Many business owners are understandably wary of diluted ownership or committing themselves to an exit just to align with a new investor’s priorities. Consequently, they may be sceptical of equity finance, even if it would ultimately accelerate their growth trajectory.
We know these individuals have likely put their heart and soul - not to mention their own money - into the venture and understandably want a partner who buys into their vision. Many also want to reduce their risk or realise new opportunities, without compromising their control of the business. In these circumstances, purpose-led investment can sound particularly attractive.
This sort of purpose sounds great in theory but does not always stand up to closer scrutiny. In reality, these positive aims can be eroded by the cycles that dictate the funding practices of many equity investors. There is nothing malicious about this, instead it is the result of two opposing forces colliding, with the investor’s interests usually coming out on top.
There is another way, however. Minority investment offers founders a route to the finance they need, without having to compromise the soul of their business or become beholden to the funding cycle demands of their investor. This approach can also give business owners the confidence to go for bigger opportunities, but it does require genuine trust and understanding on both sides.
99% of Scotland’s private businesses are SMEs, so investors embracing personality, establishing a strong connection with founders, and giving a sense of long-term support is vital if these businesses are to reach their potential. Despite the pandemic and other market challenges, there is a lot of capital out there, but this abundance can also complicate the picture for entrepreneurs as they seek the right funding partner.
A lazy assumption would be that minority investment equates to insignificant amounts of capital being deployed. This couldn’t be further from the truth. BGF invested a record £60m in Scotland during 2021, underlining the funding of this type available for the right businesses. We want to be understood as a source of patient capital, investing off our own balance sheet to free us from the fund cycles mentioned previously. We seek to give portfolio companies time to develop their business and support them every step of the way.
While BGF makes investments on the assumption that entrepreneurs will work towards an exit, founders can work to the timelines that work best for them. We put a lot of effort into building relationships with founders both pre and post investment, and assisting with the appointment of non-executive directors is an additional element of our support that is often valued by partners.
Scottish entrepreneurs have faced significant recent headwinds, but these headlines shouldn’t distract from the incredible innovation that is going on all around the country. With the right support, there is a huge opportunity for Scottish businesses to lead the world in life sciences, the energy transition and e-commerce in 2022 and beyond but, without proper consideration, there is a similar risk of potentially great firms being crushed by investor indifference or impatience.
Paddy Graham, BGF Head of Scotland