Michelle Rodger: Scotland has real start-up potential but it needs help

THERE'S a perception that Scotland lacks quantity and quality of tech start-ups. I've discovered this isn't true. There are plenty. The issue is that the majority of them just don't progress beyond the initial start-up phase and morph into a successful business of scale.

According to Professor Donald MacRae, chief economist at Lloyds TSB, Scotland has a strong track record of spinouts, but very few have actually reached scale. Moderating a panel discussion at last week's Engage Invest Exploit (EIE '10) conference, he revealed that of the 200 or so spinouts to date, only about six have succeeded in that goal, reaching employee numbers of 50 or more.

ProspeKT is a multi-million-pound initiative at Edinburgh University's School of Informatics, host of the conference. The incubator has spun out six businesses and hatched 17 start-ups since its inception in 2006. But compare that to statistics from the States, where MIT has spun out 25,800 start-ups, achieving employment of 3.3 million and annual sales in excess of $2.2 trillion.

Clearly the Americans are way ahead, and universities at home are genuinely working incredibly hard to nurture the global tech monsters of the future; but, to coin a phrase I learned at the event, everyone is agreed we need to "shorten the runway" – and soon.

Scotland is well served by an active angel community. What's missing, according to tech entrepreneur Gavin Littlejohn, is an understanding amongst wannabe entrepreneurs of what it actually takes to trigger investment.

CEO of Money Dashboard, which has raised 1.6 million in equity and grants since 2006, Littlejohn knows from experience that it's not just about nurturing and training great technologists, but involving people who are natural marketers, who can engage with an investor and explain passionately why they need to be on board.

Experienced investors will bring smart money, says Littlejohn, but you need to be able to convince them first. That gap is why so few start-ups emerge from the formative stages into the post-launch phase.

It's not the only reason.

Jessica Williamson was born and brought up not two hours from Silicon Valley, but it wasn't until she came to Edinburgh University that she felt the desire to be a tech entrepreneur. Now working with TenBu Technologies, Williamson says there's a significant amount of resources available to tech entrepreneurs across the country, but no central hub that collates the information and shares it out.

Williamson has launched a blog (StartupCafe.co.uk) to help fill that gap. The 500 page views a week would suggest it's a much-needed start, but you have to ask why this isn't being done by one of the many quangos with a sticky finger in the tech start-up pie.

While better understanding of the investor and improved communication between academia, business and the tech students and entrepreneurs is fundamental, so is a shift in attitude.

According to Simon Montford, CEO of Vibio – who signed a $1m angel investment deal with Archangel during lunch at the event – there's a huge stigma attached to failure in the UK or Europe.

Montford, who has spent two months in the UK and two months in the Valley for more than a year and a half while growing his business, says it's different in the Valley, where they believe if you've never failed, you're not trying hard enough. Just don't make the same mistake twice, he warns.

In addition, something needs to be done to heal the internally fragmented community (Dundee, Glasgow, Edinburgh) and to address the lack of serial entrepreneurs, those who make a million or two when they exit successful companies but then stop taking risks (the difference in California is those entrepreneurs want to do it again and again).

Enhanced public sector co-investment support, better marketing of Scotland as a place for external investors to make good investment returns, more VC firms based in the central belt, an active inward investment target for Scottish Enterprise and the extension of current tax breaks to encourage larger-scale high-risk investment are just a few more potential solutions suggested by Paul Atkinson of Par Equity.

Atkinson says there is still a shortage of VC funds in the 1m-3m bracket to address early-stage growth opportunities. The Par Equity Innovation Fund is about to start making its first investments, but VCs and angels need to work more closely together.

"We also need to become better at engaging successful entrepreneurs to help early-stage companies," says Atkinson, "particularly with regard to their business model and go-to-market strategy."

Scotland has an unparalleled global reputation for excellence across the board in life sciences, informatics and computer science. The volume might be relatively small but the impact is enormous. And the potential even more so.