The Angel Capital Market in Scotland

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The Angel Capital Market in Scotland

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A Vital MinorityEntrepreneurial firms seeking
external equity financing for growth, make up
only around 4 of current start-ups,
but

• In ten years time they will provide about 50 of
  the employment of those firms remaining.
• Mark van Osnabrugge, University of Oxford

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Economic Context in Scotland

• A small peripheral market.
• Pop 5m with c.3.8m in 4 main city locales.
• Biggest export category is Information
  Technology, so innovation important.
• Strong research sector (7 of UK economy but 15
  of RD spend).
• Significant financial services sector (850bn)
  but negligible trickle down from big funds.
• Benign tax treatment of angel investments.

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The Scottish Early Stage Investment Market

• Negligible early stage VC activity due to
  remoteness lack of critical mass, but
• One of the most mature business angel
  marketplaces in Europe.
• Angels the dominant investors in spinouts.
• Emergence of structured syndicates in recent
  years.
• Growing public sector and institutional interest
  in co-investing.

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LINC Scotland

• Founded 1993 to support development of the
  business angel marketplace. An angel association
  with c.200 solo angels plus 19 Syndicates
  (c.450 angels). Over 600 high growth companies
  funded to date.
• Exempt under UK Financial Services Legislation.
• Independent non-profit - financed by both
  private and public sectors.
• Active in company investor readiness,
  development of syndicates, and sustainable
  intervention.

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As noted earlier, Scotland, Europes most mature
market for business angels, has a trade body
(LINC Scotland) that acts as an umbrella
organisation to the 18 angel syndicates operating
in this area. The level of professionalisation is
very high and business angels are treated in
Scotland as an integral part of the financial
supply chain for companies. The Scottish
Co-investment fund is probably the only fund
operating in Europe where the co-funding is
automatic when an accredited partner syndicate
knocks on its door to leverage one of its
investments. White Paper for the European
Commission, February 2007

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LINC Members Activity 200821.49m in 72 deals
(54 companies)Smallest 20k biggest 1.1m

• Software 8
• Electronics 5
• Instrumentation
• Life Sciences 5
• IT Communications 4
• Engineering 5
• Manufacturing
• Medical Devices 4
• Creative Media 3
• Healthcare 3
• Energy 4
• (inc Alt Renewable)

• Diagnostic Products 2
• Environmental 2
• Opto 1
• Lasers 1
• Logistics 1
• Pharmaceuticals 1
• Chemicals 1
• Other 4

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The Local Scene

• Emergence of structured syndicates in recent
  years.
• Emerging public sector and institutional
  interest in co-investing.

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Syndicates the Trend

• LINC Scotland Membership
• 2002
• c.300 solo angels 2 syndicates (70 angels)
• ?
• 2008
• c.200 solo angels 19 syndicates (450 angels)

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BA Syndicates What Do We Mean?

• Syndicates structured co-investing groups by
  and for angels.
• May be Manager Led or Member Led.
• Can include private offices if investment
  decision made by those who own the wealth.

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Syndicates the Investor Benefits

• Diversification of risk
• Value of shared experience
• More efficient use of time
• Larger rounds can negotiate more attractive terms
  and valuations
• Shared post investment monitoring

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Typical Syndicate Structure

• Two-circle arrangement.
• Core group or board of 6 10 active and
  experienced individuals, plus Gatekeeper.
• Receive, select and structure deals, and always
  invest own money.
• Deal offered to outer membership of 20 70. Less
  active but still make own decisions.
• Syndicate appoints non-exec director and
  appoint/approve chairman.

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Other Characteristics and Benefits

• Professionalisation.
• Delivery channel for more passive money.
• A means of getting old money into new sectors.
• Increased local retention and recycling of
  wealth.
• Creates credible co-investment partners for
  institutions and the public sector . . . ?

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Scottish Co-investment Fund
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Fund Model
Scottish Co-Investment Fund

• Fund size gt 130 million
• ( 30m Scottish Enterprise, 35m ERDF, 65m
  private sector)
• Investment period 6 years to end 2008
• (Now recapitalised with further 120m to 2014)
• Type high growth potential
• 30,000 - 1,500,000 per company
• 3 million deal ceiling
• Co-Invest, pari passu, alongside private sector
  partners

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Fund Model
Scottish Co-Investment Fund

• Notional ring fenced allocation to each Partner
• Partner identifies deal and notifies SE for
  eligibility approval
• Partner negotiates detailed deal and copies full
  terms to SE
• SE confirms participation and prepares payment
• Partner concludes deal and appoints non-executive
  director(s) to represent both themselves and
  Scottish Enterprise

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Breakdown of Deals Completed April 03 to March 08
Scottish Co-Investment Fund

• Number of deals to date 237
• Private sector investment 97,730,000
• SCF commitment to deals 41,388,750
• Total Invested 139,118,750
• SCF contribution to total committed
  29.7