As one of the country’s leading business angels, and a recent recipient of the prestigious Ernst & Young Entrepreneur of the Year (Scotland) award, Geoffrey Thomson is an influential character in the Scottish business sector.

As well as being one of the founder members of Braveheart Investment Group, Thomson is a director the NESTech, the challenge fund of the universities of St Andrews, Dundee, and Aberdeen. He also sits on the board of EPSRC, the steering body for innovation in UK biotechnology.

Frustrated by the lack of funding available for SMEs, and by the treatment of the banks, Thomson speaks to Enterprising News about investment, innovation and inaccuracies.

What’s your view on the way the banks are treating SMEs?
They’re not lending, it’s as simple as that. They say they’re lending, and they are, but to much larger corporates. They are sliming their loan books down for fine reasons but it doesn’t help the small companies out there and it is very, very difficult.

The Government should be stimulating this side of it because the SMEs are the lifeblood of the economy and they cannot raise bank funding. It’s not a question of raising additional bank funding; it’s quite often a case of getting an extension to existing facilities. Last week we were told by a national British bank ‘we are not lending full stop’.

Where are SMEs meant to turn?
That’s exactly why we have become an approved lender for the Enterprise Finance Guarantee scheme. We want to go out to the market and do something, but we can’t do that without financing partners. It’s really difficult.

I understand why the banks are doing it, and there is a question as to whether the whole banking sector would have been nationalized and maybe we wouldn’t have this problem now. These companies need short-term working capital facilities. The European Investment Bank will give you capital to invest in SMEs, but the British Government will give you a guarantee against your own capital so it’s a different approach.

I don’t think the Government has been terribly successful in persuading the banks to lend money, I think that’s a fact.

It’s ironic. The banks are always going to say that they do lend to good businesses but they don’t lend to bad businesses and there seems to be loads of them all of a sudden.

The bottom line is the criteria for lending has changed and the cost of loans have gone up, that’s a factor of a tight market, but it’s the availability of capital to companies that are really vital to Scotland. We’ve seen the big businesses go wrong over the last few years but it’s the little businesses that have to remain.

We’ve suggested a number of things to Scottish Enterprise and the Scottish Executive but there are so many rules that it’s hard to come up with something innovative to try and get cash into these companies.

How has the EFG been working for Scottish SMEs?
We’ve been seeing a lot of companies who applied for it being knocked back.

We’re trialing it within our existing portfolio so we can lend more, and if we find there is an appetite for organizations in Scotland to come together and form a special purpose vehicle to produce a fund to make these loans, then we will spearhead that. We’d like to see commitment from some of the large companies like utility companies.

How has the downturn affected the support you give firms?
It’s more short-term and milestone based. Over the last year, young companies that have a business model to develop IP have had to change that model, so there is less research and development and a faster ramp to revenue. They’ve needed management support to change the business plans.

They’ve needed more support from their shareholders in terms of interim finance because there is less finance available from banks and from other equity holders. We’ve been putting quite a lot of bridging finance into our companies rather than putting in big equity runs. This is easier and cheaper to do and you can top it up more quickly. We’re still supporting the companies but instead of whacking half a million pounds in, we’re putting £50,000 in and saying when you’ve spent that come back and we’ll have another talk to you.

What are the most common mistakes entrepreneurs make when seeking investment?
Not getting the right advice in terms of understanding the market and what tools are needed to go out there and make it work. An entrepreneur needs to be tough because things are going to go wrong. It’s not easy being an entrepreneur.

A lot of entrepreneurs have to accept that it won’t necessarily work the first time but they should keep on going. In America, you’re expected to fail a couple of times before you succeed and people like Sir Tom Hunter have done a lot to help with that culture. 

Small business development is now in the hands of local authorities aim to grow and encourage business at a local level. Is this working?
I’m a great believer in the Scottish Co-investment Fund model where the private sector puts money into the public sector to make it happen, but I’m not a great believer in the public sector directly intervening. The private sector is better at preparing companies for investment because we know what the companies need to have. I don’t think having a big support network of public sector employees doing things that the private sector do better works.

Are start-ups being held up in red tape?
It’s a nightmare. There are so many rules and regulations; it would be great if we could just cut through that. The Government has helped a little bit, but there are still masses of stuff that little businesses have to deal with. The amount of time that you spend running that side of the business as opposed to going out, finding customers and making money, is extraordinary.

I’d like to see the reduction of public spending, fewer people employed in the public sector and less quangos and committees - just let people get on with it. One in three people in Scotland are employed by the public sector. I think it’s crazy that we have such a large proportion of the population pushing paper around as opposed to producing. We don’t want one in every three people checking on the two people that are doing something. We’ve got a mountain to climb in this country over the next 10 years.

What have programmes like Dragons’ Den done to encourage entrepreneurs to seek investment?
We were asked if we would like to be part of Dragons’ Den but I was worried that the impression would come across as vulture capital and rather unprofessional as opposed to ourselves who are professional investors and FSA authorized.

I think some of the things that go on in Dragons’ Den are slightly embarrassing from an investor’s point of view.
However, it’s upped the anti in terms of people knowing that there are business angels out there, but I don’t it makes people think that business angels are good people. When we decide what we’re going to invest in a business we don’t just say I’ll give you £100,000 for 30% we use a scientific method of evaluating these businesses. It’s a completely different and much more rigorous process.   

It’s woken the market up that there are these people who will write big cheques but if they come to us and expect us to behave like that then they’re going to get a complete shock. It’s good TV but it’s not the way an investment management business would like to be seen in the market.