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.

Another guest post from Michael Magnay, of Kleinwort Benson’s Private Wealth Management team who considers some of the likely implications of the new government on the financial markets and entrepreneurs.

The Good: The Election Result

5 days ago, I wrote that the electorate’s response to the election campaign was essentially a defeat for all the major parties. The politicians have turned that around in a very short space of time, such that this morning , most of them are feeling distinctly chirpy. For the Conservatives and Lib Democrats, the proximity to real power to govern the country has been sufficiently intoxicating to enable them both to make the compromises necessary. Thus the Conservatives end their longest period out of office since the nineteenth century, and the Liberals regain a place in government for the first time since 1945 – their MPs are very happy. The faultlines in this coalition are likely, in the long term, to be found in attitudes to Europe – it is not clear though just how firmly allied to the views of the base of his party, Mr Cameron really is on these issues. Even Labour MPs , one suspects are fairly happy – their much derided leader has resigned and very nobly (but deservedly) asserted full personal responsibility for their defeat, leaving none of the challengers for the empty post with anything to apologise for internally. In many ways too, this is likely to prove to be a good election to lose, with the prospect of the new government being forced to make unpopular spending cuts and tax increases – with their two main rivals in a formal coalition, Labour will be able to pin the same criticisms of Opposition onto both simultaneously.

For financial markets, given the electorate’s decision, this is clearly the best outcome, giving the prospect of a stable government with a clear majority in Parliament and a commitment to deal with the very pressing budget deficit issue. For GBP and the gilt markets the political news is positive. For equity markets though, a word of caution may be appropriate – it is clear that a “conventional” economic mindset will be in the Chancellor’s mind, in which sorting out the government’s finances will take a higher priority than delivering economic growth at least for the next couple of years – these will be difficulty times for the UK economy.

In this respect , the UK will be adopting similar economic policies to the rest of Europe – significant fiscal constraint offset by a very easy monetary policy. Interest rates in the UK and Europe are now likely to stay at current very low levels for several years to come, creating problems for conservative, income-needy investors, whilst economic growth is likely to remain sluggish.

The Bad: The European Position

Europe, too has seen its share of history over the weekend. The establishment of what is effectively a bailout fund and the direct intervention of the ECB in government bond markets, if not actually illegal, are clearly in flagrant breach of the spirit of the Maastricht treaty which established European Monetary Union. A new monetary infrastructure for EMU will now start to be developed, although the chances of this becoming enshrined in a formal new Treaty requiring ratification seem unlikely for now. For Germany this will pose considerable political problems – last weekend they were forced to choose between solidarity with their EMU partners and the stability of their currency – their leaders chose solidarity, but the opinion polls in Germany show that a huge majority would have preferred the choice to have gone the other way , and that no bailout money should be made available to countries which cannot afford to service their debts, and those countries pushed out of the club which they were never expected to join for precisely the reasons we have just witnessed.

These are momentous days in European history, but I fear they are not the precursor to a new period of great prosperity; rather, sadly, they are the precursor to a period of falling living standards.

The Ugly: Capital Gains Tax

It appears that capital gains for non-business assets will be increased from the current level of 18% to either 40% or 50%. Under John Major’s last government the rate of CGT was aligned with the top rate of income tax.

(This chart is taken from a previous post on this subject. You can read more here and here).

We may see a budget on 24th June. Historically tax rises have only taken effect from the start of any given tax year, this may be the exception that proves the rule.

The Mansion Tax has been dropped.

Michael can be contacted by phone at: +44 (0) 1223 454 561

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If you are the founder or CEO of a growth business and you want to know how to get into a position where you are faced with the problems of paying Capital Gains Tax, come along to our BLN Growth Forum on 15th July. Hear what these people have to say about how they grew their organisations:

• Tudor Brown, founder & President of ARM Holdings
• Mark Zaleski, as CEO, led QXL Ricardo to $1.1 billion exit, CEO/Chairman of DailyMotion
• Michael Ross, visionary founding CEO of Figleaves.com, co-founder of eCommera
• Terry Burt, founder & CEO of 2e2 one of the fastest growing IT service providers in Europe with 1,500+ employees
• Ted Shelton, CEO, The Conversation Group
• David Harbord, CEO of Warehouse Express
• Mark Sebba, CEO, Net a Porter
• Richard Longdon, CEO, Aveva
• Martin Leuw, CEO of IRIS, has led its growth from revenues of £9m to over £130m p.a.
• Hermann Hauser, Amadeus Capital Partners, big thinking founding investor in 7 $billion companies
• David Soskin, Chair of MySupermarket.co.uk, CheapFlights.com and Swapit.co.uk
• Head of Corporate Development, AVG
• Henri Winand, CEO, Intelligent Energy
• Russell Buckley, CEO EMEA, VP Alliances, AdMob, Sold to Google in 2009 for $750 million
• Al Gosling, CEO and Founder, The Extreme Group

The BLN Growth Forum is supported by BDO and Ideaspace.

With a new round of ash cloud inspired travel disruptions over the weekend, and some flights to be caught this week, I wanted to try to find a place where you could find out which airports are affected from the volcano fall out. With more possible volcanic activity to come, I assumed there would be a good site that gave me some up to date information bout airport closures, flight delays and forecasts.

USELESS

Easyjet was my first port of call, stunningly useless so I tried the Met Office Web site.

The Met Office site was equally useless as far as travel was concerned. Their most ‘timely advice’ was over 27 hours old but they did note that all decisions about flight restrictions were made by the Civil Aviation Authority.

At the CAA website, as at 12.30 on Monday 10th May, the most recent information about the ash cloud was released on 5th May and, ‘hope that no restrictions will be necessary.’ They also suggested looking at the NATS site.

USEFUL

The National Air Traffic Service has a brief update on their home page that probably gives the best macro view of what is happening: http://www.nats.co.uk/ Note: This does not include information about individual airports.

The BBC Travel News section has a list of UK airports that are affected including an overview of the types of flights that will be affected – Transatlantic, domestic, Continental etc. Note: In each case, it suggests that you check with your airline before you do anything.

If anyone knows of any other useful sites, please let me know. Meanwhile I am going to Edinburgh tomorrow on the train. Choo choo.

I am not going to tell anyone how to vote but this is interesting information about the effective rates of income tax and capital gains tax.

Remember that capital gains tax is paid when an entrepreneur sells a business.

To have done this, they have had to build something of value, something that has been paying employees who have paid tax and national insurance, corporation tax etc. For anyone to treat capital gains tax and income tax as the same thing is a liability to the economy and has no clue about what drives the economy forward.

If you are an entrepreneur, or care about private enterprise and the future of the economy of this country, this is an important distinction.

This is the end of this non-party political broadcast.

To paraphrase my favourite physicist, Professor Brian Cox, ‘Anyone that thinks Capital Gains Tax is the same as Income Tax – is a Twat’.