Nation building: How tech start-ups are going to drive our economic growth

Kate Forbes is putting a lot of faith in Scotland’s technology sector. At the end of April the finance secretary announced £45m of funding to incubate 300 start-ups across five so-called scaler hubs and pay for more computer science teachers and the upskilling of the workforce.

“The Scottish Government is committed to the most radical reforms of the Scottish entrepreneurial system since devolution. Our ambition is to establish Scotland as one of Europe’s leading start-up economies,” she said in a parliamentary statement.

“These game-changing tech scalers will deliver one of the most sophisticated and comprehensive state-funded environments in Europe for the creation and growth of start-ups. Tech scalers will put Scotland on the global start-up map and we will promote their services relentlessly to attract the world’s best talent to scale up their businesses in Scotland.”

It is a bold plan that was initially drawn up by Mark Logan, the former Skyscanner chief operating officer who has taken on a number of advisory roles and a professorship at the University of Glasgow since the Edinburgh-based travel search engine was sold to China’s C-trip in 2016. Speaking to Holyrood, Logan says at its most simple level the idea is to create economic growth by turning Scotland into a start-up and then scale-up nation. Computer science is his academic subject and tech is his specialism – prior to joining Skyscanner he held engineering roles at BT, Atlantech Technologies and Cisco and his directorships have been at organisations including TravelNest, Swipii and The Data Lab – but Logan says it was agreed that Scotland’s focus should be on the tech sector because “often the highest growth is in tech”. “It’s an important ingredient in a start-up nation’s recipe book,” he says.

The overall aim is to make Scotland the kind of place global tech companies want to have a base and where investors from all over the world want to spend their money to ensure a nation full of would-be game-changing entrepreneurs can realise their potential. In getting there, Logan says there are a number of countries Scotland can learn from.

Estonia is very good at teaching computer science at school and has a high start-up rate as a result

“Finland is a very small country but it has one of the best tech scale-up rates in the world. It has taken a very systematic approach to building scale-ups that work,” he says. “Estonia [has created] the concept of the digital citizen. It is very good at teaching computer science at school and has a high start-up rate as a result.

“At the other end of the scale are very large environments like Silicon Valley. There’s a lot there culturally that I don’t celebrate, but what I do think is valuable is that because it is so big there are a lot of companies being born. Those that have survived are using world-class technologies and we need to stay very plugged into those environments. At Skyscanner we learned from the best companies in the Valley but added our own concepts.”

Skyscanner was one of the lucky ones. It raised large sums of money over several funding rounds then sealed an exit that kept its high-value jobs in Scotland and made its founders so much money they have gone on to back the next generation of start-ups – its founding chief executive Gareth Williams, for example, has given angel funds to businesses including Machines With Vision, Kindaba, Appointedd and Boundary Technologies. 

Few start-ups can claim such success, though. David Anderson, who leads the law firm Addleshaw Goddard’s tech accelerator AG Elevate, says one of the biggest stumbling blocks for would-be entrepreneurs is finding that crucial injection of cash to get their idea off the ground.

“A number of challenges come up with every tech business in Scotland we look after and the biggest one is around funding,” he says. “There are two issues there. One is right at the beginning when someone has an idea and they want to spin that out into a business – how do they make that leap to develop that business? If there’s a good proposition and it’s explained to the right people in Scotland there is funding for that seed stage – it’s serviced well by angel investing syndicates, some early-stage venture capital funds and some Scottish Enterprise programmes. 

“What happens is that for those companies that have gone through that, the money they have raised at that stage is not going to be all that company needs to take it through. There’s a cycle where they have to go back cap in hand to say they need more money. In Scotland we have a gap around that Series A big-ticket funding.”

That creates a problem in that it prevents companies reaching the scale required to truly drive economic growth, but it also means there is potentially less money in the system to fund the next batch of start-ups waiting to come through. David Grahame, director of angel investing association Linc Scotland, stresses how important it is for early-sttage businesses to move through the various funding rounds, not just so they can develop their products or tech but so early investors can exit and keep the whole cycle running too. 

