ANDY Moorehouse, director of emerging business at Bank of Scotland Corporate argues that BoS is unique in having the only banking team in Scotland dedicated to new and high-growth emerging businesses. "For us, because we have a team dedicated to this area, who understand the requirements and the business of high-growth emerging businesses, early stage entrepreneurial companies are not perceived as high-risk businesses," he says.
The team works very closely with partners such as the Scottish Executive's High Growth Start-up Team, the University spin-out centres, the Innovation Centre at Hillingdon, and with business angels, such as Braveheart and Archangel. "Because of the wo
rk we do we consider ourselves to be very close to the entrepreneurs who are behind the success of so many Scottish companies," he says. Moorhouse himself has spent some 32 years in the bank in a variety of roles and says heading up the high growth business unit is one of the most exciting jobs to come his way.
"Our main role with these businesses is as a provider of senior debt. To achieve this we make full use of the relevant tools, including the Department of Trade and Industry Small Firms Loan Guarantee Scheme (SFLGS)," he says.
Moorhouse admits companies sometimes find it hard to conform to all the rules and regulations that go with the SFLGS, but the bank stresses the value of this scheme for emerging businesses.
Another weapon in the Bank of Scotland entrepreneurial company armoury is its SMART Grant unsecured loan stock scheme. This works in partnership with the Scottish Executive's high growth national team. The idea is that the team acts to identify unusually high growth companies at the fledgling stage that are likely to qualify for a SMART Grant.
The scheme requires the company concerned to put up matching private funds, and this is where the bank comes in. "We use the unsecured loan stock to help the founders of the business come up with the matching private funds," says Moorhouse.
Investment in companies under this arrangement can easily be at a stage where the company has yet to earn revenue and is still finishing off its concept. "What happens is that we get a coupon attached to the unsecured loan stock. The company can redeem this by a single payment after three years, and the whole thing is priced at a level that is cheaper than venture capital finance or even than traditional equity routes," he adds. Bank of Scotland has already committed £200,000 to the scheme and has helped ten businesses over the last 18 months. The bank's governing board has also just agreed to top up the funding with another £300,000, raising the total amount to £500,000.
The way this helps entrepreneurial companies basing their business on some piece of technology that requires "proof of concept", is by boosting the SMART grant. The grant can be up to £50,000, and Bank of Scotland supplements this, in approved cases, with a further £20,000 from its scheme. If one adds to this early-stage investment money from the business angel community, a company could easily have a starting pot of some £100,000 to get it to the stage where it can attract further funding. According to Moorhouse, the ten companies that Bank of Scotland has helped are all faring well. "A couple have raised further funding through the business angel community and others have reached the stage where we can consider following our initial loan support with further senior debt," he says.
He points out BoS has stepped up its involvement with early-stage companies for some three years now. He says: "With Braveheart we act as gatekeepers for the Alpha Enterprise Investment Scheme. Nesta, the National Endowment for Science Technology and the Arts is also a partner in this scheme. This is a pure equity-based offering and my emerging business team acts as the gatekeepers for Bank of Scotland for that fund. It gives us a chance to get in and help some very exciting early-stage companies," he says.
Bank of Scotland soon hopes to extend this scheme to some of the English regions. "We are in a fairly advanced stage with plans for the Cambridge area, for example, and there could be some good news coming out of there in the near future," says Moorhouse.
Eddie Rintoul, Royal Bank of Scotland regional managing director, commercial banking, says the spirit of the entrepreneur is alive and well in Scotland.
"Entrepreneurs are the lifeblood of their brands and are the DNA of the customer proposition," he says. He points out that looking at successful serial entrepreneurs such as Charles Dunstone and Richard Branson, one can see their footprint is all over their business models. "Indeed they become the very public face of their organisations. This is because business at all levels is essentially all about people, and who is better placed to sell your business model than the person who developed it?" he says.
Funding is critical to any business, particularly to entrepreneurial operations. "Selling your business model to financiers is an important part of the business cycle. One factor that any budding entrepreneur has to be aware of is that when accessing finance they have to be very open and honest with prospective investors," he adds.
It is critical, from an investor's perspective, that they have the full story, from the history of the product and management behind it to the vagaries of the marketplace. This helps them to decide upon the risk/reward element of any potential investment.
The relationship between the funder and the investor is critical. As such the investor should be seen as an integral part of the business and should be kept informed at all times of developments in the business model, he argues.
Of course the banks aren't the only ones in the funding game. Sir Tom Hunter's finance vehicle, West Coast Capital, has got together with Bank of Scotland and Baugur, the Icelandic retail group, to back LXB, the London retail investment group, with a £500 million property investment fund. The fund aims to acquire stores and retail parks across the UK. Some investments have already been made by the LXB management team in Stirling and Paisley and more are expected. Sir Tom and the bank each own a little more than 40 per cent of the LXB fund. Scottish Equity Partners has raised approximately £160m for its new venture fund, SEP III, the largest fund raising in Europe for the last three months. SEP plays an active role in supporting entrepreneurs in Scotland and the rest of the UK.
"We provide capital to emerging and growth businesses involved in information technology, healthcare and life- sciences and energy-related technology and we also provide ongoing support, advice and access to our global network of expert contacts in these fields," says managing director Calum Patterson.
Patterson points out that as an owner-managed company itself, SEP understands the challenges involved in building a business. "We have achieved significant entrepreneurial success in our own right. SEP III attracted strong support from existing investors as well as a number of new investors from blue-chip European and UK financial institutions and we are now clearly established as a top-tier venture capital company operating in the most vibrant venture capital market in Europe," he says.
SEP has a strong portfolio of companies with disruptive and innovative technology. A considerable number of these are based in Scotland. They include pioneers in energy technology such as MTEM, based in Edinburgh, which has developed a new way of detecting oil and gas deposits using electro-magnetic surveying, which can deliver cost and efficiency savings to global energy companies. The company has also been through multiple funding rounds with Daysoft, based in Blantyre, which has developed an innovative method of manufacturing high-quality daily disposable contact lenses at exceptionally low prices.
CASE STUDY
Robot in an underwater revolutionPANTON McLeod is a small water services company based in the borders. It may only have a staff of 16 but it is revolutionising the way reservoirs are cleaned and inspected.
The company started in 1994 with a manual tank cleaning service for big water companies. The drawback of manual cleaning is that the reservoir must be emptied, thus cutting communities off from their water supply. So, inspired by a Swedish company that had developed a robot to clean swimming pools, Panton McLeod set to work developing a machine that would clean water tanks whilst still full.
Getting the necessary financial backing while they developed their product was crucial and Panton McLeod turned to their long-term finance team at Bank of Scotland.
Managing director Iain Weir says: "They were very supportive and helpful in finding ways to fund the investment in equipment."
Happy with their final product, Panton McLeod managed to dispel the initial reservations of the water giants and now work for Thames Water, Severn Trent, Welsh Water, Yorkshire Water and Scottish Water.
Panton McLeod are now expanding their automatic cleaning service to industry. The firm has just achieved a world first by cleaning the water cooling system of a major European chemical plant. Again, this was done while the plant was fully operational. Using a traditional cleaning method requires the plant to be shut down - at considerable expense.
Panton McLeod are also developing an underwater robot that can inspect tanks and detect leaks and cracks by injecting a harmless dye into the reservoir. This system again obviates the need to empty the tank. Weir says: "This has raised some eyebrows but it's also attracting great interest."
