Funding for ambitious Scottish businesses is on the up
Delegates at a recent Invest2scale summit heard how positive changes in capital markets and a growth partnership by the British Business Bank are just some of the developments helping companies grow, writes Jeremy Grant from the Times.
When Daniel Rodgers was in London on holiday with two young children in 2011, he had an experience that sparked one of the most successful business ideas to emerge from Scotland.
“It’s a traditional founder’s story. You come across a problem and you think you can fix it,” he explained to an audience of investors and scale-ups at the third annual Invest2Scale conference in Edinburgh, which focused on the challenges faced by scale-up founders.
The problem in question was how to feed a family, quickly, at a self-service restaurant. “Trying to get my kids fed in restaurants was hugely frustrating, particularly in the kind of place where you sit them down, get their coats off, sit them at a table, then you realise you have to walk 300 yards to place an order at a bar. You’re left with this quandary of leaving kids and valuables at the table.
“In this instance my kids had taken the sugar from the centre of the table and had started eating it, but I thought ‘they’ll be fine for a few minutes’. But I came back from the bar thinking: there has to be an easier way to do this. We should be able to order stuff on our mobile phone, particularly given that my phone at that time had more computing power than the 20-year-old till behind the counter.”
And so, the idea behind QikServe was born, using the now-ubiquitous QR code to allow customers to make orders digitally at their tables as soon as they sit down.
The first customer for Rodgers and co-founder Ronnie Forbes was a pilot project at WEST Brewery, a German-style brewpub at Glasgow Green. Now, QikServe is at 8,000 locations in 44 countries and counts global coffee chains among its customers.
To cap off QikServe’s scale-up journey, which involved funding from Par Equity, Equity Gap, Scottish Enterprise and Maven Capital Partners, the company was last month acquired by The Access Group, a UK business management software provider, which will incorporate the business into its hospitality division.
Yet as Rodgers explained to the audience of funders, founders and scale-up advisers, progress from start-up to scale-up was not always smooth. A first attempt to break into the US failed when the product was not mature enough to be fully applicable to the US hospitality market.
“On the surface we were ready with a really good front-end product but when you lifted the lid there were another 16 different tech platforms that sit behind a restaurant. So, it wasn’t necessarily the core technology that tripped us up, it was the wider tech estate that sat behind a restaurant.
The lesson learned, Rodgers says, was getting the product right and “proving you can sell something before you go and build it”.
This was echoed in advice given by Shane Corstorphine, a former chief financial officer of Edinburgh-based online travel aggregator Skyscanner, in a presentation entitled “The Three Pillars of Scaling”.
“Nail your product market fit before you go anywhere near scaling,” explained Corstorphine, who now runs his own scale-up consulting firm, Now Scale It.
Such advice was part of a “back-to-basics” theme that ran through the event, supported by founding sponsors Eden Scott, an executive search firm, law firm MBM Commercial, Cazenove Capital, a wealth manager that is part of Schroders, and CT, an accounting firm. It came at a time when the funding environment for scale-ups is less encouraging than it has been for some years.
That is because overall funding has been falling in the UK since 2021, when it reached a peak of £28.4 billion involving 7,872 deals, to £18.2 bn in 2023, according to Beauhurst, a data-led consultancy based in London. This year is estimated at an even lower level of £14.4bn, involving 5,205 deals.
Scotland followed a similar trajectory, with deal numbers falling steeply since 2022. However, one bright spot was that the total value of deals for 2024 looks set to be greater than in 2023 at around £600 million, akin to the level in 2017, compared with £500m last year. Among the largest deals were electric vehicle street charging business Trojan Energy, which received £26m in equity funding from Scottish National Investment Bank (SNIB), vertical farm company Intelligent Growth Solutions, and commercial rocket launch business Orbex.
Top investors in Scotland were Scottish Venture Fund and Scottish Co-investment Fund (both managed by Scottish Enterprise); Equity Gap; Par Equity; and Old College Capital (OCC Ventures), managed by The University of Edinburgh.
Henry Whorwood, Beauhurst’s managing director, research and consultancy, cautioned that while the UK-wide trend was clear, this had to be balanced with the fact that 2021/22 saw quite a number of so-called “tourist investors” coming into the market, who had since left. “There’s been a bit of a correction in the market, as well as a true downturn,” he said. “But while it has got harder, there are still a lot of deals happening,” he added, pointing out that deal activity was back to levels seen in 2015.
He also highlighted two inflection points that had taken place. In one, investment in artificial intelligence-focused scale-ups overtook such investment in fintech in 2021, and in another “clean-tech” overtook fintech in late 2022.
