This entry is an excerpt from the OECD’s International Compendium of Entrepreneurship Policies (2020), which contains 16 case studies from 12 OECD countries. The Compendium examines the rationale for entrepreneurship policy, presents a typology of policy approaches and highlights principles for policy success. Case studies span policies for regulations and taxation, entrepreneurship education and training, advice and coaching, access to finance, internationalization, innovation, and holistic packages for ecosystem building. (OECD Publishing, Paris, https://doi.org/10.1787/338f1873-en.)
This case study examines LINC Scotland, the Scottish angel capital association. Its overall aim is to improve Scotland's economy by ensuring that ambitious, high-growth startups have access to angel capital. The OECD classifies this type of policy instrument as a matchmaking service for businesses with growth potential and business angels.
LINC Scotland addresses information asymmetry where entrepreneurs find it difficult to secure equity capital and angel investors find it difficult to identify investible startups. LINC Scotland acts “soft infrastructure” supporting the development of the business angel sector but does not provide investment advise.
LINC Scotland was created for three main reasons:
- A network would increase the size of funding available beyond what angels would invest on an individual basis by enabling them to pool their investments into larger investments;
- Bringing angels who were successful entrepreneurs together with high net worth individuals who do not have the expertise or networks to invest (so-called “smart” and “dumb” money) would increase the number of angels in Scotland;
- A network would create angel groups that would partner with Scotland's co-investment fund.
LINC Scotland acts as a central clearinghouse that brings high-potential startups together with business angels who share experience, knowledge and contacts in addition to funding. In addition, LINC Scotland operates a range of programs including education and raising awareness initiatives, identifying and supporting new business angels, encouraging the creation of new groups and international networking. It publishes Young Company Finance, a monthly magazine and website that shares information on early stage investment deals in Scotland.
LINC Scotland is a delivery partner for the Scottish Government’s SME Holding Fund Strategic Initiative, a project funded by the European Regional Development Fund (ERDF) that provides access to financing for SMEs seeking to enhance their competitiveness and grow in regional, national and international markets, and enables SMEs to access research and development or finance innovative start-ups that other lenders might consider too high-risk.
LINC Scotland is a registered company limited by guarantee and a not-for-profit independent association spun out of Glasgow Opportunities Enterprise Trust. It works with Scotland's public agencies and private stakeholders and, through a strategic partnership, is partly funded by Scottish Enterprise.
1993 - present
LINC Scotland was spun out of the Glasgow Opportunities Enterprise Trust and several Enterprise Trusts across the UK.
As an ERDF-funded program, the Scottish Angel Capital Program, managed by LINC Scotland, is independently assessed on a regular basis against the following KPIs:
- New to Market Products
- New to market products
- Financial support – non grant
- Non-financial support
- Public investment leverage
- Private investment
- Total investment
- Increase in employment
- Innovation active SMEs
- Exporting SMEs
- Number of enterprises supported
- New angel groups
- Number of Angel Group grants
- Business Expenditure on R&D
An evaluation of LINC Scotland activities from July 2015 through December 2018 found that LINC members had invested a total of GBP 84.9 million (approx. EUR 92.7 million) in 144 businesses at an average of GBP 2.0 million (EUR 2.2. million) per month. They attracted matching investment of GBP 98.5 million (approx. EUR 107.5) in these businesses from other investors averaging GBP 2.4 million (approx. EUR 2.6) per month. This contributed to the creation of 313 jobs. LINC members were the first external investor in 80 new enterprises (Malcolm Watson Consulting, 2019).
Volume of deals over the years: Monitoring shows an increase in the volume of deals facilitated by LINC Scotland over the years. In 2018, LINC members invested approximately GBP 50 million (approx. EUR 55 million) in private capital in about 80 investments in high-growth Scottish companies. This is in comparison to the approximately GBP 40 million (approx. EUR 44 million) invested in 87 deals in 2017, and GBP 250 million (approx. EUR 270 million) committed during the previous ten years beginning in 2008. In 1996-97, total deal value was GBP 2.6 million (approx. EUR 2.8 million).
- Equity market development: A 2017 evaluation of the Scottish Co-investment Fund (SCF) by Malcom Watson Consulting found that LINC Scotland played a strong role in helping the Scottish Investment Bank (SIB) further develop Scotland's equity market for growth ventures through SCF.
Member support: In a 2019 survey of LINC members, almost one third (31%) stated that their syndicates would have not grown without LINC Scotland support. Over half (54%) said their syndicate had grown more quickly than would have been the case without LINC Scotland support. Only 15% said that LINC Scotland had not affected their growth. The survey report noted that members valued not just LINC Scotland's financial support for developing and growing of angel syndicates, but the information, knowledge and peer learning LINC provided, which enabled their syndicates to learn from each other. They also valued LINC serving as a lobbying platform that helped educate policymakers and the media about the role angel investing plays in economic growth.
