How to shock a Scottish Government Minister? Try showing them this graph...
THE BRITISH Venture Capital Association published this breakdown of venture capital (VC) investment by region for the various UK regions. I've particularly highlighted the Scottish region and also London and the South East, and the picture it shows is scary.
The availability of VC funding is crucial to the development of our economy. It is all very well having breakthrough scientists and engineers developing new technologies in their laboratory, but unless there is risk capital available it will not be possible to create the new companies that will power the economy.
This graph shows that back in 1998 Scotland won around seven per cent of the VC investments made. London had around 25 per cent and the South-East of England about 16 per cent. But ten years later, by 2007, the picture was dramatically different - London's share had risen to 48 per cent and the South-East to 21 per cent.
Between them, London and the South-East now have over two-thirds of all the risk investments of the UK. The Scottish share now languishes at two per cent to three per cent and although the total amounts of risk capital available has grown substantially during that time, the actual amount of it invested in Scotland has shrunk dramatically.
Speaking to some life sciences entrepreneurs recently, I received the shocking but not surprising news that they were now having great difficulty in raising VC money. They told me that whereas 10 years ago there were four or so VC funds in the life sciences sector in Scotland, today there are none.
Life sciences happens to be one sector where we have a disproportionate share of innovation in Scotland. Universities in Aberdeen, Dundee, Edinburgh and Glasgow, in particular, punch way above their weight in this field.
But if we look behind the figures in this graph, we can see why this collapse has happened. In 1998 by far the largest VC player in Scotland was Scottish Development Finance (SDF) which, although run commercially and with funds provided by a mixture of private and public sector sources, was a division of Scottish Enterprise and was constrained to only make investments in Scotland, usually attracting other VCs from elsewhere in their deals.
Despite these restrictions it was very successful, making an excellent return to its investors. In 2001 SDF was privatised and it is now the very successful Scottish Equity Partners (SEP). SEP regularly wins awards as the best VC firm in the UK.
These days, however, SEP is no longer restricted to Scotland, and no longer specialises in early-stage technology businesses. Most of its investments are now outwith Scotland, are larger, and at a later stage. There is nothing wrong with this; it is a successful strategy and it is good to have such a major player in the investment community based in Glasgow.
But what we desperately need now is new VCs in Scotland, investing in early-stage technology; attracting other VC partners, raising risk finance from private as well as public sources, but required to invest in Scotland as in the old SDF model. All the justifications for setting up the original SDF are back.
Once our Government Ministers have recovered from looking at this graph, they should be working on how to fix it. Re-inventing one or more SDFs would be an excellent start. •