The risk capital market in Scotland 2009-2011

The purpose of the report is to provide a detailed and comprehensive analysis of the early stage risk capital market in Scotland between 2009 and 2011. The report is intended to inform Scottish Enterprise’s (SE’s) understanding of the market to support its investment interventions and to improve understanding of the scale and characteristics of the early stage risk capital market at a time when the economy was experiencing considerable turmoil.

The research methodology consisted of two stages: data collection and consultation. The data collection stage comprised of the compilation of a list of well-known investment deals between 2009-11, using deals listings from Young Company Finance (YCF), LINC Scotland, and the Scottish Investment Bank, alongside data from the Companies House database. The consultation stage involved a series of interviews with investors, entrepreneurs, non-executive directors representing several young companies, intermediaries, universities, and senior SE staff, in order to build an understanding of the dynamics and future trends of investment in the sector. This was supplemented by a half-day workshop with 14 invited participants.

The study found that, despite a period of unprecedented economic uncertainty, the Scottish risk capital market has held up relatively well, especially in the deal band size between £100,000 and £2 million. It is also suggested that the market continues to be fragmented with limited visibility, which presents challenges when determining the extent to which it is efficient in how it functions in channelling growth finance to early stage companies. The main message which emerged from the consultation exercise was that the market must be considered from the demand side, as well as from the analysis of access to and supply of finance. The other key themes that emerged from the consultation included: the market is seen as having a long timescale, and significance should not be attached to relatively small year-on-year changes; young companies experience much more difficulty in securing bank loans; there has been some fragmentation of the market into discrete elements which have little interaction, which can partly be blamed on investors, including angel investors and venture capital firms, improving their performance by focusing on specific areas; Scotland has a wide diversity of sectors where innovation and entrepreneurship play a key role in the performance of the early stage risk capital market, particularly the enabling technologies, life sciences, and energy sectors; and the market is affected by a lack of exit opportunities for investors.

A series of actions are suggested that should be considered to support the future development of the Scottish risk capital market, including: alternative start-up business models for all sectors should be explored; funding initiatives and programmes for connecting young companies to the different sources and types of investment available should be adapted, in recognition of the increasing fragmentation of the market; and more companies, particularly young ones, should do more to capitalise on changes in the venture capital market.