Investing in ambition: Scotland’s equity risk capital market 2022

The purpose of this report is to provide a detailed analysis of the risk capital market in Scotland for the calendar year 2022. The report is the latest in a series that tracks the flow of equity investment into Scottish headquartered companies, setting Scotland’s performance alongside the other nations and regions of the UK. This evidence base is used to inform Scottish Enterprise’s interventions to support ambitious early-stage high growth companies, which in turn, supports the continued growth of the Scottish equity risk capital market.

The purpose of this report is to provide a detailed analysis of the risk capital market in Scotland for the calendar year 2022. The report is the latest in a series that tracks the flow of equity investment into Scottish headquartered companies, setting Scotland’s performance alongside the other nations and regions of the UK. This evidence base is used to inform Scottish Enterprise’s interventions to support ambitious early-stage high growth companies, which in turn, supports the continued growth of the Scottish equity risk capital market.

Scotland’s risk capital market saw record levels of equity investment in 2022, with £953m raised (up 26% on the previous year). A small number of large deals were particularly impactful on Scotland’s performance, making a strong contribution to Scotland’s position as the most active equity investment market in the UK after London, the South East and the East of England (collectively known as the Golden Triangle). Scotland’s strengths include a well organised and established business angel market and a growing number of companies that are attracting later stage VC and international investment.?Scottish university spinouts also saw record investment levels in 2022. With a total of £235m raised, this type of investment increased 53% on the previous record set in 2021. Despite this, some challenges still clearly exist in Scotland’s risk capital market. Investor sentiment affected market activity in the second half of 2022, a trend that is likely to continue into 2023, with many equity investors showing signs of changing risk appetites. The proportion of investment and deals going into the earliest stage of the market, where higher risk deals take place, continues to be an area of concern. Despite the value of first time equity deals in Scotland increasing in 2022, these deals still made up just 10% of market value in Scotland, and first time deal numbers were significantly lower than they have been over the past five years. Underlying market investment (deals below £10m) also fell. The below £2m market was particularly impacted, with investment falling from £157m in 2021 to £137m in 2022 (down 13%). This highlights the continued need to support early-stage businesses in securing the patient capital and expertise needed to help them start up and to fuel their growth.

Taking into account the challenging macroeconomic and geopolitical climate, which has impacted the risk capital market, not just in Scotland but worldwide, the report suggests we look to build on our market strengths, through collaboration with our ecosystem partners to nurture and grow the many talented companies we have in Scotland. Where risks are perceived by investors to be greater and the market is increasingly cautious, there is even more reliance and demand placed on the public sector to share risk and reward with the private sector. To grow our market and safeguard progress over the long term we need more seed and early-stage companies able to access equity funding. The need to increase the investment that is going into new to equity, start-up and early-stage companies to help grow the pipeline is an ongoing issue. This will require ambitious entrepreneurs, more high growth start-ups, a growing supply of capital and experienced investors that are willing and able to fund companies who are earlier stage, higher risk and yet to deliver on their promise.