With so much focus on the cost of living and rising business costs it is easy to overlook the more robust side of the economy’s balance sheet. It may be tough out there for those struggling with the impact of inflation, but there are a lot of innovative companies who have been on a sharp upward curve, looking to get their ideas to market.
Over more than a decade scrutinising hundreds of propositions, Equity Gap’s Fraser Lusty has been a key player in nurturing some of those nascent plans into thriving businesses.
“Many of those company founders came to us with a small team, some of them on their own,” he says. “We’ve watched them grow and altogether I’d say the portfolio has created about 600 jobs.”
It has also created some healthy returns for the syndicate of investors who have backed firms it brings forward, which have included Sunamp, Enterobiotix, MiAlgae and Trojan Energy. The portfolio now has a collective turnover of £90 million and a value of £300m, about nine times the syndicate’s contribution.
While the climate for tech investment may have become more cautious, he has noted a growing interest in smaller private companies from clients of wealth managers and IFAs who might otherwise restrict their investments to the listed sector.
He puts that down to two things: weak stock markets and a recognition of the rapid growth – and potentially high returns – from the private sector.
Last year was a record year for investments, with members injecting £7m across 30 rounds, leveraging total funding of £70m, more than double the figure for 2021.
“There was always going to be a period of consolidation and it’s fair to say there was a lot of sign-posting of a slowdown,” says Lusty, “but last year allowed us to view 2023 as a period of not worrying about firms coming to market for more money. Most of the companies in our portfolio have strong balance sheets.”
Lusty, who joined the banking industry as a 16-year-old, has worked alongside Equity Gap founder Jock Millican since meeting him through a mentoring programme in the wake of the banking crash.
“The two of us muddled through at first with no certainty about what it was going to become,” he says. With a little help from their friends and the investors who jumped aboard, they have turned Equity Gap into the sixth most active syndicate in the UK.
Millican is now taking on the role of executive chairman and Lusty has been elevated to managing director. He has hired Rhona Bree from Scottish Enterprise to join the team of nine as senior investment and portfolio manager.
He says: “My immediate focus for Equity Gap is to develop new strategic relationships, open up new capital opportunities and partnerships, and attract significant new investors to Scotland to create jobs in sectors where tech-led disruption has a key role to play.”
Disruption has become an increasingly significant factor in company development.
“The pandemic accelerated the growth of some of our companies. Society changed and became more reliant on technology,” he says. “For those companies that had a solution that was deemed to be market ready, the adoption was quicker than we envisaged. That has seen companies move into the scale up phase more quickly.”
He says there has also been a change of attitude among bigger companies towards the adoption of new technologies developed by small firms.
“Big companies need to have confidence to use these technologies. They have been slow to deploy such solutions but we are now starting to see this coming through.”
He refers to Trojan Energy whose electric vehicle charging technology is building a lot of momentum.
As for exits, he says the preferred route is still through a trade sale rather than a market listing. This is a historic trend in Scotland which not only has a small contingent of companies quoted on the stock markets but has seen that pool diminish as a result of takeovers (most recently Stagecoach and Aggreko), but also through poor trading which has led to the collapse of valuations. The most recent example was Parsley Box, the meals delivery firm which lost almost its entire value within months as investors took fright over a series of weak trading updates.
“That sort of thing creates a negative sentiment [towards public markets] that spreads across the wider community,” says Lusty who notes how companies such as Skyscanner – which may have been a good contender for the stock market – achieved a huge return for its founders when it was sold to a Chinese buyer.
Equity Gap has made its own advances by becoming FCA authorised in the last year as a non-MIFID deal arranger and by achieving Innovate UK investor partner status which speeds up the R&D funding process for companies it supports.
He is a big supporter of the taxpayer-funded Scottish National Investment Bank which has had its critics. He argues that it fills an important gap in the venture capital sector.
“It has taken a year or two to understand how to interact with other stakeholders but it is settling down,” he says. “Three of their first 25 investments were in Equity Gap portfolio companies which has allowed those companies to move more quickly in deciding what to do next.
“I’m not sure that would have happened without the bank.”
Occupation: Managing director, Equity Gap
Education: Craigmount High School, Edinburgh Napier University (banking)
Career highlights: Bank of Scotland, Clydesdale Bank, Scottish Chambers of Commerce, Edinburgh Chamber of Commerce, Lending Crowd, Equity Gap
What do you find frustrating?
I am impatient to make things happen. I have had to learn to be more pragmatic.
What have you learned about yourself?
I have learned to delegate and that means surrounding yourself with good people.
What advice would you give anyone starting up a business?
Back yourself. Have a strong vision about what you want to achieve. Be a person with good values.
Do you carry cash?
If you could choose three people as guests at a fantasy dinner party who would you choose?
Michael Portillo… I enjoy listening to his travelogues
Hedy Lamarr.. actress and inventor of technologies
Nelson Mandela… he was released from prison in the week my son was born