Building momentum after a record year for equity investment in Scotland’s smaller businesses
Discover how the British Business Bank in supporting small businesses to thrive and grow.
Scotland has a proud history of invention and entrepreneurship. Smaller businesses, representing more than 99% of the business population, are the lifeblood of modern economy.
Layering this entrepreneurial spirit with Scotland’s sectoral strengths within the creative industries and life sciences, and a proven track record of generating economically impactful university spinouts, has resulted in the creation of a buoyant equity market.
Despite the difficult economic conditions of the past three years, investment into smaller firms in Scotland fared well during 2022, with smaller businesses attracting record levels of equity investment to help them thrive and grow. The British Business Bank’s small business equity tracker showed that equity deals involving small businesses in Scotland totalled £762 million last year – up 37% on the previous year’s record of £557 million.
Scotland bucked the trend for lower deal values seen at a UK level, where the economic downturn had a significant impact on deal activity in the latter part of 2022. Total investment value declined by 11% to £16.7 billion compared to the previous year.
Despite this increase, the number of announced equity deals fell by 22% (190) compared to 2021 (223). This suggests that the increase in value is heavily influenced by a small number of higher ticket deals rather than a rising tide. It also points to a gap at the lower end of the scale, whereby we need a greater flow of capital to companies in that experimental phase of development, trying to move from the proof-of-concept stage to a minimum viable product. Addressing any such gaps within the funding landscape will be essential if we want to maintain the momentum of previous years.
The British Business Bank has supported a number of Scottish investors this year, with announcements totalling in excess of £80m to Foresight, Eos, Archangels and Panoramic in recent months. This will continue, with further financial support for smaller businesses set to be available later this year, with the launch of our new £150 million Investment Fund for Scotland. The fund will help smaller firms access the finance they need to succeed, providing both debt and equity finance to companies across a range of sectors and, importantly, across the breadth of Scotland.
The British Business Bank’s small business equity tracker also highlighted a record year for university spinouts, with the University of Edinburgh placed just behind Oxford and Cambridge as a stand-out success for academic-led businesses. At a UK level, businesses stemming from academia received £2 billion in funding – 12% of total equity investment – and 15 of those were founded at the University of Edinburgh.
In 2021, Scotland also ranked top in the UK for the number of announced equity deals in university spinouts, with 47 of the total 243 deals coming from Scottish academic institutions. That success has continued this year with Chemify, a spinout from the University of Glasgow, securing £36 million in August. The deal stood out as a show of confidence in the exciting businesses that continue to emerge, even as liquidity tightens.
Investing in research-led businesses is an essential part of fostering an innovation-led economy, so it is highly encouraging to see Scotland accounting for this proportion of equity investment deals into spinouts.
Increasing the supply of specialist, deep tech capital to fuel the future growth of companies developing these transformative technologies is a key consideration if we want to close the gap between UK and US VC markets. Initiatives such as the British Business Bank’s Future Fund: Breakthrough programme, which is designed to support R&D intensive businesses raising a minimum round size of £30m, aims to do just that.
Boosting diversity key to success
Promoting diversity both within the venture capital market and by providing more targeted, bespoke support for diverse founders is absolutely critical if we want to continue the momentum and ensure that record levels of investment are sustained in the years ahead.
Earlier this year, the Bank published its report: Finding What Works: Pathways to Improve Diversity in Venture Capital Investment, highlighting three key areas to help unlock the untapped economic potential of diverse entrepreneurs.
It detailed the need for diversity on investment committees and amongst key decision-makers, the need to encourage a pipeline of opportunities that include diverse businesses, as well as continued measurement to help track change and drive improvements.
When it comes to supporting the businesses themselves, we need to acknowledge the additional barriers that exist for under-represented founders, whether that be because of age, geography, gender, ethnic background or social status, and ensure adequate support is available to tackle these barriers and ensure a level playing field for all.
Equal opportunities for female entrepreneurs
While one in five entrepreneurs in Scotland is female, there is a huge gap in the amount of funding awarded to female-led businesses. Figures from the small business equity tracker showed that for every £1 of equity investment in the UK during 2021, female founders received just 2p. Meanwhile, male founders received 84p and mixed-gender teams got 14p.
The fact that women typically receive far less investment than men at all stages of the entrepreneurial journey has previously been highlighted as one of the top five reasons why women are less likely to start their own businesses.
Of the Scottish companies that received external investment in 2022, only 12% were female-led, compared to 73% being led by men. For everyone working in small business finance, our aim must be to get that to a 50:50 ratio where female founders have access to the same opportunities as their male counterparts.
It is encouraging to see the recent independent review into women in entrepreneurship in Scotland and the subsequent publication of the Pathways report, authored by Ana Stewart and Mark Logan which sets out a clear desire to rapidly and effectively shift the gender imbalance referred to above. In support of this vision, the British Business Bank recently joined forces with Mint Ventures – one of Scotland’s female-led angel investment syndicates – with the aim of increasing the number of female angel investors across Scotland and subsequently increase the flow of capital to female-founded companies.
Equality, diversity and inclusion is key to a successful business ecosystem and we all have a part to play. By continuing to break down some of the barriers that business owners may face when accessing finance, we can ultimately help even more entrepreneurs with the funding and investment they need to thrive – and set new records for investment in Scotland’s small business population.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.