The risk capital market in Scotland 2008

The report aimed to provide an analysis of the size, structure and nature of the early stage risk capital market in Scotland in 2008, covering only external equity investments. It aimed to identify the contribution made by risk capital investment to business ventures in Scotland and provide evidence for the development and evaluation of policies to stimulate the market. The report aimed to improve the understanding of the scale and characteristics of the early stage risk capital market in Scotland during a period when the economy experienced considerable turmoil.

The methodology consisted of: data collection from three sources (Scottish Enterprise’s listing of investments made from three funds, LINC Scotland’s listing of investments by its angel syndicate members and Young Company Finance’s Deals Monitor 2008 listing); data verification, using Companies House records and direct queries to investors and investees; an analysis of investments, primarily using Companies House records; and consultation interviews with a range of investors, intermediaries and investee companies.

Overall, the early stage risk capital market in Scotland remains buoyant. In 2008, £119m of equity investment was made in early-stage high growth companies in Scotland in 186 deals, which is a slight increase over the previous three years, but much lower than the amounts invested in 2000/2001 (an exceptional period for investment). £65m of the total was invested in 14 deals of over £2m or more. The sector is largely continuing as in previous years, but with an increase in investments in later stage businesses. The expansion capital market is characterized by Venture Capital (VC) investment in existing portfolio companies, rather than investment in new ventures. The withdrawal of many VCs from the market in Scotland has significantly reduced the scope to develop this segmentation. The various SE funds are meeting an important need in the market, although there may be a possible re-emergence of an equity gap at the bottom end of the range. The continued evolution of the market raises implications for its ability to provide access to risk capital on the scale required to support the growth of high-potential ventures.

The report suggests that a commitment to the development of high growth businesses as central to economic development policy must be accompanied by a commitment to develop access to capital on an appropriate scale. An increasing reliance on a ‘cradle to exit’ investment model by established investors means that a continual flow of new investors will be needed to maintain the capacity to invest in high-growth potential start-up and early stage ventures. The report recommends that priority must be given as to how to extend the pipeline effect within the SE portfolio of funds, either through new fund creation or by attracting new VC players to participate in the Scottish risk capital market.