Many will look to the high street banks and blame the financial crisis when they are rejected, but one of Scotland’s most famous entrepreneurs says start-ups have always been too risky for mainstream lenders.
Sir Tom Hunter says the gap in early stage business investment is better filled by those who know business best – entrepreneurs who have already succeeded. And he says that will also give start-ups access to the other crucial ingredients to success: support and advice.
“From the finance point of view at this early stage, banks don’t really come on board,” he said.
“It’s early stage and therefore it’s risk capital. It’s the riskiest part of the entrepreneurial process, so I wouldn’t expect a high street bank to lend at this stage.”
Hunter is leading by example, ploughing £700,000 from his Hunter Foundation into the Scottish Edge project in a deal that will turn it into a self-sustaining funding and support system for fledgling firms. With cash input also coming from Royal Bank of Scotland, the new scotedge.com will immediately convert its current pure grant programme into a 50/50 loan and grant combination, in order to move towards sustainability.
Hunter hopes that by making Scottish Edge more commercial, it will open up a market that will see the private sector fund start-ups in a manner seen in some of the most vibrant business communities on the planet.
“In Silicon Valley there’s a thriving market in this early stage venture money,” he said. “I would love it if the market were providing that, but it’s not quite there yet in Scotland. I’m hoping this is a kick start to it. I’m hoping with the successes we will have, others will think, ‘I want to play in this part of the early stage financing.’”
The serial entrepreneur, who has ploughed millions into supporting business creation and was knighted for his services and philanthropy in 2005, said the Scottish business community had traditionally been good at helping the next round of entrepreneurs.
His own involvement has included working with Entrepreneurial Exchange and setting up The Hunter Centre for Entrepreneurship at the University of Strathclyde.
He was inspired by Muhammad Yunus, the Bangladeshi social entrepreneur who won a Nobel prize for pioneering microfinance.
He says he “became fascinated” by Yunus’ Grameen Bank and went to see him. Although not drawing a direct comparison between his initiatives in Scotland and the microcredit system that has financed thousands of female business owners in the developing world, Hunter said he has drawn inspiration from the system.
Like the Bangladeshi women, he hopes Scottish entrepreneurs financed by scotedge.com will feel honour bound to do their best to succeed and to pass on some of the proceeds in order to keep the system going.
“We’re not wrapping it round in lots of bureaucracy, we’re saying to the entrepreneurs, ‘If and when you can pay it back, that helps fund the next entrepreneur in life,’ ” he said. “I see it as a ladder, and those further down the ladder need a help up.”
But he added: “In all my years doing this, it’s never just about the money, there’s got to be some mentorship as well.
“Entrepreneurial exchange was for entrepreneurs by entrepreneurs, it was about education and innovation and exciting the entrepreneur to achieve. There were never any funds available.”
Scottish Edge will be identifying areas where businesses need help and work with existing support organisations such as Business Gateway and Highlands and Islands Enterprise.
The businessman says he is particularly pleased that RBS came on board, because it allows a bank to be involved in business at an early stage.
“This is about getting businesses bank-ready, but we also work with RBS to get the bankers entrepreneur-ready. This is a two-way process,” he said.
RBS will still have to compete against other banks when the businesses are ready to go out and seek debt finance. However, the bank’s investment in scotedge.com should stand it in good stead when it comes to understanding what the needs of a young business are.
Hunter said: “When I had the first success back in 1998, one of the things I decided I wanted to do was help more entrepreneurs start and grow their businesses, because the economy needs it. We in Scotland are a bit behind. Things are getting better but there’s a long way to go.”
Sir Tom Hunter factfile:
Scotland’s first “home grown” billionaire, Hunter started out selling trainers from the back of a van, eventually hitting the big league in 1998 when he sold his Sports Division chain to JJB.
At the time he sold it, the business had around 250 branches across the UK and employed 7,000 staff. The deal netted Hunter more than £250 million.
Since then he has mostly been an investor, using his firm West Coast Capital to acquire medium-sized companies with strong growth potential and build them into global players.
He admits it’s been some time since he started a business from scratch. The last one, an e-commerce software platform called Dynamic Action, started in 2006, is “now going from strength to strength”. The company has taken on a number of private equity backers including West Coast, and has built operations in Canada, France, India and various US cities.
However, he says “that’s not really what West Coast do”. Its most recent success came from floating off a property investment firm.
He established the Hunter Foundation alongside his wife Marion in 1998. To date it has invested £50m in “venture philanthropy” projects, working with partner organisations from Kigali to Kilmarnock.
He was knighted in 2005 for services to entrepreneurship and philanthropy, and was awarded a doctorate by Strathclyde University in late 2001.