Supporting SMEs in Scotland

Pat McHughInvestment Director

Scotland – key facts

• Population = 5.2m

• Employment = 2.5m

• Unemployment rate = 7.6%

• Education = 14 universities, 5 Higher Educ Institutes, 43 colleges

• Exports = 21.1bn (excluding oil and gas)

Scottish Enterprise

Scotland’s main economic development agency:• 1000 staff across Scotland• Close links with government

Delivering economic growth by:• Attracting inward investment• Business infrastructure development• Growing indigenous companies by providing:

– Account management and grant support;– Innovation and Commercialisation support;– Investment through the Scottish Investment Bank

Scottish Investment Bank – a division of Scottish Enterprise

To support Scotland’s economic development by growing Scotland’s private sector funding market to ensure that both early stage and established SMEs with growth and exporting potential have adequate access to growth capital

Develop Scotland’s SME funding market by:

Growing the investor base:• Develop, grow, and professionalise angel syndicates.• Bringing in new private investors, both local and international;• Angels, VCs, Corporates.

Increasing the money supply:• Introducing new investment funds;• Accessing ERDF: £100m for 3 funds (2003-10);• Raise private sector institutional funding

ERDF

Managing Authority

Financial Engineering InstrumentsRepayable Investments

Co-Investment FundPublic Cofinance and ERDF

Angel

Syndicate

Angel

Syndicate

Angel

Syndicate

Angel

Syndicate

Angel

Syndicate

Angel

Syndicate VCCorporate InvestorVC

SMEs SMEs SMEs SMEs SMEs SMEs SMEs SMEs SMEs

Coinvestment Approach

Co-investment Partners

CORPORATES

• Channel 4• Mitsubishi UFJ Capital• Murray Capital• Siemens Technology

Accelerator• Scottish & Southern

Energy• Statoil Hydro Venture• STV• UKSE Fund Managers• Wideblue

VCs

• Evolve Capital• FinTech Global Capital• Herald Ventures• Imprimatur Capital• Kapital Ventures• Exomedica• Kenda Capital• MMC Ventures• Nauta Capital• NBGI Ventures• Noble FM• Pentech Ventures• Quayle Munro• PUK Ventures• Sigma Technology Group• Symphony Equity• Tate & Lyle Ventures

VCs

• ACT Venture Capital• Aescap Ventures • Amadeus Capital• Atmos• Ceres Finance• Albion Ventures• Adamant Ventures• Close Growth Capital• Delta Partners• Discovery Investment

Fund• ED Capital Ltd• Emerald Technology

Ventures• Energy Ventures• E-Synergy Ltd

ANGEL SYNDICATES

• Alida Capital International• Archangel Informal

Investments Ltd• Ashleybank Investments

Ltd• Aurora Private Equity Ltd• Barwell plc• Braveheart Ventures Ltd• Capital Angels

Investments• ChimeraBio• Highland Venture Capital• London Capital Finance• Longbow Capital• Par Equity• Pre-X Capital• Sir Tom Farmer• Souter Investments• Tricapital

Case Study: AlbaTERN

Prototype development:• Product: wave energy converter;• High Growth Start Up Unit advice;• SMART grant funding for one-fifth scale prototype;

Commercialisation:• £200k seed funding from SIB, management team and SMART;• Design + build of 10kW working prototype;• Commercialisation and further rounds for 50kW and 100kw scale;• Portfolio management and account management support.

Does the co-investment approach work?

• At the level of the Fund – annual (2010/11) data:£23m invested in 109 SMEs (ICT, Life Sciences, Renewables);Investment income = £10.8m;Leverage = £23m : £54m;Portfolio = 241;Jobs = 3,479

• At the level of the industry – longitudinal (2003/11) data:Increasing the availability of risk capital -

• More investors: from 2 to 19 syndicates;• More money: 2003/4=£4m; 2010/11 = £23m

Improving market stability: UK = -23% cf Scotland = +0.4%Catalytic effect: 20% of money, 66% of all deals;Professionalising the investor base.

Benefits of the co-investment approach:

• Accelerated rate of investment cf traditional LP models;

• Complements and enhances existing private sector provision;

• Increases investor pool;

• Extends investor reach;

• Increased availability of finance for early stage, growth companies;

• High levels of additionality.

Issues for consideration:

• Intervention based on market analysis/consultation

• Public sector underpins/complements/stimulates private

• Exit take 7-10 years, portfolio resourcing implications

• Act fully commercially and pari passu

• Need for long term public sector intervention.