The credit crunch and the economic climate mean funders and investors are looking for less risky projects
IF START-UPS are a barometer of a nation’s economic health, then Scotland must be a pretty sick place. There were only 15 recorded in the period and, even though this was actually 50 per cent up on the ten recorded in 2006-07, the £186 million raised was well down on the previous year’s £378m.
Recent figures from the Committee of Scottish Clearing Banks confirm that business creation is slowing. According to CSCB figures, the number of businesses formed in Scotland in the first quarter of 2008 fell by 17.2% to 5,550, down from 6,704 in the same quarter last year. And 40% of these were in property and renting, a greater proportion than for 2007 as a whole.
Neil Patey, transaction services partner at Ernst & Young, believes that start-ups, and in particular their ability to secure funding, have been badly effected by the credit crunch and uncertain economic outlook.
“Start-ups are high risk and high reward. But banks and other investors are currently looking for more solid, risk-free ground.”
However Caroline Rollestone-Brown, corporate technology partner at law firm Maclay Murray & Spens, believes that bank funding is largely irrelevant for the sort of high-growth technology start-ups she specialises in, and is confident that quality start-ups will attract funding come rain or shine.
“At the early-stage, high growth technology end of the market, after ‘friends and family’ funding sources have been exhausted, the next step is usually to seek grant or debt funding from the Scottish government or Scottish Enterprise schemes and equity funding from private individuals, business angel investors and syndicates,” says Rollestone-Brown.
The start-ups featured in the table fall into four broad categories. Perhaps unsurprisingly, given the CSCB statistics, the busiest segment was property. Real estate start-ups included the Kintyre Development Company, which is aiming to redevelop a couple of hotels in Machrihanish on the Mull of Kintyre. KDC, advised by Grant Thornton, was launched by the Australian entrepreneur Brian Keating, who is also betting £30 million on the future of golf tourism in Scotland with the opening of a new links course called Machrihanish Dunes.
Other property-related start-ups included Aberdeen Property Fund France & Southern Europe, a closed-end fund launched by Aberdeen Asset Management, for which £134m was raised at launch. Others were vehicles designed to invest in specific property developments such as Warburtons’ Eurocentral Development and Knaresborough Property Investment.
However the biggest start-up of the year was LXB LLP, a property investment vehicle backed by Sir Tom Hunter’s West Coast Capital, HBOS and Tim Walton, who formerly worked at property developers Grantchester. With an estimated value of at least £200m, this is a follow-on fund from previous two existing LXB funds, and was formed to invest in retail-led mixed-use developments around the UK.
Sir Tom Hunter, founding partner of West Coast Capital, says: “We have a great relationship with Tim and his expertise is well known in the property market – its great to be back in business with him.”
Healthcare and pharmaceuticals was another busy sector, with BioOutsource, Centeo Bionsciences, Lamellar Biomedical, PWB Health and ReactivLab all being formed in the period. Oil and gas was also active, with the oil and gas consultancy G3baxi Partnership and Fletcher Shipping being formed.
Hunter believes an irrational fear of failure is probably holding more Scots back from starting their own businesses. He says “We are being held back by myth – business “failure” rates are significantly lower than we think, but because we think that some nascent entrepreneurs don’t start-up for fear of failure.”
“The truth is only 20% of businesses that close do so because of failure. Policymakers, the media and our educators must get that message across consistently, because if they do for every four people starting up now we’d have five if that myth was shattered; that would be a very, very big win.”
This article was published in Scottish Business Insider’s Deals & Dealmakers Yearbook 2008, published in August 2008.