The 'business angels' in Scotland transforming start-ups, including university spin-outs, into success stories

Her fledgling business, Gut Wealth, makes probiotic capsules that help people deal with irritable bowel syndrome, a condition that not only brings suffering, but costs business billions in forced sick days.

“Our vision for the future is no more shame and embarrassing toilet dashes,” she declares with a flourish as she asks the assembled “business angels” for £300,000 to allow her to scale up her three-year-old company.

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The term business angel was first coined in the US in the 1980s and refers to wealthy individuals prepared to invest their own money in start-ups with a promising idea.

They are not the only source of early-stage business funding beyond often risk-averse high street banks. Some comes from Scottish EDGE, a competition offering grants and loans of up to £150,000, and from British Business Bank, through its £150 million Investment Fund for Scotland, launched in 2023.

But business angels play an outsized role in early stage investing in Scotland, with more than 2,000 high net worth individuals who are angels around Edinburgh alone. Most are successful entrepreneurs who invest by themselves or as part of around ten active angel syndicates.

Four out of the ten most active angel networks across the UK are based in Scotland, according to a report last month by consultancy Beauhurst. Two are in Edinburgh (Archangels, founded in 1992, and Equity Gap), one in Glasgow (Kelvin Capital) and a fourth in Melrose (Tricapital). Other leading syndicates are Edinburgh-based Par Equity and Gabriel Investments in Glasgow.

This makes the Scottish capital the largest angel presence outside the “Golden Triangle” of London, Oxford and Cambridge. “Business angels are the lifeblood of the whole Scottish start-up eco-system,” says Margaret Morton, who this month became the first chief executive of Angel Capital Scotland (ACS), successor organisation to LINC Scotland, which helped establish the world’s first public sector-business angel co-investment model with Scottish Enterprise in 2004.

Some of the best-known Scottish innovative businesses got their start thanks to seed capital from angels like Rob Dobson. He was an early investor in QikServe, a restaurant QR code business founded by Edinburgh entrepreneur Daniel Rodgers in 2011 that was sold last year to business management software business The Access Group. Others include Gareth Williams and Shane Corstorphine, formerly of travel search business Skyscanner.

Tax breaks under the UK government’s Enterprise Investment Scheme (EIS) are a big driver, allowing a 30 per cent tax deduction against investments in a start-up, while a separate scheme for younger businesses allows a 50 per cent deduction.

But angels are also willing to take risks in a way that others aren’t, often based on faith in the potential of new technology, rather than financial track record.

Alex Robertson, a 39-year-old entrepreneur who launched Uber in Scotland in 2015, was one of the investors at the Royal Scots Club session, organised by a group of 75 angels called Apollo Informal Investments. “We’re not so concerned about the financial achievements to date, but more about the potential for that business to achieve velocity and ultimately a return on our investment,” he says.

That explains a bias in favour of university spin-outs, especially in fintech, biotechnology and medical technology. About half of the 21 companies in Archangels’ current portfolio are spin-outs.

“When you look at the quality of innovation that's coming out of the university eco-system, it’s a really good curated pipeline for us,” says David Ovens, Archangels’ joint managing director.

One recent example is Reactec, a business spun out of University of Edinburgh’s school of engineering in 2001 that produces wearable tech for industries like mining where there is risk of injury from working with vibrating tools. Archangels and the university’s in-house investment fund, Old College Capital, were early investors in the company that was sold last month to Ideagen, a UK software group.

Yet things have become tougher for angel investors and start-ups alike since a post-Covid boom in EIS-related investing petered out a couple of years ago as money became more expensive with interest rates rising. Tough macroeconomics conditions and a lack of so-called exits, either through stock market listings or selling the business to larger companies, have resulted in angels having to wait longer before cashing out. UK-wide, Beauhurst says, there were 267 deals totalling £586m in 2024, well down from 380 fundraisings worth £866m two years earlier.

“Unless you are in a really hot industry, the days of being bought [out] six to 12 months after a product launch are pretty much gone,” says David Alexander, an Edinburgh-based investor involved in a number of different angel groups. He says there are also fewer US buyers in the market. “You really need to be prepared for longer hold times of five to seven years, even seven to ten,” he says.

The result is that angels have recently focused on re-investing in existing start-ups as they wait for the market to turn. “The knock-on effect is that we invest less in new companies because we have to support our existing companies,” explains Michiel Smith, director at Apollo.

Fortunately, business angels appear to be patient. Archangels had to wait around 20 years to achieve exit with Reactec. The motivation to make a difference is also a striking feature of many angels.

“They tend to want to invest in solving world problems,” says Ms Stuart, the entrepreneur, who has herself just invested in a skincare start-up in England. "I have huge ambitions to scale Gut Wealth which allows us to help even more people who are suffering in silence with the pain and shame of gut ill-health.”

As for her pitch? Watch this space.