Thoughts and Observations from a year in the Scottish Startup scene
I have been enjoying the sunshine this week and looking forward to heading to Majorca for my hols next Saturday. This will also mark a year since I left my previous firm and started looking for Startups in Scotland. I still feel like a bit of a newcomer and there is a ton of great things happening across the ecosystem so it is hard to keep up. So I offer a few thoughts and conclusions very tentatively….
First and foremost, there is a fantastic level of energy, innovation and freshness. There are lots of great companies with inspiring founders, strong teams, viable ideas and the passion to make things happen. I have had so many good meetings with people that just demand to be heard and I have seen many of these businesses make great progress even in the short time I have been around. At recent events like EIE, Opportunity Knocks and the Scottish Edge Awards this message has been emphatically driven home by the quality of opportunities being pitched. I saw it again last week as a judge at the Scottish Digital Technology Awards. I have tended to focus on the tech companies, especially those with a mobile aspect but there are also great Startups in green energy, life sciences, manufacturing, services, health and many other sectors.
The seeds of a business renaissance have clearly been sown. The initial fertiliser to feed growth is also largely in place. Very early stage seed funding flows through universities and two very active business incubator schemes, ESpark and Codebase, which attract both public and private funding. There is also a thriving angel community with many active syndicates offering slightly different focus and a fair number of individuals also joining in. For amounts between £100,000 and £1 million plenty of options exist. These funds are supported from the public purse in two ways. The UK’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer generous tax incentive. Scottish Enterprise provides a range of grants and through the Scottish Investment Bank (SIB) matches monies raised by those angel syndicates which are co-investment partners.
What is needed to get from these early shoots to a flourishing ecosystem? Firstly, I think it needs to be one ecosystem. Glasgow, Edinburgh, Aberdeen and Dundee do not have the muscle or scale to be individual hubs. Scotland has its own identity, we can offer incredible lifestyle options in the Highlands and Islands as well as vibrant cities and great culture so lets operate as one Scottish hub. I know from personal experience that those already in the ecosystem are open, warm and welcoming so lets work together to grow. This might also allow us to harness the output of our world class universities more effectively, something that is only just beginning to happen right now.
We also need to harness the knowledge, experience and networks of the wider community. Angels are good at providing finance and there are some great mentors out there but nowhere near enough. It would be great if we could create a forum where the expertise and connections of the whole community could be accessed by Startups. Ideally, we should cast the net as wide as possible including both those in Scotland who are not currently involved, usually because they don’t have the resources to invest, and the global expat community of successful Scots.
The rest is harder. I was brought up to believe that Scots were people who went out into the world and punched above their weight. I am completely convinced that we have the talent and passion to do this again but we seem to have lost something. I have heard people talk about lack of money, shortage of ambition and so on but these are not quite right. Whatever happens on 18 September, we need to get our global mojo back and then everyone else watch out!
The Scottish EDGE Awards Round 4 Final
One of the stars of the Golden Age of Hollywood, the great Bette Davis, once said "to be given a chance to create, is the meat and potatoes of life. The money is the gravy.” The finals of round 4 of the Scottish Edge Awards which took place on Monday 16 June at RBS HQ in Gogarburn were a full day of excellent meat and potatoes followed by some well deserved gravy in the evening.
Scottish EDGE (Encouraging Dynamic Growth Entrepreneurs) is a competition to win up to £50,000 of funding to help businesses grow, create employment and export their products outside of Scotland. By finals day, over 200 entries have been whittled down to thirty through an exhaustive process of desktop review and panel interviews. The selected 30 pitch on the day and face challenging questions from a heavyweight panel of five business leaders. This is where the basic fare comes in. It is a pretty tiring day to be in the audience and must be exhausting for the judges.
This is the first time I have attended. The money and recognition are obviously important to all the businesses so they are well prepared and the quality of pitches was very high. Being the final group, the underlying businesses are also strong. To make it more difficult, the variety was quite extraordinary covering services, agriculture, manufacturing, food & drink, software, fashion to name but a few. Everyone who came on stage seemed to have a genuinely stand out and innovative idea. Comparing these different propositions must have been extremely tough. Keeping up a constant level of interest and energy for the whole process is even more important. I know from similar experiences that it is essential to give the same attention to the last pitch as to the first. The schedulers did their best by putting an especially high energy pitch last so maybe that helped!
This is the mince and tatties of the event. The ideas are inspiring and the people were brilliant. Thirty pitches in succession with forensic challenge on growth and investment plans still feels like a working day though. EDGE is not razzmatazz. It is a tribute to graft, focus and determination.
In the evening though 15 companies were awarded funding. The whole atmosphere was different. Blood and sweat was replaced with excitement and gratitude. Chris Van Der Kuyl, chairman of the judges, handed out the trophies and Gordon Merrylees of RBS reminded the audience why they were so deserving. It would be easy to get picky and mention other companies who deserved the money instead. A strong case could easily have been made for any of the companies that pitched and I’m sure the judges felt the same. Tough choices.
The gravy was also accompanied the next best thing to a glass of fizz. For the first time, there were also Young EDGE awards for businesses run by under 25s. This was part of a separate process but the winners were at the same ceremony and another great bundle of ideas and passion.
Scottish EDGE is a day for the entrepreneurs and their businesses. Being in the audience was very different from an event like Opportunity Knocks where entertaining the attendees is part of the script. In the end it repayed the time and attention. I learned about some great business and met some fantastic people. I also know it works. One of my investments Mallzee won an award in round 2 about a year ago and it was instrumental in helping them get into the market and move the business from startup to first round of Angel funding. The CEO Cally Russell gave a great talk about the benefits as part of the awards ceremony. EDGE does not just provide money. Recognition, advice from the panels at various stages and networks of willing helpers all contribute to the future success of those who enter. I am sure the £660,000 awarded this time round will make a huge difference too.
