Crossing the chasm: the role of co-investment funds in strengthening the regional business angel ecosystem

ABSTRACT

Government intervention to improve the supply of early stage risk capital has taken many forms, the most recent of which is the establishment of public/private co-investment funds. The contribution of this article is to provide a detailed case analysis of the first phase of operation (2003–2009) of the earliest such fund, the angel-led Scottish Co-Investment Fund (SCF). Unlike many other co-investment funds, SCF is a passive investor: it does not find and negotiate deals of its own, but forms contractual partnerships with active business angel syndicates and Venture Capital fund managers. Based on a detailed analysis of the design, operation and impact of the Fund, the article concludes that it has encouraged more angels into the market and stimulated the organizational transformation of the business angel market in Scotland into one dominated by business angel groups and syndicates. This analysis provides useful lessons for public risk-capital investment more generally.

KEYWORDS:

• Co-investment fund
• business angels
• equity gap
• risk-capital market
• policy
• entrepreneurial ecosystem
• Scotland

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Richard Harrison is Professor of Entrepreneurship and Innovation and Director of the Compassionate Leadership Initiative at the University of Edinburgh Business School. He is author of over 125 papers and book chapters and has published books on crowdfunding, business angel investing, innovation and economic development, regional policy, entrepreneurial learning and entrepreneurial leadership, and is founding co-editor of the research journal Venture Capital: An International Journal of Entrepreneurial Finance. He is the 2015 recipient of the UK ESRC (Economic and Social Research Council) Award for Outstanding Research Impact on Business.

Notes

1 This figure for investment is significantly higher than that recorded in successive Scottish risk capital market reports, suggesting significant undercounting in the Library House data.

2 Information on SCF taken from http://www.scottish-enterprise.com/invest-scottish-co-investment-fund accessed 01 July 2009. See also Hayton et al. (2009) and Watson (2017).

3 Exclusions include: dealing in land, commodities, futures, shares, securities and other financial instruments; banking, insurance, money lending, debt factoring, hire purchase financing and other financial activities; leasing or letting assets on hire; providing legal or accountancy services; property development; farming, forestry or market gardening; operation or managing hotels, nursing or residential care homes; retail sectors if there is a trade displacement issue with other local businesses.

4 This is primarily measured by considering: location of main or head office; location of majority of staff; country of registration of the operating company; and location of the majority of executive directors, to assess a company’s ‘centre of gravity’. SCF investment is restricted to investment in Scotland.

5 This is a more limited analysis than the figures quoted in the previous section, as a function of the availability of detailed data for analysis.

6 Scottish Co-Investment Fund Annual Report for the year to 31 March 2008; the table includes updated data for the final claim against the 2000–2006 ERDF Programme (last investment against this – November 2008).

Additional information

Funding

This work was supported by National Endowment for Science Technology and the Arts [grant number n/a].