VC Prozac & thoughts on the Scottish entrepreneurial ecosystem

An eventful 24 hours in Edinburgh at the excellent Engage Invest Exploit and Techcrunch Edinburgh yesterday. Some lessons learned, and some reflections on the Scottish Entrepreneurial ecosystem.

Love There is an incredible amount of support, energy and enthusiasm for entrepreneurs and entrepreneurship in Scotland. It was a delight to meet so many infectiously enthusiastic people who want to get on, or who are getting on, and doing stuff. People are founding companies, setting up networks and just getting on and getting stuff done. Invigorating. Energising. Exciting.

Money Investors take you seriously – up to a point. To pull organisations up to Scotland, which has not traditionally been seen as a hot bed of investment opportunities (more of which later) shows how far the ecosystem has developed in the past five years. Organisations represented from south of the border included VC investors and corporates such as Amadeus, Balderton, Index, Silicon Valley Bank, Google, BSkyB, as well as early stage investors including NESTA, IQ Capital, 4iP, Cambridge Angels.

To get their attention in the long term however, you need to be able to show a constant flow of great companies springing up and you need to be able to get on a plane or a train and get down to London which is where they all hang out. (I say that as someone who lives in Cambridge, a whole 45 minutes from central London). Very few VCs make the journey on a regular basis – why should they? If you are not making the effort to meet them, there are plenty of other people who will.

There is a gulf of difference between desire for capital and deserve for capital. Everyone in their right mind desires capital (at the right price). Investors, and professional investors in particular, get to see a lot of opportunities.None of them lack dealflow. Most of them lack a flow of deals that they feel they can do. It is easy to say as someone did to me, “Well if I was in Silicon Valley, I would get funding in a week.” Guess what, go to the Valley if it is that simple. investors want to see committed, talented people chasing big ideas.

One person I spoke to claimed to have a world class team, the company had been going for three years but when it came down to it, they were looking for £30,000 of investment to match £70,000 of public funding. This is not a credible opportunity for an institutional investor and frankly would be hard for an angel to make sense of. If this really was a world class team and had committed people, and they didn’t have £30,000 available what on earth happened?

If you want to raise VC funding, you need an idea that has the potential to be really, really, really big.

Greed Gordon Gekko, played in the film Wall Street by Catherine Zeta Jones’ great grandfather, famously said, ‘Greed is good’. I disagree but in a funny kind of way I would have really liked to see some people who wanted to make tons of money from their projects. Investors typically invest to make more money (certainly institutional ones). They look to invest in businesses run by smart people who understand how to go after big, growing markets and are willing to sacrifice almost everything and anything to get to their goal. These are not always the nicest people around but…

A few great companies does not an ecosystem make. Gareth Williams at Skyscanner was hugely impressive and maintained quite rightly that you could build a world class company in Scotland. He is.

I totally agree that you can but this is different to there being the right conditions to build lots of them at the same time. If there were forty or fifty companies in Edinburgh of the size of Skyscanner, the competition for the right people would be huge,  salaries would increase and you would start to lose some of the advantages that being located in Edinburgh gives you. In my home town of Cambridge, one very successful company, Redgate Software has upset other software companies by recruiting in the words on one prominent angel investor, ‘too aggressively’. (Redgate has hired an ice cream van to drive around science parks giving away free Redgate ice cream to potential software hires, offers free iPads to developers that have an interview amongst other things). They have to hustle in the market for people in a way that they didn’t when they were smaller as they are operating in an environment where there is huge pressure on talent.

The reality is there are very few places in the UK that have the critical mass of the right ingredients to support an effective ecosystem. Cambridge is often cited as being a shining example of an effective cluster but the sneaky truth is that a lot of startups in Cambridge end up going to London because they can’t get all the talent they need locally. (Or some of them can but there is not enough brilliant people for all the ideas).

On another scale, this is one of the reasons that Silicon Valley (actually a fairly wide area that contains a number of sub clusters of activity), is, and will remain, the powerhouse of innovation that it is. It has momentum, it attracts great people from all over the world – including Scotland, Cambridge and London (and China, Hungary, Russia, India, Spain, Norway, Brazil etc etc etc). It attracts investors who just want to go there to hear what other people in the valley are thinking even if they are not going to make any investments there. It has the infrastructure to support a vast startup ecosystem and other places don’t have the scale.

