The recent British Private Equity and Venture Capital Association (BVCA) report paints a positive picture in terms of the growth in investment in Scotland in 2021, with a substantial increase on previous years to £895m of support from the BVCA’s private equity and venture capital members.

The BVCA is the industry body and public policy advocate for the private equity and venture capital industry in the UK.

Supporting and advising on business growth, investment and transactions is a key area of work we deliver with our clients across our service lines, and we were delighted to see a few of our clients profiled within the report.

The 2021 picture is positive, and hopefully demonstrates an encouraging longer-term future of investments, however it’s important to note that the funding landscape has changed during 2022, offering many new challenges and considerations. It is yet unclear when these challenges will ease. Managing the cash runway remains a major focus for many businesses in the tech sector. We will be working hard to support our clients through what may be a challenging 18-24 months.

Key highlights from the report

• Positive signs of investment growth in Scotland - in 2021 alone, firms across Scotland received £895m of support from the BVCA’s private equity and venture capital members. This is growth from the £213m and £271m of 2020 and 2019.
• Ongoing challenge to access local venture capital - access to local venture capital remains a challenge and may be preventing or stalling the growth of start-ups in Scotland.
• Scottish National Investment Bank increases support - the Scottish National Investment Bank, seeks to support the nation in key areas; a Net Zero economy; addressing the innovation and productivity challenges facing the nation; and tackling place-based inequality.

Positive signs of investment growth in Scotland

The UK Government has spoken of its determination to make the UK a technology and science global leader. This vision is one mirrored by the Scottish Government who set out in their strategy for economic transformation the desire to “make Scotland a leader in R&D, a nation of entrepreneurs and innovators who have embraced new technologies, and a magnet for global private capital.”

Out of the £895m invested by BVCA members into Scottish firms in 2021, the report shows that £321m of this went into 57 tech businesses. Growing from £49m into 53 tech businesses in 2020. This level of funding is a positive signal for the tech industry in Scotland but may only be one of three key areas required to realise the full potential of tech growth. The report quotes Mark Logan’s (ex CEO of SkyScanner) 2020 review of Scotland’s tech ecosystem, where he identified the three areas of success as being education, infrastructure and funding.

Whilst Edinburgh and Glasgow remain key hubs, investment is also flooding into Dundee, Aberdeen, Inverness and Stirling, bringing jobs, developing skills and supporting communities throughout the country.

Our experienced Technology & Life Sciences team support over 300 technology and life sciences businesses from start-up through to international businesses of scale. Whilst the progress made in 2021 was very welcome and is hopefully indicative of a longer-term trend, the prevailing economic headwinds have significantly impacted the ability to raise funds in 2022. Consistent themes promote the need for more conversations, funding taking longer to complete and challenges on valuations. As a result, businesses are carefully managing their cash runway with hiring freezes being a common feature.

Ongoing challenge accessing local venture capital

The report outlines a higher percentage of start-up businesses looking outside of Scotland for capital. Some issues with this are identified as a consideration for businesses, but not necessarily damaging to future growth. Having access to local venture capital may simply be easier, more convenient, less time consuming for business owners/founders. Local allows for closer management and guidance as well as opening local connections with networks and supply chains.

The report does recognise however that the private capital industry is flexible and will still seek out exciting new companies looking for investment.

We do believe that this “local challenge” is already improving, with new angel funding syndicates having formed in the last few years, some of which have specific geographic focusses within Scotland. In addition, early-stage VC investors such as Techstart are providing much needed capital and experience at the seed capital stage.

Scottish National Investment Bank (SNIB)

Launched in 2020, the SNIB “invests in Scottish business, projects and communities to deliver environmental, social and financial returns for the people of Scotland.”

The BVCA report summarises investment from the SNIB since its formation in 2020 as; over £267m of investment in 21 projects and companies across Scotland, alongside more than £525 million of third-party investment.

Working to address the three main challenges facing Scotland; Net Zero economy; innovation and productivity challenges and tackling place-based inequality, SNIB investments have gone into businesses/products and areas that they hope can improve specific efficiencies, deliver long term stability to regions, support of university/business partnerships, grow innovative net zero solutions, and more.

It is encouraging to see SNIB taking an active role in providing growth capital to Scotland’s tech companies. It is hoped that their capital can help to catalyse additional growth capital opportunities, so that our scaling companies can raise the funds required to achieve their ambitions.

How we can help

On the whole, the BVCA outlines many positive aspects of business investment and growth potential in Scotland in 2021, in particular across the wider tech sector. The coming 18-24 months will be a challenge, however long-term signs are positive, particularly for Scottish businesses with innovative products, services, and leaders.

We have a team of cross-disciplinary advisers who have extensive experience advising private equity and venture backed companies. We are here to share our experience with clients and help them navigate the often-daunting experience of taking on private equity or venture funding.

If you would like to discuss this further, please don’t hesitate to get in touch with myself, a member of our Technology & Life Sciences team, or your usual Johnston Carmichael adviser.