An overseas-based venture capital (VC) firm is close to signing a deal with Scottish Enterprise (SE) to open an office in Scotland to run the fund, which will provide so-called follow-on funding worth between £2 million and £5m to companies that have already been through one or two funding rounds but have not yet reached the point of commercialisation.
Jim McFarlane, SE's managing director of operations, said: "Life sciences is a sector where we believe [non] access to finance is an impediment to growth in university spin-out companies. The demand is from the industry itself.
"The VC partner would operate the fund. The proposal hasn't reached the stage of a final legal agreement, but we are talking to one investor who we believe will become our partner.
"It's looking as if it could come good in the next three to six months. If we are successful, the idea would be to expand the fund at some future date and hopefully attract further partners."
The VC, said to be a specialist in the sector, would contribute to the fund along with several Scottish universities. SE has committed a minimum of £5m and is also seeking backing from the European Investment Bank, which is owned by the EU and lends to member states for economic development.
The fund would not lend but would invest in return for stakes in businesses. It is intended to be an intermediate step between earlier-stage SE funds such as the Co-Investment Fund and the new UK-run Business Growth Fund (BGF). The BGF, which has an office in Edinburgh, can invest as little as £2m for equity stakes in businesses but its maximum is £10m.
McFarlane said: "We have spoken to the four universities that have medical schools – Aberdeen, Dundee, Edinburgh and Glasgow – plus Strathclyde, with whom we work closely on various initiatives. They are all interested and we are confident that at least some of them will come on board."
He added that SE had not yet decided if the fund would be available to all life sciences companies or would preserve its limited funding by staying away from drug discoverers. They can take 10-15 years to get to market, which would potentially mean that a chunk of the fund would be locked up for a long period.
Scott Johnstone, CEO of the Scottish Lifesciences Association (SLSA), said: "Bringing more funding into Scotland is always useful and if SE are looking to get involved we are happy to welcome that. The more funding that's available the better."
But asked whether he believed there was a gap that needed to be addressed, he said: "There's a lot of interest from VCs in Scotland. GlaxoSmithKline's new SR One fund alone is offering £50m in the UK. Another sizeable fund is based in Edinburgh. And we have another member from outside Scotland that is a fund and has just joined the SLSA. There is no shortage of cash coming in."
He added that SE would be wrong to exclude pharmaceutical companies from its new fund. "Would you want to exclude someone like Hugh Griffith at [Edinbugh biopharma company] NuCana? The answer has to be no. There are always points where you can exit as an investor.
"Pharma services companies are major employers in Scotland, such as Quintiles, Charles River and BioReliance."