Gavin Gemmell: Scotland's angels giving recovery an essential helping hand

News that the UK government is poised to provide £50 million funding to angel investors to stimulate economic growth in some of the poorest parts of Britain has rightly won plaudits from the investment community and early-stage companies alike.

Replicating the Scottish model, under which the Scottish Co-investment Fund matches private funding for early-stage companies, the new business angel scheme aims to stimulate entrepreneurial activity in parts of the country that have been heavily reliant on the public sector in the past.

Lord Heseltine, who is tasked with allocating funding from the Regional Growth Fund, and the UK government are right to look to Scotland. Here, thanks in large part to the valuable support of Scottish Enterprise, we have established one of the world's most successful and vibrant angel investment communities.

Last year, Archangel announced the 22m sale of Glasgow-based Mpathy Medical, following an investment by our members of some 5m. Scottish Enterprise, which was a joint investor through the Scottish Co-investment Fund, is to receive about 4.2m for its original 2m investment. In February, we achieved another successful exit with Lab901, the Edinburgh-based life sciences firm, again delivering a sound return to Scottish Enterprise.

These are tangible examples of the mutually beneficial relationship that we and Scotland's other business angels have with the public sector through the Scottish Co-investment Fund.

A crucial aspect of this relationship is that business angels are trusted to make investment decisions. Business angels, who are prepared to put often substantial amounts of their own money into early-stage companies, are best placed to make these decisions. We have the business acumen and network of expertise throughout Scotland in areas such as life-sciences and computer software that allows us to identify the most promising businesses. Civil servants often have neither the energy nor, in some cases, the skill to make successful investment decisions. If the UK government's new investment fund is to work effectively, then it must place its trust in the decisions taken by business angels.

Another key feature of the current system in Scotland is that the Scottish Co-investment Fund is restricted to owning no more than 30 per cent of a company in which it invests. This means that the public sector is never the majority supplier of money and it is up to private shareholders to keep driving the business to ensure its success. If the company fails, then the private investors and founders of the company lose more than Scottish Enterprise. This limits the public sector's exposure and, due to the low buy-in charge, is a very cost-effective way to invest public money.

Early-stage companies rely on significant investment for their growth that is not available from other sources.Banks have never been a major source of funding for start-up and early-stage businesses because these firms are not bankable propositions. Meanwhile, most venture capitalists are looking for economies of scale with investments in the order of 10m. Business angels are the only people providing funding for the smallest firms.

Private companies are often reluctant to sell part of the business but they need smart equity - equity that brings expertise with it - if they hope to turn their big ideas into successful commercial propositions. As part of our agreement to invest, we typically appoint two non-executive directors with experience and expertise in the relevant sector to provide support, mentoring and advice.

Business angel investment is also crucial if we hope to capitalise on the research and development carried out by Britain's universities. In the past, Scotland has been criticised for not commercialising the discoveries of our academics.

The UK government is right to recognise the role early-stage companies will play in Britain's economic recovery. Virtually all growth in employment is coming from small and medium-sized businesses. Through our collaboration with Scottish Enterprise, business angels can help unlock the entrepreneurial potential of the most promising early-stage companies, delivering jobs, economic growth and a significant financial return to both the private and public sectors.

• Gavin Gemmell is chairman of Archangel Informal Investment.