Challenge 1: Education
The most significant challenges in the early years of LINC Scotland were education of entrepreneurs and their advisors of the benefits and process of angel investing. LINC members reported that entrepreneurs were not “investor ready” and that existing support programs did not address this issue.
In response, LINC Scotland developed a pilot “Trial Marriage” program in 1998/99 in which investors could receive a GBP 7,500 grant if they contributed at least 25% of eligible costs to address business development issues. For example, an investor might undertake extensive market due diligence that involved travel and time spent with potential customers or suppliers. Of the six companies aided, five subsequently were invested in. This initiative was supported by the ERDF.
Building on this pilot, LINC Scotland launched an ERDF-funded Investor Ready Fund in which nearly investible companies (as determined by a LINC member) could apply for an up to GBP 15,000 (approx. EUR 16,400) convertible grant to address the business development issues preventing an investment. These were typically a combination of the following: (i) market analysis and access, (ii) financial structuring and forecasting, (iii) technology validation, (iv) patent and intellectual property, and (v) legal due diligence (EKOS, 2013). An important part of the program was ensuring that companies had the right solution to address these issues. Between 2000 and 2010, 62 grants were awarded, of which 25 were converted into equity, 18 were repaid, and 19 were written off (EKOS, 2013).
The Trial Marriage program was reviewed by Mason and Harrison (2001; 2004) and the Investor Ready Fund was reviewed by EKOS (2013).
Challenge 2: New deals vs. the need for follow-on investment during economic downturns
A second challenge occurred during economic downturns (e.g., the dot com crash in the early 2000s and the global economic recession in 2008/2009). As venture capital firms and banks significantly reduced their investments in early stage companies, angel groups were left with portfolio companies that needed follow-on growth funding. As a result, the proportion of new deals declined following each downturn and only began to recover several years later. For example, in 2002 members of the Archangels syndicate invested only GBP 1.5 million (approx. EUR 1.6) in new companies but GBP 4.3 million (approx. EUR 4.7) in its existing portfolio (Business Insider, 2 January 2018). Mirroring this, in 2011 LINC member invested in only 13 “new to portfolio” companies compared to 65 follow-on investments. Unfortunately, research strongly suggests that returns from follow-on investments are worse than from initial investments (Wiltbank and Brooks, 2017). Despite this challenge, the number of investments by LINC members rose from 2003 to 2015, though around 75% of deals were follow-on deals.
Challenge 3: Securing exits for angels
In the past 20 years, the greatest challenge has been in securing exits for angels from their investments. A recent survey of LINC members found that training and information on securing an exit was the most popular potential new service that LINC could offer. (Boag, Harris and Harrison, 2009; Malcolm Consulting, 2019).
Lessons for other ecosystems:
LINC Scotland has successfully grown an active angel market in its region and navigated changes in government policies and economic shocks. Supporting factors for LINC Scotland’s success include the dynamism of the local ecosystem, a supportive Scottish state, the development of favorable regulatory regimes for angel investing in the UK, and innovative funding instruments – such as the Scottish Co-investment Fund – that facilitate risk-sharing and portfolio growth. Key lessons from evaluations of LINC Scotland include:
Choose an appropriate institutional form that allows for efficient use of resources. LINC Scotland's Enterprise Trust status was a key success factor in the beginning. This offered LINC tax breaks to its corporate sponsors, access to European Union Structural Funds support, and an important exemption under the UK Financial Services regulations that enabled it to introduce investors to investees.
Include education and awareness raising. Early work by LINC focused on educating the market – entrepreneurs, government officials, the media, etc. – on the merits and processes of business angel investment.
Foster partnership between angel groups and syndicates. LINC Scotland managed relations between angel syndicates to ensure cross-learning and to contribute to the development of new groups. In 2019, there were 21 angel groups in Scotland, up from about five in 2003. The partnership approach between syndicates helped the leaders of Scottish angel groups to inform UK government initiatives aimed at promoting angel investing. They became a natural counterpart for government officials to consult with by becoming a visible organized representative group through their Angel Leaders’ Forum (ALF), which were organized by LINC.
Foster engagement with international initiatives. LINC Scotland was an early entrant or founder of several international business angels representative groups (e.g. the European Business Angel Network, the World Business Angels Association) and has close links with others. These linkages support the development of Scotland's angel market and raise the legitimacy of the organization, facilitating interactions with the government.
LINC Scotland is not publicly funded, but does receive public support for its specific economic development activities.