Finding finance for scale-ups

Finding finance for scale-ups

Scotland’s start-up ecosystem is thriving, with many sources of investment and advice for new companies. But how can finance be found for scale-ups? BQ Scotland editor Peter Ranscombe goes on the hunt.

Engage Invest Exploit (EIE) has become one of the highlights in the Scottish tech calendar. The annual events in Edinburgh and London – which are organised by technology accelerator Informatics Ventures – bring together start-up companies that need funding and investors looking for the next ‘unicorn’ or billion-dollar company.

But where can later-stage companies go when they need investment? Could Scotland’s massive asset management sector invest more in our nation’s high-growth companies?

Sandy Finlayson, a partner at law firm MBM Commercial and one of the father figures in the Scottish technology community, says: “There are about £750bn of assets being managed on the north side of Princes Street and a thriving tech community on the south side of Princes Street – and we’ve built a tram line in between them to make sure the two never meet.

“We need to take the conversation from being ‘whether’ asset managers can invest in tech companies to ‘how’ asset managers can invest in tech companies. If they can take that decision then we can show them how.”

While asset managers are unlikely to be able to invest directly in companies, Finlayson highlights the possibility of using “funds of funds”. He points to The Supply of Growth Capital for Emerging High-Potential Companies in Scotland, a report published in June 2014 by the Institute of Chartered Accountants of Scotland (ICAS), the Royal Society of Edinburgh (RSE) and trade body Scottish Financial Enterprise (SFE).

The report’s recommendations included using the UK Government’s Enterprise Capital Funds model and Venture Capital Trust vehicles to invest in high-growth companies. “These could raise funds on the scale of £100m or more rather than the smaller amounts currently being raised,” Finlayson says.

The report also recommended building on the success of the Scottish Co-investment Fund. “If business angels invest one pound and the Scottish Investment Bank invests one pound then the asset managers could invest perhaps five pounds,” Finlayson explains. “There’s also a lack of locally-based strategic corporate finance advice for scale-ups, especially those that want to access investment from overseas.

“The advisory community needs to stop thinking about what they can get out of young companies through billable hours and more about what they can put into them to help then to succeed – that way everyone will win.”

Some fund managers are already investing in Scotland’s scale-up companies. In January, Edinburgh-based duo Artemis and Baillie Gifford took part in a £192m fund raising for flight comparison website Skyscanner.

Strathclyde Pension Fund launched its New Opportunities Portfolio in 2009 and last year re-branded it as its Direct Investment Portfolio.

Sinclair Dunlop, chief executive at life science investor Epidarex Capital, says: “You have to be able to demonstrate to the more traditional asset managers that you can generate a competitive rate of return – you can’t just play the local card to try to guilt them into doing something for the home team. Asset managers, like any fund manager, have a legal and fiduciary responsibility to maximise returns for their investors and the vast majority of their investors are not looking for venture-type risk or venture-type returns.

“That said, there are doubtless some large asset managers in Edinburgh as in any geography that will have an alternative assets allocation in their portfolio. The question that the entrepreneurial and venture communities in Scotland should be asking is ‘How can we best convey – locally – Scotland’s home-grown potential to generate competitive returns from alternative assets, equivalent to that which asset managers would be expecting from their investments in California, for example?’.”