You don’t need no education – except you do, just a different kind. I don’t agree with Professor Anne Glover’s thesis that there should be more private sector investment in Scottish academic institutions as a remedy to commercialising science (though as science minister I would be surprised to hear that she would say anything else). The measures of academia have almost no direct effect on the commercial success downstream. Patents are an absurd measure of the commercial potential of research activity and the discussions around IP just seemed to show how far academia has to move to be of long term value to the commercial world. I don’t think we necessarily need more university courses in entrepreneurship.

Anyone in academia that wants to learn how to set up a business should – set up a business – even a market stall. Even if you fail to last a year, you will have learned more in that time than you ever could in classes. (And there is tonnes of public money available to support you in Scotland so go and work out how to get some of that).

We got involved in running a Silicon Valley comes to Cambridge event last year. There were several things in this that really made me think. Most memorably for me, the incredibly earnest MBA who asked Biz Stone, founder of Twitter what he looked for in the MBAs that he hired. His response was direct as he sad he would never hire an MBA into a start up. They have been taught to think inside a box and until you get to the sort of size – 70+ people, when the organisation can absorb them without doing too much damage, then you shouldn’t. ‘Running a start up is like riding a roller-coaster you go up and down and then you throw up.’ MBAs are not, in his opinion, good passengers on that journey.

In my view, the single best thing that can be done to support the commercialisation of science in academia is for academic institutions to get out of the way. Stop obsessing about IP, stop obsessing about patents and supporting (when you mean controlling) spin outs.

This is one of the reasons that I as so hugely impressed by the efforts of Informatics Ventures on Wednesday. They have taken a big risk with EIE to put your entrepreneurial ecosystem on the map. Investors came and saw stuff, much of it early. Lots of it exciting. Very little of it was the finished article but they got people there and Techcrunch and the indefatigable Mike Butcher got people talking, got them educated and got some conversations started. The kimono was opened and it did not feel to me like there was a huge amount of control being exercised. Great news. And ultimately, if you have a startup, it will succeed on the merits of the core team of people doing it, not on the quality of the support that you are given by tech transfer departments. That does not mean that tech transfer is irrelevant even if tech transfer departments often focus on the wrong things in the opinion of investors.

Leave depressed VCs alone. While I was writing my witterings, I picked up on this great post by Sam at Techmeetup who I was lucky to meet yesterday. I know the last session was a bit down about the opportunities that VCs see in Scotland. Talking VCs out of a depression isn’t going to work. They need Venture Prozac. The most effective medicine a VC can have is to see people making money.

The VCs that are successful work incredibly hard. Unbelievably hard. They are away from home often 3/4 days a week working to spot opportunities and support their portfolio companies. The reason that limited partners (the investors in VC funds) really like working with funds like Pentech and Scottish Equity Partners is they work hard and they travel for deals. Eddie is absolutely right. He can do deals across the UK and Europe and he will invest where he sees the greatest likelihood of return on his money.

As entrepreneurs in Edinburgh, you are not competing to be the biggest startup in Leith, or Edinburgh or Scotland. The conversation around Edinburgh, Glasgow, Stirling and Dundee being different silos of activity is frankly risible. You are all in it together. You are competing in a global market. You need to get out there and learn. When Scottish companies start to make massive amounts for money for their investors on a regular basis, you will find that Eddie’s mood has changed. It is not his responsibility to make it happen although I do believe it is his responsibility to make it clear under what conditions he would be happier which I think he has.

Conclusion. Visiting Scotland was an energising experience and I left feeling hugely optimistic about the emerging ecosystem. There is a long way to go but it is incredible to have been able to observe the changes in entrepreneurial culture and outlook over the past ten years. My guess is that the next ten years will see even more significant changes as the ecosystem develops, entrepreneurs become more confident and more and more people make a success of their businesses, with or without venture funding. The work that Informatics Ventures has done, (Andrew Mitchell in particular) has been awesome in attracting attention and capital.

Organisations like Techmeetup and GirlgeekScotland and Startupcafe do great stuff.

2010 is a very good time to be a startup in Scotland. I hope that everyone can find ways to work together to make sure that it gets better every year. One way to make that happen is to engage with the world south of the border. I hope to get back soon. Thanks for having me.