Is a changing venture capital market helping stymie Scots start-ups?

Start-ups in Scotland are seen as a key shot in the arm for a coronavirus-ravaged economy – but are they being stifled by a lack of fresh funding?

There are fears that firms trying to raise money for the first time are finding it much harder. Picture: Andy Buchanan/AFP via Getty Images.

New data from KPMG highlights how venture capital (VC) investment in Scottish scale-ups increased in the third of quarter of this year – by about £10 million from the previous three-month period to reach a collective £72m.

The accountancy giant also noted the period’s largest deal involved Edinburgh-based games developer Everywhere, which raised £32.7m of venture funding from NetEase, Makers Fund and Galaxy Interactive. Other deals included funding for innovative new products covering areas such as biomedical and clean energy.

Organisations in Scotland enabling VC funding include Scottish Equity Partners, which over the years has invested in the likes of travel giant Skyscanner.

Amy Burnett, senior manager with KPMG’s private enterprise emerging giants team in Scotland, said the latest data “reinforces the resilience of the country’s growth-hungry scale-ups and the confidence investors have in the Scottish market”.

Professor Colin Mason, who specialises in entrepreneurship at the University of Glasgow’s Adam Smith Business School, said on the back of the data that Scotland seems to be following the larger UK and European trends that venture capital is still investing despite the prediction six months ago that it would grind to a halt.

But KMPG said the deal volume fell to 17 from 22 – with Ms Burnett seeing this “slight dip” suggesting that investors are, understandably, slightly more cautious, investing in late-stage deals, which could have a long-term negative impact on entrepreneurial businesses and founders that require investment and support to take their products and operations to the next level.

Prof Mason sees the fall in deal numbers as potentially some cause for concern. Business angels fund early-stage firms, then hand the “baton” onto the VC crowd, he explained, but in both cases they seem to be focusing more on their existing portfolio.

VC funds are “moving further up the escalator,” which creates a gap, “and it might force business angels to stick with their companies longer and do further funding rounds themselves”, Prof Mason said. “And that means they are less able to make new investments too ... if I have a concern [overall], it's companies trying to raise money for the first time are finding it much harder,” he said.

As for the broader implications, he said: “We need to ensure that all of our businesses are not starved of capital, both to start and to scale up, so that that is certainly a concern – in Scotland and much more widely.

"The risk will be if there isn’t that early-stage capital available. Businesses will grow more slowly or they might go into hibernation until the economic environment improves.”

Investing organisations want to ensure their portfolio companies have enough “financial runway” for, say, the next two years, and continue their growth, he added. That said, he does note some appetite by the likes of Archangels to make new investments.

Also giving cause for optimism is KPMG saying that its latest data, compiled by PitchBook, shows an improvement on the third quarter of 2019 – when there there were fewer deals and a lower total value – 13 and about £32m respectively.

A message from the Editor:

Thank you for reading this article. We're more reliant on your support than ever as the shift in consumer habits brought about by Coronavirus impacts our advertisers.

If you haven't already, please consider supporting our trusted, fact-checked journalism by taking out a digital subscription.