Funding gap widens as investors become more selective

Scotland's early-stage investment market remains active, but raising capital is becoming more difficult for ambitious growth companies.

Moray Martin

While investors continue to back innovative businesses with strong growth prospects, fundraising rounds are taking longer to complete, investors are carrying out more detailed due diligence and capital is becoming increasingly selective.

That is the view of Moray Martin, chief executive of TRICAPITAL Angels Limited (TAL), one of Scotland's largest angel investment syndicates.

The organisation, which comprises around 100 members, has invested almost £7m over the past two years.

That funding has been matched by Scottish Enterprise and other investors, helping portfolio companies secure more than £40m in investment during the same period.

Its portfolio currently includes 34 businesses operating across sectors including technology, life sciences, engineering, defence and advanced manufacturing.

Martin believes Scottish companies face a more demanding investment environment than they did several years ago.

"TAL operates in the funding gap between seed and Series A investment, a segment that has become increasingly challenging in the current market," he said.

"Investment rounds are taking longer to complete and transactions are becoming more complex as investors apply greater scrutiny to opportunities."

The shift reflects wider economic uncertainty and changing investor behaviour.

Following several years of geopolitical disruption, inflationary pressures and higher interest rates, investors have become more cautious about risk and are placing greater emphasis on business fundamentals.

According to Martin, investors are looking more closely at how efficiently companies use capital, how quickly they can generate revenue and whether management teams have the capability to execute growth plans.

"The wider investment ecosystem is experiencing a degree of investor fatigue, driven by heightened risk aversion and economic uncertainty arising from ongoing global geopolitical and macroeconomic events," he said.

"As a result, companies are facing a more demanding fundraising environment, with investors placing increased emphasis on capital efficiency, market traction and the strength of management teams."

One of the biggest challenges facing the market is the increasing time it takes investors to realise returns from their investments.

The UK angel investment model relies heavily on capital being recycled.

Investors back businesses through schemes such as Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), achieve an exit and then reinvest proceeds into the next generation of businesses.

However, exits are taking longer to achieve.

Martin believes this is creating a bottleneck within the ecosystem.

"The average time to exit is continuing to increase, resulting in S/EIS capital being tied up for longer periods," he said.

"For the early-stage investment ecosystem to function effectively, it is important that S/EIS investments are realised and recycled into new opportunities within an approximate five-year cycle."

The consequence is that capital remains locked within portfolio companies for longer, reducing the amount of fresh money available to support emerging businesses.

"When capital remains locked in portfolio companies for extended periods, the rate of reinvestment slows, reducing the flow of funding available to the next generation of high-growth businesses."

Despite those challenges, Martin sees significant opportunities for investors and entrepreneurs.

Rather than chasing short-term trends, TRICAPITAL has focused on sectors benefiting from long-term structural demand.

Energy, food security, life sciences and defence are among the areas attracting the greatest interest.

These sectors have become increasingly important as governments and businesses seek to strengthen energy resilience, improve supply chains and respond to changing geopolitical conditions.

"The most compelling investment opportunities are found in sectors that address enduring global needs and benefit from long-term structural demand," Martin said.

"These include energy, food security, life sciences, and military and defence."

He added that these sectors align closely with the syndicate's investment strategy because they operate in markets that are strategically important and capable of delivering sustained growth.

Scotland's strengths in research, engineering, advanced manufacturing and life sciences mean it remains well positioned to benefit from these trends.

TRICAPITAL invests exclusively in Scottish businesses and places a strong emphasis on economic impact.

The syndicate looks for companies capable of generating significant gross value added, creating skilled employment and building long-term economic value within Scotland.

Alongside changing market conditions, Martin believes artificial intelligence is already beginning to influence the investment sector.

While AI is often discussed in terms of disruption, he sees significant opportunities for investors and portfolio companies.

"Like all major technological advances, artificial intelligence presents both challenges and opportunities," he said.

"TAL has embraced AI as an important tool for enhancing efficiency, insight and decision-making."

The organisation is already using AI to support due diligence, portfolio reporting and internal systems integration.

Looking ahead, Martin believes government intervention could help strengthen the funding ecosystem by improving capital recycling.

He suggests the creation of a secondary investment fund capable of acquiring stakes from angel investors in mature EIS-backed companies.

Such a vehicle would provide liquidity, release capital back into the market and support the next generation of high-growth businesses.

For TRICAPITAL itself, the priority over the next 12 months is growth.

The organisation plans to recruit additional members and expand the expertise available to portfolio companies while also exploring new sources of capital.

By increasing both funding capacity and access to experienced advisers, Martin hopes to improve support for Scottish growth businesses and help more companies scale successfully.

Scottish firms attracting a broader investor pool

Scotland's angel investment community may be focused on backing Scottish businesses, but the investors behind those deals are becoming increasingly international.

TRICAPITAL Angels now has around 100 members, with only half based in Scotland. A quarter are located elsewhere in the UK, while the remaining members are spread across international markets.

The trend reflects the growing ability of Scottish growth companies to attract support from experienced investors regardless of geography.

For businesses seeking capital, access to a wider investor base can provide far more than funding. International investors often bring sector expertise, commercial contacts and experience of scaling businesses into overseas markets.

That support can be particularly valuable for companies operating in sectors such as life sciences, technology and engineering, where global markets often form a key part of long-term growth plans.

The development also highlights Scotland's increasing visibility as a destination for innovation-led investment.

While access to capital remains a challenge for many founders, Scotland continues to produce companies capable of attracting interest from investors far beyond its borders.

For organisations such as TRICAPITAL, the next phase of growth will not simply be about raising more money. It will be about expanding the expertise, networks and international connections available to portfolio companies as they seek to scale.

In an increasingly competitive funding environment, those connections could prove just as valuable as the capital itself.