LINC Scotland

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.