Meanwhile, the proportion of deals that are relying on foreign capital has been increasing. Specifically, the larger amount of money that founders are looking to raise, the more that will be sourced from overseas, and that trend is accelerating, Whorwood said.
Finally, he singled out exits as a key indicator of the health of the sector. “There is certainly a liquidity crunch with acquisition transactions having followed broadly the same trends as the investment ones,” he said. The number of exits in 2023 was 246, significantly down on the 384 in 2021.
However, one bright spot was that the total value of deals for 2024 has already exceeded that of 2023 at £600 million, akin to the level in 2017 and well above last year’s £500m. This month, it was announced as part of the UK government’s “international investment summit” that the British Business Bank will establish the British Growth Partnership, encouraging more UK pension fund investment into the UK’s fastest growing, most innovative companies. At the same time, the Bank’s £7.9bn commercial programmes were placed on a permanent footing, including the £150m Investment Fund for Scotland that was rolled out in the summer of 2023.
A third development is what Irene Graham, founding CEO of the ScaleUp Institute and Invest2Scale chair, said was “a huge amount of change happening in the capital markets”.
She pointed to listings reviews to make it easier for smaller companies to list, as well as the launch next year by the London Stock Exchange of a new secondary market for larger scale-ups called Pisces, which will allow scale-ups to privately access institutional investors without having to list. “I do think there is a real opportunity for Scotland and Scottish scale-ups in terms of accessing this capital,” she told the audience.
Meanwhile, funders had advice for businesses looking for funding to enable scaling up. Mike Reid, senior partner at Frog Capital, conceded that the market was “really, really tough” but said it was “all about back to basics” such as “getting momentum in the business”. Part of that is finding a “sparring partner” who can act as a sounding board to test ideas.
Asked what he looked for in a pitch, Shane Gallwey, managing director at Guinness Ventures, said the firm sees at least 100 pitches per month and looks for growth rates, product market fit, scale, and management capability. He also highlighted the value of the nature of the relationship between founders and potential funders. “It’s a journey you’re going to be taking for years, so there’s an element of chemistry between the two sides,” he said.
Developing a network, or ecosystem, of contacts was seen as important in the funding world. Myles Stephenson, chief executive of Modulr, a payments business, said it was vital to keep a record of all the funders that early-stage businesses had spoken or had contact with. “Be disciplined about who you’ve met. We met the right people but it can also be that you meet the wrong people. Ask: who really understands our sector?”
That was re-inforced by Rodgers’ experience at Qikserve. “One of our ex-chairs said to me in 2017: you’ll know your acquiror before they acquire you. It will be someone on the radar who you’ve been working with. That was really true of Access, which had resold our tech since 2018 and we’ve built up a really good relationship with them.”
For some start-ups, interaction with large corporate customers and how to scale-up these relationships is an important daily challenge, as the audience heard from Jacqui McLaughlin, chief executive of Reactec, which has developed a suite of workplace wearables and software to help minimise health and safety risks, and Elspeth Coates-Gibson, chief operating officer of Appointedd, which specialises in a cloud-based online booking platform for SME and enterprise businesses.
At Appointedd, sales and marketing are run as one team, with marketing sitting in 60-70 per cent of sales team meetings so there is more visibility into prospective corporate clients across the business. “In an organisation, whether it’s a start-up or a scale-up, you have the luxury where those people can come together more regularly and the more understanding and empathy the marketing team has with some of the sales challenges the better,” Coates-Gibson said. “It makes our shop window so appealing because we are talking about the right kind of things.”
Finally, the value of Scottish scale-ups thinking globally was highlighted. Rodgers described how a major hospitality provider at Schipol Airport in Amsterdam was QikServe’s first international customer, not only fulfilling the founders’ ambition of “being international from the start”, but also immediately connecting QikServe with a global client based, given that the provider worked in almost 110 countries.
Celtic Renewables is another scale-up with international ambitions. The company makes so-called “green chemicals” – such as sustainable fuels made from waste whisky mash produced by distilleries – which displace chemicals made from gas and oil in the manufacturing process and lower the carbon footprint of everyday products like skin creams, nail varnish, household cleaning products, paints, medicines and vitamins.
It has international ambitions and last month hosted a delegation from Japan, including Mitsubishi Heavy Industries and Itochu Corporation, at its Grangemouth biorefinery, as part of ongoing collaboration with the Japanese consulate in Edinburgh.
Celtic Renewables used the opportunity to present the company’s globally scalable technology. “It’s really about being able to take our product development roadmap and applying it globally,” explained Mark Simmers, chief executive, told the Invest2Scale audience. “It’s key to make sure that Scottish start-ups don’t have a parochial mindset, and to think globally.”
[This article originally appeared in the Times]
