National innovation strategy 2023 to 2033

7. Innovation Investment

The Strategy's second programme of activity is focused on the investment and funding necessary to catalyse economic innovation.

The intention is to collaborate across the public and private sectors to design a system of innovation investment and support that is truly built around the needs Scotland's businesses, ensuring that the right type and level of support is available to help develop their capacity and capability to innovate, no matter what stage of the innovation journey they are on or what part of the country they are in.

'It was hugely important to pull together the thoughts and opinions of a wide range of both public and private sector contributors to the Innovation Strategy.

'It was clear from this that a diversity of investment sources and close involvement of the private sector and close collaboration with the public sector was going to be crucial in delivering the resources required for a vibrant start up scene in Scotland.

'It was also clear that successful organisations should develop an "investor mindset", in making the most of the financial and support resources being provided, in order to navigate and build the growth organisations of the future.'

Paul Atkinson,

Founder Par Equity

Strategic context

Public sector support for business innovation is provided by our enterprise and skills agencies – Scottish Enterprise (SE), Highlands and Islands Enterprise (HIE), South of Scotland Enterprise (SoSE), Skills Development Scotland (SDS) and via our colleges and universities by the Scottish Funding Council (SFC). Commercial and equity investment is provided through the Scottish Enterprise Growth Investments and the Scottish National Investment Bank (the Bank).

Support to help Scottish businesses navigate the landscape to access information, advice and funding is provided by the Business Support Partnership (BSP).

The innovation support landscape in Scotland is complex, including a network of seven sector-focused innovation centres, grants and wider non-financial support for innovation, accumulating to around 90 innovation initiatives across the Scottish Government and the enterprise and skills agencies. This rises to around 500 initiatives when including innovation funds run by other organisations, such as the UK Government, EU, local Government and the third sector.^[18]

There is evidence to suggest that for female founders this investment landscape is even more difficult to navigate. The Scottish Government's Pathways: A New Approach to Women in Entrepreneurship report highlights that there has been a widening gap between female and male-led companies securing institutional investment over the past five years, with female owned teams raising lower sums of money at each funding stage, as well as there being a lack of diversity in the UK-wide investment community itself.

Recommendations from the Pathways Report and the Scottish Technology Ecosystem Review seek to redress this imbalance and facilitate an increase in investment support for female entrepreneurs through addressing particular barriers to women fully utilising their entrepreneurial capabilities.

Through this Innovation Strategy we will complement this work by seeking out ways to identify and ensure there is a growing number of female entrepreneurs operating our innovation priority areas, and that these entrepreneurs are highly visible to the ecosystem and are able to access the right investment support, at the right level and the right time."

Innovation Funding in Scotland 2019/20

Scottish Public Sector Innovation Funding

In 2019/20 Scottish Public Sector Funding for Innovation through our Enterprise Agencies totalled over £430m. It should be noted that this figure includes funding for higher education institutions which, while contributing towards innovation, has broader objectives.

In 2019/20 innovation funding through Scottish Enterprise totalled around £114.8m. Of this the largest proportions of spend were on commercial investments (£76.2m) and R&D grants (£23.5m).

HIE funding during this period totalled £8.28m, of this the majority (£5.03m) was on investment in infrastructure investment, including investments in buildings for R&D intensive businesses.

Of the £310m of SFC fund, the majority comprised their Research Excellence Grant (£236m) and Postgraduate Research Grant (£35.3m). This total also includes funding of £15.85m towards Scotland's Innovation Centres and £13.5m on the University Innovation Fund.

UK Innovation Funding

In 2019, Scotland received £328m in funding from UKRI, This figure includes £49m to organisations based in Scotland through Innovate UK and £279m through the seven disciplinary research councils

International Innovation Funding

During financial year 2019/20 Scottish organisations were awarded around €100m in funding through Horizon 2020, the EU's then research and innovation funding programme and the precursor to the ongoing Horizon Europe programme.

In relation to support of a financial nature, the following breakdown provides an overview of both Scottish and UK public sector funding towards innovation in Scotland for the financial year 2019/20.^[19] This pre-dates the establishment of both SoSE and the Bank.

We recognise that public sector funding of innovation-led businesses is only one of a number of diverse types of investment. While recent data shows the public sector remains the most frequent investor in Scotland, private equity and venture capital was the next most active investor type, participating in 85 Scottish deals in 2021, up 29% on 2020.^[20]

Scotland also stands out as having well-established business angel networks (also described as Business Angel Groups or Syndicates). Angel networks participated in 68 deals in 2021, an increase of 11% on the previous year.

Vision and Opportunity

It is our ambition that through renewing our approach to innovation investment and support, that over the next ten years we become a world leader in our priority areas, that we create jobs and opportunities throughout the country, leverage substantial levels of additional investment, contributing to our objective of making Scotland one of the most innovative small nations in the world.

We will recognise the importance of international collaboration and explore new ways to connect our innovation activities internationally, recognising the vital role international funding has played in developing Scotland's innovation system and aligning with the ambitions of Scotland's Global Capital Investment Plan.

