Improving Access to Early Stage Venture Capital in Regional Economies: A New Approach to Investment Readiness

Abstract

It is now recognised that many businesses are unsuccessful in raising equity finance because they are not investment ready. This has prompted enterprise support organisations in various countries to develop investment ready programmes. In the UK, the emphasis of these programmes is on providing information on sources of finance and how to access them, and on presentational skills. These are necessary but not sufficient conditions to get a business investment ready because they do not address business development issues which discourage potential investors. These issues are generally company specific and often require the input of significant expertise in order to make a company investable. This paper reviews LINC Scotland's approach, which is based on investment facilitation. It suggests that this approach does effectively address the business development support component of investment readiness at limited public cost and provides useful lessons for the design of investment ready programmes.

Keywords:

• Equity gap
• finance
• small firms
• venture capital
• business angels

Acknowledgements

The authors are grateful to David Grahame of LINC Scotland for providing them with information on the Trial Marriage scheme and to Nelson Gray and Jane Karwoski for discussing their involvement in the scheme. They have also benefited from the helpful comments of Jonathan Levie on an earlier draft of the paper.

Notes

¹ A similar scheme is operated by Scottish Enterprise in Scotland on a fund-of-funds basis, with Scottish Executive money placed in funds that are matched by and managed by private sector interests, including business angel syndicates.

² For example, Eastern Scotland Investments, a £7 million early stage venture capital fund managed by Gap Fund Managers, had to return £1.5 million to its investors (including £500,000 to the European Regional Development Fund) because it could not find sufficient investment-ready investment opportunities (Scotsman, 2001).

³ Some of these are not described as such, having been developed before the term became popularised.

⁴ The fifth stage in the programme is an initiative to link businesses to potential investors (e.g. business angel networks, venture capital fairs).

⁵ This syndicate had between 50 and 80 members, most of whom were cashed out entrepreneurs looking to reinvest in fast-growth companies. Members could decide on a deal-by-deal basis whether or not to invest. They hired a manager to find investment opportunities and undertake investigative research on those companies that were of interest to the syndicate members. The manager's skill was to recognise what inputs were required by investee companies and to manage the investment process, matching syndicate members with appropriate investee companies and also with appropriate other syndicate members. The manager was not paid a fee but could participate in the investments. The syndicate folded when the manager was head-hunted by a Plc and then moved on to be the CEO of an internet company.

⁶ One example of the use of this money was to pay for a legal opinion which potential investors required before they would be willing to invest.

⁷ Following the publication of the investment returns by Archangels and Braveheart, leading Scottish business angel syndicates, LINC Scotland has calculated that if it had made grants worth £10,000 to each of the companies that these syndicates had invested from 1997 to 2000 inclusive it would have received a cash return in 2001 equivalent to one-third of its current annual running costs.