In Investment, Opinion

There is a new lean startup community forming in Scotland, following the principles captured in by Eric Ries in his book The Lean Startup.  Typically lean companies develop web applications, hosted in the cloud and usually with strong social components.  They can often start to test a “minimum viable product” with customers after only a few months development, and are bootstrapped by the founders.  I think of companies following this pattern as web-tech – calling them “lean” is confusing  since principles can be applied to business of many types.

The needs of web-tech companies are very different from the startups that dominate the portfolios of Scottish angel groups and the support of Scottish Enterprise.  Currently supported companies are traditionally high-tech, bio-tech or med-tech, and need to spend months or years and hundreds of thousands of pounds to get to a working prototype and even more to get to market.  They have protectable IP (often from Universities) and there is an established pipeline of support through universities, RSE Enterprise Fellowships, SMART, Investor Ready, HGSU and other initiatives.  We have a number of excellent angel groups that dominate the startup investment market and understand this model well.

Right now I am seeing a lot of energy and activity in the lean/web-tech space – perhaps most recently exemplified by the Turing Festival – but I fear that this energy is being blocked by the immaturity of the ecosystem supporting companies of this type.  Are we in danger of putting these beautiful fireworks in a steel box and stifling them?

In many respects, my current business model in supporting startups is typical of this problem.  My work is mostly with high-tech startups and is funded by the schemes mentioned above (SMART, HGSU, Investor Ready) and a change of model would be required for me to get involved in the lean web-tech community.

So what might this new ecosystem look like?

At the Turing Festival, experienced entrepreneur and Silicon Valley VC Brendan Richardson presented his view of what a lean web-tech community could look like.

“An ecosystem can be built in Scotland to create sixty plus web-tech companies a year and within three to four years you guys can have three companies with billion pound exits.  That idea might sound fantastical, but Boulder [Colorado] has something equally amazing with one hundred thousand people.”.

That’s called thinking big.  He cites Paul Graham’s three necessary ingredients for a flourishing ecosystem:

  • Nerds bringing the technological expertise and entrepreneurial spirit
  • Rich People who can invest capital
  • A place people want to live which helps to bring together the people needed for the ecosystem to flourish

Scotland, and perhaps Edinburgh in particular, can certainly provide these.  Brendan posits however that the most important factor is Attitude – which he characterises as:

  • Violent optimisim – the belief that tomorrow will inevitably be better than today
  • Culture that Embraces Diversity in thought, backgrounds, enthicity and age – particularly youth.
  • Contrarian thinking – true contrarians look dangerous but just inside the circle of radical thinkers lie the entrepreneurs creating disruptive innovation
  • Meritocracy where ability is more important than your history and where you are from
  • Understand Risk and Reward – which means there will be “failure” and it must be embraced
  • Take a LOT of shots on goal to increase the chances of success

The system that works so well for high-tech startups is geared up to a relatively small number of large investments, and these investments only come after public money (typically SMART) has started to de-risk the process.  The money and time needed to prove the companies is significant so investors tend to favour companies in sectors they know, following established patterns.  These seldom exhibit contrarian thinking, and violent optimism tends to be met with violent cynicism in a clash that is destructive for both parties.  The ecosystem we have to support high-tech (and bio-tech, med-tech) is fundamentally different from that needed for web-tech companies.

To generate the sixty startups, and the resulting billion pound exits, I see one key need that would fundamentally change the landscape, and it is a new type of investor or invesment.  I believe that everything else – the support, mentors, incubators, events and even some of the necessary attitudes – would be motivated by the presence of lean web-tech savvy investment.

What would the ideal investment culture for web-tech look like?  What environment could help to build the next Instagram in Scotland?  I think such investors might look this:

  • Small Deals with Low Overhead – Investments of £50k or less can make a huge difference to a lean startup, but this must be done without most of the money going to lawyers!
  • Embracing failure as inevitable for many companies, and recycling the experience of “failed” entrepreneurs into new companies.
  • VC Friendly.  To scale a company for a £1bn exit will need significant VC invesment.  The terms of initial deals should recognise this and where instruments like EIS / SEIS are used to improve tax efficiency this should not be at the expense of allowing VC funding later.

While these are my views on the key attributes, they are largely borrowed from others.  There are already programmes in London that look a bit like this.  SeedCamp invests €50k in return for an 8-10% stake with “take it or leave it” legals.  They combine this with an incubation and mentoring program to enhance the chances of the companies they take on (Carlos Espinal is a partner at SeedCamp and also spoke at the Turing Festival).

At the moment, when I meet web-tech startups I find myself encouraging them to look South, to SeedCamp, SpringBoard and others.  I would love to be able to direct them towards programmes in Scotland, but right now there really aren’t any.  The example of Boulder Colorado cited by Brendan Richardson suggests we are big enough and have many of the right ingredients to have a home-grown lean web-tech ecosystem, so why don’t we?

All too often I meet entrepreneurs who bemoan the fact that our Angel groups “just don’t get it”, but I don’t think that elsewhere in the world the seed-stage investment in web-tech companies is coming from groups like our angels.  The investment is coming from a new generation of cashed-out entrepreneurs, it is coming from new funds set up specifically for the purpose.  The right question is not “how do we educate our angels” but rather “how do we create the new investment groups to support this movement”.

Since the Turing festival this has been a topic of conversation in a number of mailing lists, LinkedIn groups, meetups, coffee shops and bars, and I think change is coming.  I know one or two individual angels who have already made investments in lean companies who are now having conversations about building a “SeedCamp for Scotland”.  The conversation was conspicuously absent from the Young Company Finance conference last week, but given the audience from the current investment community perhaps this is not surprising.

Some at Turing called for more public sector and Scottish Enterprise support for web-tech companies.  In principle I wholeheartedly agree, but in reality the public sector tends to be slow moving and is likely to follow rather than lead.

