected.

In the year that ended in September 2006, £57.6m was invested in 379 deals ascompared with the same period during the previous year when £43.8m was invested in 317 deals – an overall increase of 19.6%.

In the past quarter, 88 investments totalling £16.2m have been made, with one company receiving £865,000.

Of these 88 deals, just 31 involved amounts less than £100,000, and the median investment level for the past three months was £125,000.

However, Modweenna Rees-Mogg, managing director of Venture Index, says that the fall in early stage investment is storing up trouble for the future.

“Seed capital and start up finance, at the highest end of the risk spectrum, have long been the preserve of angel investors and government-backed regional funds,” she says.

“The availability of risk capital is critical to early stage companies growth, but what we can observe is a softening of investor appetite for seed and start-up investment.

“If this trend continues it has major ramifications for growing business in the UK and potentially signals the opening up of a new equity gap.”

Mogg is urging the government to persuade the banking community to do more to help start-ups through debt-finance.

“If the equity markets are moving away, not only from seed and start-up deals, but also from sub £100,000 funding, the government must call on the banking community to reinforce its efforts to enable such businesses to gain their first meaningful source of start-up capital through debt finance,” she said

“This is what the Small Firms Loan Guarantee Scheme should be used for.”

© Crimson Business Ltd. 2006