Thoughts

Funding Scotland’s Tech Start-ups

Paul Atkinson, Founding Partner of VC firm Par Equity and Converge Board Chairman, on why we need to think bigger about funding Scotland’s tech start-ups.

Last year, a review by the Scottish Government into the technology sector detailed a number of recommendations to help a post-pandemic Scotland flourish.

Amongst the 34 proposals outlined in the report, there were calls to create incentives for Scotland’s universities, helping them to maximise the volume and success rate of spin-out companies, as well as recommending the creation of a new network of hubs for tech start-ups.

The investment aspirations to help shape Scotland’s future technology start ups are laudable, but as the next generation of companies begins to emerge, a question remains about how the investment eco-system should develop in Scotland.

There’s certainly been no shortage of investment activity in Scotland across 2020. Par Equity, as an example, increased its new investment activity last year to a record £12.4 million, having closed the year by completing 35 deals and for the seventh year in a row, they were able to return cash to investors.

This, together with the announcement of a £75m investment partnership with British Business Investments (BBI), which saw Par becoming part of the Regional Angel Programme, suggests that Scotland’s tech sector still has a fantastic opportunity to acquire funding from our indigenous investor community.

This is great news for the investment community and the businesses they support. However, there are two very notable funding gaps. The first one is for very early-stage seed funding – many new tech businesses have difficulty securing that first £150-£200k seed round with fewer angel investors risking finance into little more than a nascent idea.

A further gap exists in raising Series A funding – between £3m and £10m, and Series B funding – above £10m – is relatively rare in Scotland.

The comfort zone for Scotland’s venture capital community is around the £1-£2mparticularly so when the big Angel syndicates can work with the Scottish Co-Investment Fund.

Our investment rounds, by comparison, are dwarfed by what happens in the United States where a huge disparity exists in the definition of seed funding.

A tech start-up emerging from Boston’s Massachusetts Institute of Technology seeking early-stage investment, could expect to receive up to $10million.

That’s a huge investment sum – equivalent to what to an upper-level Series A investment would look like in Scotland. The investor community in the USA is brimming with suitors looking to finance its early-stage tech and digital community and know that ‘risk’ is all part of the investment.

In Scotland, we need a broad consensus on how we encourage the adoption of economically viable earlier stage sources of funding.

Company creation programmes like Converge have shown how innovative Scotland is, maintaining a healthy throughput of start-ups and spin-out companies with strong and transformational ideas, even in 2020. However, more investment is needed to enable these early-stage companies get to a better growth stage.

Moreover, Converge has led the way for university start-up businesses to become the ‘engine room’ – an economic driving force that to date, have raised over £104 million in finance and are responsible for the creation of hundreds of jobs.

One of the Converge alumni businesses which attracted significant external funding is med-tech company Current Health. It emerged from the University of Dundee and Par Equity led the early investment rounds for the business, which is now based in Boston, Massachusetts.

The company is busier than ever providing its wearable patient monitoring device to enable a greater efficiency of hospital patient remote monitoring.

Current Health is well on its way to becoming another champion of the Scottish investment community.

We have it in us to produce many more like Current Health.

Published article from The Scotsman, 4 March 2021.