Comment: Rise of the start-ups

SCOTTISH entrepreneurs are prepared to take risks to grow their businesses, but they need serious financial backing to go global, finds Dominic Jeff.

A New generation of Scottish entrepreneurs is blazing a trail that is helping transform the country’s reputation for excessive business caution.

Aided by a raft of incubator programmes and support services backed by both the government and private sector, the business birth rate is trickling upwards, and US entrepreneur Eric McAfee was impressed by what he saw at the We Are The Future start-up summit in Edinburgh last week.

With some 400 fledgling firms in attendance, McAfee was delighted to find internet-savvy tech start-ups with the potential to go global – but he warned that they won’t stay in Scotland unless the funding to help them grow is available.

The entrepreneur, who has taken seven companies public and invested in more than 25 firms which have generated profits of more than $100 million (£64m), isn’t talking about the initial funding requirements of small businesses. He believes some of these have the potential to become major earners and employers, but that will take much more investment than that being doled out by angel investors and government schemes.

“Some of the recent successes of entrepreneurial companies in Scotland is driving an interest in smaller, potentially fast-growing companies,” McAfee told Scotland on Sunday.

“Scotland is coming from a place of being risk averse in which potential loss could affect your career or reputation, but there is a group of younger people primarily who are using the internet and software to get excited about how many opportunities they can pursue.”

He said that is causing a change of attitude as fear of risk is overcome by “the excitement of what can be achieved”.

In recent years Scotland’s business birth rate has gradually been catching up with other parts of the UK – in 2012, the country had 40 new business registrations per 10,000 of the adult population in comparison with the UK figure of 52. The figure is based on VAT registrations so may underestimate the true number, but it is still lagging behind the US.

However, McAfee is more excited by the nature of the enterprises coming out of Scotland’s universities in particular.

He said: “You will see some very exciting younger technology companies that rapidly grow employment. Educated younger people, because of the products they make – specifically software products – they leverage the internet and are almost automatically global.

“In Scotland there is a very strong academic feeding ground for those types of company. What increasingly will be needed will be growth capital, not the angel capital that seems to be here, but the capital in the order of £10m to £20m and up that will lead companies to continue growing here instead of being pressured to move elsewhere to get that kind of funding.”

He points out that Scotland’s business angel community has become an effective force for providing early-stage capital and backing to ambitious young firms. Those funding rounds are typically in the order of £1m or £2m.

“The growth of businesses really requires ten to 100 times that in order to scale them rapidly,” McAfee said. “That next layer is where pension funds, endowments, insurance companies and commercial banks all play a vital role. They have to be encouraged to do so and they have to be allowed to do so by the government and not restricted so much that they can’t be effective in that role.”

Given that Scotland is not short of money managers with the capital to invest, he suggests the government needs to encourage them to favour home-based firms, ensuring that the money stays, and multiplies, in the local economy. That may require a higher tolerance of risk but can bring large rewards.

“Are you going to water your neighbour’s field or your own field?” McAfee said. “Whether you are buying currencies of bonds or other conservative instruments, what you are effectively doing is transferring that job creation to a foreign country.”

Instead, he suggests that with natural wealth such as oil, resources could be leveraged so that Scotland becomes a destination for foreign entrepreneurs, rather than the other way around.

“Scotland should be attracting growth companies and entrepreneurship because it has capital, and people,” he said. “A technology business needs capital and people – everything else can be acquired.

“The money is there. You’ve got all the resources. Scotland has a history of innovation and global impact – those two things are what the internet requires of its entrepreneurs. It would be wise to find ways of funding those businesses because otherwise they will get funded somewhere else.”

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