I believe that we have a limited window of opportunity to build a lean web-tech ecosystem in Scotland.  The time is ripe with plenty of examples for us to build on, but if we leave it too long others will overtake us and we will become irrelevant.  A generation of Scottish entrepreneurs will leave to London, Austin, Boston, Boulder, Silicon Valley and other destinations where the climate is more favourable, and when they make their billion pound exits they are likely to remain in those communities.  We will lose their energy, knowledge, enthusiasm and ability to invest in the next generation and beyond.

I wish I was a cashed-out entrepreneur and I was able to support this movement financially (maybe one day) but for now have to settle for contributing to this emerging community in other ways.  I will just have to continue to watch developments with interest, and help out web-tech companies where I can.

Showing 12 comments
  • Scott Torrance (@scottorrance)
    Reply

    Great post as always Ian, you have done well to capture the mood of the Turing festival and the discussions that have followed.

    I couldn’t agree with Brendan about the mindset being a huge problem-not just in start-ups.

    ‘Web-based start-ups’ in Scotland have to be careful not to get into a victim mentality and start to play a part in their own rescue. Maybe we need to look at the problem from a whole different angle rather than looking to copy what’s been working elsewhere?

    If I remember correctly Brendan suggested it would take a minimum of 6 people with a long-term view to bring about the bit gauntlet he laid down, do you see these people stepping up to the mark and if not where do you see them coming from?

  • Anne Johnson
    Reply

    Paul Graham’s requirements are useful, and your description of the investment profile is accurate. In addition, Boulder had David Cohen, doing this full time, backed by Foundry Group, who saw the long term opportunity for them in growing more investment opportunities of this type, first in Boulder and then elsewhere in the US. Note that Silicon Valley Bank are helping them with the $100,000 convertible note portion of the Techstars program; SVB now have a licensed bank in London, and are building their presence in Ireland. They’d be a great partner to have in Scotland too. Techstars have partnered with the Kaufman Foundation. They don’t have any government involvement, although Brad Feld lobbies for a better Startup Visa arrangement for entrepreneurs moving to the US.

    Edinburgh needs a person like David, and a group like Foundry.

    • Scott Torrance (@scottorrance)
      Reply

      Thanks for the background info on SV Anne, very interesting indeed. I know Techcube in Edinburgh had been talking of building strong links with one of the established accelerator programs in the States but I am not sure how things are progressing there.

      The question is, who is going to step up to the mark???

  • Hugh Anderson (@hughforth)
    Reply

    Nice post, Ian. I think it is an excellent assessment of the challenges created by the new form of start-up opportunity – “web-tech” as you call it. From all I observe, I would say that we do have the necessary component parts (principally brains, capital and desire). If I can add a few sticks to the fire, I would suggest the following as potential component parts to help make it happen:
    Firstly, input and direction of new capital is needed, possibly in the form that Brendan suggests, and ideally supported by public co-investment or an organisation like SVB as Anne suggests;
    Secondly, some practical infrastructure around “engaging the entire entrepreneurial stack” as Brendan puts it; and
    Thirdly, in the early days of this, I see a role for some quite material engagement with experienced people who have been there before (the Brad Feld/David Cohens of the world). To realise the latent potential, it makes sense to network with guys who have been through it, and beyond just setting up the ecosystem, but also picking the winners, educating the community and advising/mentoring specific opportunities.

  • Reply

    As a violent optimist, I agree completely. We really should stop pumping money exclusively at academics, though, since their job is not wealth creation and their culture treats all failure as irrepairable. Bear in mind too that Silicon Valley occurred only after several decades of bottomless US govt. spending on defence projects, most of which were ultimately scrapped.

  • Dave Hilditch
    Reply

    The Turing festival was very optimistic. I was impressed at the level of entrepreneurs there and the enthusiasm everyone had but I fear there isn’t a suitable ‘hub’ for this energy to continue growing around.

    Any ideas?

  • Ian Webster
    Reply

    Been meaning for a while to comment on this Ian. Fantastic post. We’re ‘leaning’ an (internal) startup right now, and my investors said in moving forward that the thing they liked most was the amount we would learn by applying these principles in practice. Given there is probably some similarity in age etc between our board and the typical angel, it’s a shame to hear that the lean principles are not always getting a fair hearing – maybe a need for an elevator pitch on why lean is good for the investors!

    • Ian Stevenson
      Reply

      Thanks for the comment Ian. I think that our angels love the principle of lean, it’s more that web-tech and social media are outside their areas of interest!

  • Fiona
    Reply

    This is a great discussion! At SIE (Scottish Institute for Enterprise) we encourage lean thinking in our student entrepreneurs and I would love to get involved in any future actions around this subject – lets go do!

  • Jules
    Reply

    Hi Ian, I was wondering, 3 years later… what do you think is the current state of Edingurgh (I am en entrepreneur considering relocation) as a location for startup, nowdays?

    • Ian Stevenson
      Reply

      Hi Jules – thanks for getting in touch.

      Things have certainly moved on – I wouldn’t write this in today’s climate, although some of the structural challenges are still there.

      There are more digitally savvy investors, and CodeBase has created a fantastic community of lean startups. “Unicorns” in the form of FanDuel and SkyScanner have helped raise the profile of online business too. Scottish Enterprise and Scottish EDGE provide great opportunities for for financial and practical support, and of course Edinburgh is still a great city.

      The flip side is that I think there are still a LOT more web-tech investors and incubation opportunities in London, and recruitment of talent is getting harder with Amazon, FanDuel and SkyScanner hiring so many people!

      I think Edinburgh is a great place to start a business of almost any sort, and if you’re shopping around I guess the key is to figure our what you are looking for in a location!

      Ian

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