The government's flagship £1bn scale-up fund will miss out on top deals and deliver poor performance for its pensioner investors if ministers choose a traditional firm rather than a specialist venture capital shop to manage it, a group of the UK's leading early-stage investors has warned.

The industry heavyweights, who between them were early backers of British unicorns Elevenlabs, Synthesia and Fuse Energy, cautioned that awarding the tech-focused UK Scale-Up Fund to an institutional investment house would "make a mockery" of the UK's venture industry and result in the fund losing access to the most exciting firms.

The warning follows the revelation that both M&G and Schroders – two of the UK's largest asset managers – have bid to run the £1bn government-backed pot, which is made up of cash from a consortium of pension providers.

Alex Macdonald, chief executive of seed-stage investment shop Sequel, told City AM that handing the mandate to a traditional public markets investor rather than a growth investing specialist would "make a mockery of the venture industry in the UK".

"If you're the government and you're going to give that mandate for scale-up capital to someone, you should give it to a proven venture investment manager," Macdonald, who also founded the luxury concierge service Velocity Black, added. "One who has been there in the ecosystem has credibility, understands the space and understands technology."

At its launch last month, the government hailed the UK Scale-Up Fund, which will be geared toward investing in both science and technology companies, as a vital means of connecting institutional capital with the companies "driving the next wave of British innovation". Andy Burnham said it would help "unlock growth in every postcode" and generate "more opportunities for working people".

The debate goes to the heart of a long-running complaint in UK tech circles: that promising British companies frequently raise later-stage funding from US or international investors, or relocate altogether, because domestic pools of growth capital have historically been smaller than those available to American peers.

Venture investors, however, have raised concerns that a traditional asset manager – with less specialist experience in the venture and early-stage investment ecosystem – would struggle to access the same opportunities as specialist investors with track records of backing successful UK start-ups.

Scale-up fund would miss out on top deals

Unlike public markets, fast-growing private firms can be highly selective about the investors they take on board, and often turn down more prospective backers than they accept.

Harry Stebbings, founder of 20VC, warned that the crowded nature of that investment process means a generalist investor will be left with an "adverse selection" of potential companies.

"They are not equipped to analyse the next generation of technology companies," he said. "If they get chosen, it will be because companies that could not fundraise anywhere else go to them."

Tom Wilson, partner at Seedcamp, added: "It's not just a matter of turning up and saying I want to invest in this amazing company – like a Synthesia or whoever that might be. It's incredibly competitive at the growth stages because the best companies have a huge amount of options."

The warnings come amid a concerted effort to ring-fence more of the pension industry's vast pools of capital for British-grown success stories. Last year, the UK's largest pension providers all signed up to a government-backed push to unlock billions of pounds for domestic private companies.

Schroders has already played a pivotal role in facilitating that drive, launching the UK's first long-term asset fund (LTAF) geared specifically at pension providers. The fund has used cash from its first investing round to back the likes of autonomous vehicle firm Wayve and deeptech darling Elevenlabs.

M&G, meanwhile, has been an early backer of Physics X and the chipmaker Pragmatic Semiconductor.

The bidders' existing venture track records mean the outcome of the mandate decision is likely to be scrutinised closely by both the venture community and the pension providers whose members' savings are at stake – and it will offer an early test of how the government balances cost against specialist expertise when allocating public-backed capital.

"I would say it is incentives that drive outcomes, and when you go for the cheapest provider, you will most often get the worst quality product," Stebbings added. "I think that would very much be the case here. Government organisations align and focus on cost, not upside, which drives poor performance, which will ultimately hurt the pensioners in this fund."

The government declined to comment. Schroders and M&G, whose interest in the UK Scale-Up Fund was first reported by Sky News, also declined to comment.