Business secretary Kate Forbes commissioned Mark Logan to review how the Scottish technology sector could drive economic growth

“Angel investors are mostly looking for companies that they can take to an inflection point in value,” he says. “They choose where their money can make a difference and then they will hopefully find someone else to take on the baton. At the moment the average time for a positive exit is about nine years. [Investors] need to get some money back to recycle. We’re talking about private citizens investing their own money. If they stay in there there may be the opportunity of further gain but there’s also an opportunity cost because they don’t have the money to put into other things.”

Scaling up and securing an exit can be fraught with difficulty. FanDuel’s early investors saw their holdings wiped out as a result of the business taking scale-up money from a group of American private equity funds. The terms of the deal were so onerous that when FanDuel was bought by Paddy Power Betfair (now Flutter) in 2018 the big-ticket investors got all the value. But even getting to the stage of being ready to seek seed funding is tricky, with Logan noting that not every university is good at teaching entrepreneurial practice to computer science students while the foundational educational system has a long way to go before any student can be described as a true digital native.

“We want to make developing entrepreneurial practice an opt-in standard for universities,” Logan says. “Some already do it, some are a long way from it, but the idea is to create that standard to allow universities to know where they need to go. You can’t be a world-class industrial university unless you are also doing entrepreneurialism.

“At school level, the challenge we have is that computer science is the poor cousin of Stem [science, technology, engineering and maths]. We’ve set ourselves the target or goal that computer science has to be aligned with physics and maths. At the moment computer science is not taught by specialist teachers – if you don’t think a subject is important you don’t try as hard to recruit those staff. We need to elevate the subject to the same level as those others. If we want to make a meaningful change in computer science then it requires central government’s buy-in, Education Scotland’s buy-in, SQA involvement, local authority involvement and head teacher involvement.”

Anderson agrees, noting that education is the key element in ensuring Scotland can move beyond being seen as a low-cost location for companies to base their teams in to a leading tech centre in its own right.

“For a while Scotland was seen as the most cost-effective place to have a software development team and it probably still is, although it’s moved on in the last couple of years,” he says. “For me, we need to make the education syllabus spit out the most tech-savvy, tech-engaged school kids we can. Every business is a tech business in some shape or form and in the last two years in particular so many businesses have started to reinvent themselves as tech businesses. If we really changed how we look at education, from primary school onwards, it would create a tech-literate nation. We have a limited population and if we’re not doing more and more of that we’ll lose people to other places.”

These issues are, in part, what Forbes’s £45m is designed to solve, though at £1m and £500,000 the funds set aside to variously help people on benefits learn coding and create a digital skills pipeline are vanishingly small. The scope of the newly launched Scottish Teachers Advancing Computing Science organisation, meanwhile, is likewise miniscule, with just £1.3m allocated at the beginning of this year to “refresh” the teaching of computer science. From that fund, individual schools will be able to bid for grants of up to £3,000 to fund new equipment or teaching resources, something Meghan Gallagher, the Scottish Conservatives’ shadow minister for children and young people, said “won’t touch the sides”.

No nation can be at ease with itself if it’s denying opportunity to half of its people due to some arbitrary attribute like gender”

While it is clear that significantly more money is going to have to be invested if Forbes wants to turn Scotland into a tech nation that can compete on a global scale, what the government also needs to pay significant attention to is ensuring that tech-savvy Scotland reflects the entire Scottish nation and not just the white, male, middle class segment of it. In an interview on pages 30 to 32 of this magazine Gillian Docherty, the former chief executive of The Data Lab who is now leading Scotland’s AI Strategy as chair of the Scottish AI Alliance, tells how, despite all the work being done to improve female representation in the tech sector, there are fewer women studying computer science today than there were when she was a student in the early 1990s. “We are not getting the sufficient movement we need to deal with diversity in tech,” she says.

For Logan, it is a major issue that needs to be addressed with haste.

“What we are doing is removing half of our best people from industry roles where we desperately need our best people and that can’t make sense economically,” he says. “If Scotland can dramatically and significantly improve on that imbalance, that’s a huge economic advantage. No nation can be at ease with itself if it’s denying opportunity to half of its people due to some arbitrary attribute like gender. We have normalised appalling imbalances in participation rates and that makes it hard to fix so we have to take a different view and change the terminology. I think of it as gender ghettoisation – we have, hiding in plain sight, ghettos based on gender and everything I’ve said about gender applies more so to ethnic minorities.”