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  • Ian Ritchie : Scottish Business Insider

In search of a solution to the problem of growing businesses of scale

EVERY THREE MONTHS Ascendant, a corporate finance company based in London, publishes a review of investment trends for the technology sector across the UK and Ireland.

Ascendant is run by an ex-pat Scot, Stuart McKnight, and his latest report shows that investment is booming, but only if you happen to be based in London. Investment levels in Q1 of 2014 were £538m in 85 deals compared with £287m the previous year – by far the highest we’ve seen since the dotcom bust back in 2001.

There is a particular boom – some might call it a 'bubble' – in internet and wireless services but this phenomenon is entirely located in the capital, which has now grown to represent 73% of all funds invested over the whole UK and Ireland.

Some 51 internet business were funded – up from 16 the year before – but outside the M25 investment levels remain flat or dropping. You might think that the internet is independent of geography but try telling that to the London based investment community who can get all the deals they need by using their Oyster card.

Here in Scotland, we have a few ambitious internet companies that are taking on the world – Skyscanner, FanDuel, Maximiser, and CloudSoft spring to mind – but in general we have failed to grow enough companies of scale.

The Royal Society of Edinburgh (RSE) published an Advice Paper in 2012 which illustrated this problem by using an analogy: ‘we have an environment that is well adapted to growing seedlings into pot plants for early sale; it is not well adapted to growing bushes, far less trees’.

The RSE decided to follow this up with a working group held in conjunction with two other organisations – the Institute of Chartered Accountants of Scotland (ICAS) and Scottish Financial Enterprise (SFE) the body that represents the financial industry in Scotland. I chaired this working group.

The report from this working group has now been published – available from – and it analyses the reasons for this situation. These days Scottish start-ups don’t tend to go to London to raise their risk capital, despite the fact that almost all UK technology venture capitalists are based there. Scottish companies tend to look to local investors, which are mostly angel syndicates.

‘Angels’ are individuals who are risking their own money – as opposed to venture capitalists who manage money for others – and here in Scotland, syndicates of angels can apply to the Scottish Investment Bank (SIB), part of Scottish Enterprise, for co-investment status. After that is approved SIB will match any funds offered.

It means that angel syndicates can ‘double-up’ any money they can raise and can therefore cope with the start-up needs of most businesses. The problem arises if the business then uncovers a major market opportunity and needs substantial follow-up investments in order to grow into a significant international business.

Angel syndicates find it very difficult to mix with venture capitalists and often prefer to sell their companies for an early return than take the further risks incurred by bringing in fresh investments. This means we grow fewer companies of scale.

The RSE report looks at this dilemma and suggests a few ways in which it might be addressed. We are not London, and maybe we need to look for a uniquely Scottish solution for our different situation.

We think we can find mechanisms that provide sources of substantial additional investment funds which our angel syndicates would find easier to work with. It is a prize worth striving for.

Ian Ritchie is Vice-President, Business of the Royal Society of Edinburgh

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