Thinking big: Scotland's start-up nation plan lacks ambition

The Scottish Government has got a lot riding on the country’s entrepreneurial talent. Talk of becoming a start-up nation has abounded since one-time Skyscanner executive Mark Logan – now the government’s chief entrepreneur – issued a 2020 report in which he recommended wide-scale support for tech start-ups to help the economy recover from the coronavirus pandemic.

The Scottish Government has run with the theme ever since. Then finance secretary Kate Forbes, who commissioned the Logan Review, issued a report in early 2022 – Delivering Economic Prosperity – in which she extolled the virtues of fostering early-stage entrepreneurial talent. In his first Programme for Government, unveiled last September, First Minister Humza Yousaf announced a £15m funding package to "unleash entrepreneurial talent from all parts of Scotland” and “boost those starting out in business". Wellbeing economy secretary Neil Gray, meanwhile, announced in October that part of that money will be allocated through a £1.6m Ecosystem Fund and a £1.3m Pre-Start Pathways Fund that will help under-represented groups play a part in "delivering a start-up nation".

Yet an economy cannot thrive on start-up businesses alone and, while Logan’s vision included 'scaler hubs' to help new tech businesses grow, there is a growing sense that the Scottish Government’s ambition is lacking in, well, ambition.

For Sandy Kennedy, the former chief executive of Entrepreneurial Scotland who is also adviser to angel investment syndicate Eos, part of the problem is that Scotland is too quick to celebrate business successes. That leads to assumptions about what businesses have achieved and can even lead to founders selling out – often to overseas investors – well before their start-up has had the opportunity to reach any kind of scale. Intellectual capital, particularly in areas such as tech, gets shipped to places such as Silicon Valley and, while teams undertaking high-value jobs may well be kept in the Scottish economy, the potential to accelerate growth is diluted.

"Could Scotland perform significantly better than it is at the moment in terms of successes? Definitely," Kennedy says, "but in some cases we celebrate too early. 

"If you look at university spin-outs as an example, there are undoubtedly some great spin-outs. However – and some of the big universities do this a lot – we're very good at saying how amazing  they are but when you look at it from a bigger-picture view, 10 years later, how many jobs are still in place? How much investment has been brought in? There are a tonne of opportunities to take what we've got and make it better but we're not good at doing that."

Kennedy wrote on this topic back in 2022, when he and business consultant Tom Inns published a paper – Opening up Scotland’s scale-up conversation – that suggested that while start-ups are "already well provided for by Scotland’s ecosystem of business support", much more needed to be done to help businesses achieve scale. 

"These are the most economically significant companies, they exist in all sectors of the Scottish economy, they drive innovation and will be key if Scotland really wants to deliver on shared challenges such as climate change and social justice," they wrote. "To succeed they need an ecosystem that is highly attuned to their scaling needs."

Last year a report published jointly by the Scottish National Investment Bank and Scale-up Institute made a similar point.

"The investment ecosystem in Scotland has certain strengths at early-stage investment, but there is a gap for investment in scaling businesses," the paper – Scaling Up Scotland – said. "Early-stage investments are available from a broad range of sources both public and private. However, at the mid to later stages of a business’s growth, particularly where greater levels of investment are required, there are fewer options for accessing growth capital."

At that time, the Scale-up Institute put the funding gap in the region of £217m to £1.5bn.

The impact of not being able to bring a business to scale on home turf was illustrated by the case of FanDuel, the Edinburgh-founded tech firm that was once the poster child of the Scottish business scene but was ultimately taken from its founders by its aggressive US-based private equity backers.

Between 2007 and 2009 the company raised seed and early-stage finance in Scotland, including from the Scottish Government’s development agency Scottish Enterprise. However, when it came to growing the business the company’s five founders, led by chief executive Nigel Eccles, were forced to look further afield, with Eccles noting that even the start-up environment had been difficult to navigate.

Husband and wife team Nigel and Lesley Eccles were among FanDuel's co-founders | Alamy

"It was incredibly difficult to start up as there were only a handful of angels and two venture capital funds and we knew that when it came to scaling that we’d have to be raising money in London or the US," Eccles tells Holyrood. "For our B round I went to London to raise the capital then for the C round I got on the plane to San Francisco and New York."

For Laura Falls, a corporate partner at the law firm Addleshaw Goddard, part of the reason the Scottish funding gap exists is that Scottish entrepreneurs are afraid to engage with the kind of backers that can help them bring their businesses to scale.

"There's a general reluctance in Scotland to embrace private equity investment," she says. "Part of the reason is that business owners see that private equity comes in and floods businesses with debt and are in it for themselves, but actually it's a really good opportunity to allow businesses to grow – they only invest in businesses where there's a demonstrable growth opportunity – but there's a reluctance from owners to relinquish any control. A lot of investors will want some control because they've paid that money in but they will also leave founders to get on with running their company. If we could try to embrace that a bit more in Scotland it would help to grow businesses."

Some of the fears around private equity are well founded. The terms of the funding deal Eccles signed with backers including KKR and Shamrock Capital Advisers meant that he, his fellow founders and all the company’s early investors saw their shareholdings wiped out when the business was sold to Paddy Power Betfair (now Flutter Entertainment) in 2018.

However, he says in a market like the US private equity is far more normalised and as a result the business environment is much more conducive to building and scaling companies than it is in Scotland. He and his wife Lesley – another of FanDuel’s cofounders – even moved to the US in order to start their latest ventures, digital music collectables platform Vault and relationship-coaching app Relish respectively. While that makes sense from their perspective, it is a loss not just to the Scottish business community but to the economy their businesses could have been grown in.

"There's super-high quality engineering talent in Scotland which we can tap into, but while there are also talented entrepreneurs there [in Scotland] they struggle to raise capital," Eccles says. "That was a big reason for us leaving Scotland. I knew that raising capital would be so much easier here in the US, but there's also a shortage of people who can fill product marketing roles in Scotland. Those areas are really lacking – that's a challenge if you want to scale."

For Kennedy, it is by supporting an ecosystem that addresses issues like that that the Scottish Government could really make a difference to the business sector. No one is suggesting it should step in to fund scale-ups itself – given its track record in backing businesses such as Ferguson Marine, BiFab and GFG Alliance it is unlikely that such a move would be welcomed. But what it can do is help create an environment that contains all the elements business require to successfully scale.

"You need investment, but you also need talent and know-how and access to markets," Kennedy says. "Ultimately, you can start a business and grow it with a little bit of a dream and some capital and not a lot of sales […] but Scotland is a relatively old economy – it has old institutions and old ways of doing stuff and a government that doesn’t quite get it, and as a result it will end up lagging behind.

"We’ll end up looking back in five or 10 years and saying, 'we could have been like country X'. We have to get over ourselves and recognise that the systems put in place 20 or 30 years ago were for a different world, but I don't think there's an appetite for things like improving teaching in schools around entrepreneurialism. We've got old ways of looking at things."

For Falls, one of the most important things the Scottish Government can do is show it is supportive of the business community, whether through facilitating consultation with other business people or being innovative in areas such as taxation. 

"It's about wanting to support businesses and fostering and encouraging growth and I'm just not sure the Scottish Government has that mindset," she says. "It's about sharing business knowledge and experience and having people to consult with. They don't do enough of that – there are some really successful business people and others could tap into their knowledge."

That matters, Falls says, because "the bigger the business, the more it brings to the economy".

Or, as Kennedy and Inns wrote in their 2022 report: "Scaling firms are the ones who have market traction, with the agility and the ability to gather the resources required to deliver significant impact. Scaling companies are where most future economic and societal value will be realised."