You can find out about all the Scottish EDGE finalists and award winners on the Scottish Enterprise website and if you have a growing business look out for round 5 which will open to entries in September.
How Should Startups Approach Corporations?
Canon has just announced the $150 million acquisition of Milestone Systems, a Danish software company specialising in video surveillance. In the same week, HP used its annual Discover event to trumpet Helion, a portfolio of Cloud products and services aimed at taking on Amazon’s market leading cloud offerings. Another story which caught the eye was an analysis of IBM’s network of support for Startups in Africa which now encompasses Smartcamps in four cities. All of these stories have a common denominator. The tech industry faces immense disruption and established players are trying desperately to find ways to adapt.
Startups have a vital role to play in this process. Of course, they are the prime source of disruption but they are also at the centre of change within the tech industry. Acquisitions, acqui-hires, partnerships and incubators are all strategies adopted in response to the threat of the mobile and digital revolution. This means the big, slow moving giants of the industry are not just easy targets for Startup founders. They are also a source of funding, market access and a potentially lucrative exit route for investors and founders.
How can Startups take advantage of these opportunities? Begin at the end. Acquisition by an established player - a trade sale in the jargon - is by far the most likely way to a lucrative exit for Startup investors. Once you have a clear idea of your value proposition, it will often be quite straightforward to identify a small number of companies which are likely buyers even though the exit may be five years or more away. These need not be restricted to the tech industry. Mobile and digital technologies are disrupting business models across the board. Although in many industries, the market leaders are less aware of the threat and much slower to adapt. Nonetheless, retail, advertising, health, financial services and many others may be a good source of possible buyers.
Look into the areas of investment and development that companies are pursuing. Often this will be publicly announced. Even if not, a quick glance at the type of investments made in recent years should give plenty of clues. I spoke to a couple of senior executives from large corporates recently and security, networks, cloud, analytics and big data all came up as areas of focus.
If there is a clear exit strategy, the next question is how to start building a relationship with the target acquirer. Incubators or similar schemes to help Startups are a great place to look. I know of at least three Startups that have been through an initial bootcamp funded by Microsoft in Scotland or Germany and all continue to receive help and attention from the company. Even if the incubator option is not available, keep an eye on the partner programmes that large corporations run. These can be a great route to market and therefore a great growth accelerator. They are also one of the prime sources of acquisition. Many corporates rely on recommendations from product teams to identify partners that would make suitable acquisition targets.
Even if none of these routes is available, just enquiring and meeting with executives from potential future buyers will help build valuable relationships. The Startup ecosystem is diverse and being noticed is a key part of success. How can Startups best take advantage of the disruption they are causing? I would love to hear your thoughts in the comment section below.
How Metrics Damage Teamwork and Morale....
“There’s no I in team” is one of the most hackneyed, happy clappy management cliches. It has a less well known but equally tired companion “All of team is in measurement but it is completely screwed up.”
Let me try to explain. A few years ago the firm I worked for elected a new leader. Less than a year later he brought in an outsider to run the business unit I worked in. Both leaders were more charismatic and inspiring than their predecessors. Both men have gone on to achieve great things, in many ways transforming their businesses and achieving profitability and growth in very difficult economic circumstances. Many of their priorities were similar and one common area was an emphasis on greater collaboration, hunting in packs as it is sometimes called, to leverage the power of the whole organisation. Both failed to make real progress in this area.
There are many reasons for this but one is the use of performance metrics. In my business, the previous boss had always believed that performance should be rewarded on the basis of team performance. He had never tried to measure it. At the end of each year, we would simply have a conversation. How did you do? was never the first question. Why did this account over perform? How can this group do better? were more typical. At the end, we would look at my contribution to those team achievements or struggles and reach a conclusion.
The new man and his leadership group took a different approach. He announced that collective rather than individual performance would be the new philosophy, perhaps without realising that it was actually the old approach as well. His management group backed this up with a series of measures in every arena. Revenue, profitability, utilisation, investment, compliance, relationship strength and many more were measured and reported weekly. In the face of consistently strong performance, some landmark new client engagements and the acquisition of brilliant new talent, one of the most important measures of morale went into reverse. Staff satisfaction and engagement scores dropped every six months and after a few years, employee turnover started to rise inexorably.
Why did this happen and how can Startups learn from this experience? The answers are complex and as yet little understood. Essentially this is a human problem. If you measure something and translate that into a message for a machine, the outcome will be entirely predictable. People are different. The messages that individuals and groups take from any given metric are impossible to predict. I love the Amazon “two pizza” rule which says a team can be no larger than can be fed with two pizzas. But even this with say a dozen people has many different moving parts. It is not just 12 individuals and one team. Every group of two, three or more people has its own dynamic with within the team. All have a different view of the team leader (if there is one). The law of unintended consequences basically runs riot in this environment. One of the wrongest and therefore most dangerous sayings in the dictionary of tired cliches is “What gets measured gets done.”
Anyone who follows this blog may be confused, didn’t we say a few weeks ago that measurement was really important to Startups? True and it is but it can also cause problems. Teamwork is also vital in the intense, close knit environment of a Startup. There is a simple answer. No internal measures. None. Nil. Nada. Zip. All measures should be directly linked to the customer. Winning them, keeping them happy, delivering what they need. No matter how precise, resist the temptation to measure internal performance. Forget attendance, productivity, quality and everything else. Truthfully, if I was running a large business again, I would be sorely tempted to do the same thing. Especially if it was a service business.
Perhaps I am too negative. We have the opportunity to develop metrics that could not have been imagined a few years ago. Which measures have been used successfully to build teams and drive business change? Where have you seen measurement work effectively? I would love to read your comments.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.