This Strategy will improve and enhance the role of Scotland's public sector in driving and enabling innovation. By making our public sector an anchor customer for innovation we can enable and require the public sector to work together to support growth in our priority areas, support innovation more widely across the economy and to become more innovative in our own approaches.

We will place our priority areas at the heart of our approach, ensuring that over time they are given the appropriate levels of support and investment to enable them to become world-leading. This will require a greater level of focus and ambition.

Actions

4. We will undertake an Innovation Funding Review to be completed by the end of 2023.

It is clear that a substantial number of small innovation funds have been established over time, many of which are trying to achieve common objectives. Through extensive engagement with the business community, as well as stakeholders from across the innovation ecosystem, it is apparent that the current system could be joined up more effectively to maximise the impact of the available funding.

In partnership with our Enterprise Agencies, local government and other public sector bodies we will therefore review public sector funding and the impact it is having, building on the mapping work previously undertaken by the Enterprise and Skills Strategic Board.

The review will focus on increasing alignment of funds, reducing unnecessary duplication and, over time, closing any gaps in the funding landscape. We will take a place-based approach to reviewing the landscape, considering the impact of across the whole of Scotland including its rural communities.

5. We will announce a renewed and consolidated Innovation Investment Programme in early 2024.

This renewed package of support will be aligned to our innovation priorities, ensuring that they are given the appropriate levels of support and investment to enable them to become world-leading. It will establish common service standards, metrics and monitoring activity for businesses engaging with Scotland's Innovation Support services. This will ensure all parts of our innovation system provide a quality service, and fostering collaborative working and knowledge exchange across all areas of Scotland's innovation ecosystem.

We will include clear aims around leveraging additional investment, including working with international partners, supporting our ambitions of a world-leading innovation nation, and foster the creation of jobs and opportunities across the whole country.

Current levels of funding against our priorities are not known due to a lack of standardisation in metrics and monitoring across the funding landscape. The common service standards will ensure that we are able to accurately measure and monitor our levels of investment in these areas going forward.

Our Innovation Investment Programme will include consideration of ring-fencing a proportion of our innovation funding to be invested in the priority clusters identified in this strategy. We will work collaboratively with industry, academia and other parties including the UK Government and its agencies to maximise match-funding opportunities and through our agencies we will facilitate partnerships between industry and academia to collaborate on the big challenges within these priority areas.

As part of this Programme we will seek to take a more a coordinated approach to increasing Scotland's share of UK and EU innovation funds. This includes Innovate UK's funding of £2.4 billion over the next three years with a focus on place-based innovation, and Horizon Europe, the EU's fund of €95.5 billion or more fund for research and innovation which runs until 2027.

We will monitor and report on the impact of the Innovation Investment Programme on an annual basis as part of the Innovation Scorecard.

The Scottish public sector has an opportunity and an obligation to be one of the main customers for Scotland’s most innovative businesses. There are a number of areas including the built environment and health where the Scottish state is the biggest customer and that provides an opportunity to drive new markets and encourage innovation.

We will work across the public sector to look at how we can create more consistency on enabling an outcomes and value based approach to procurement across Scotland in line with our public procurement strategy for Scotland and our progressive framework of procurement legislation and policy, which includes wider issues such as carbon footprint and impact on net zero.

We will look at how we can scale successful assets such as CivTech and adopt these methodologies and frameworks more widely. We will continue to track the Scottish public sector’s levels of spend, including how much of that funding is supporting Scotland’s businesses and our supply chains to inform opportunities for continuous improvement. We will explore opportunities to do more to promote local economic development – and other wellbeing outcomes - through a more resilient and diverse supply chain, reporting progress in our annual procurement reports.

We will work with our partners to further enhance our public sector procurement systems to better promote and enable innovation which will help us create and maintain a world leading innovation ecosystem.

6. We will work with the Bank, SE Growth Investments and other key partners across the public and private sectors to explore the potential to create new and innovative models of investment to support Scottish businesses and clusters to innovate. This includes more traditional SMEs and the broader concept of productive finance (defined as investment that expands and advances growth and productivity e.g. infrastructure, R&D or new equipment).

It is clear from our engagement with businesses that there is a need for greater flexibility in the forms of investment and support available to Scottish firms to invest in innovation. This is especially true of traditional SMEs carrying pandemic-related debt, which limits their ability to secure new loans and where there is little culture or experience of sacrificing equity to raise capital for investment in innovation and growth. There is a need to think more creatively about how we support and capitalise these businesses, potentially through the creation of new and innovative financial instruments, and by the blending of existing tools such as grants and convertible loan notes. This is particularly important in the context of net zero transition where there is significant economic opportunity in supporting SMEs to invest in the innovation necessary to pivot towards supply chain opportunities in areas such as offshore wind.

We will seek to engage closely with private sector partners on this work. In particular, Scotland possesses genuinely world-class capability in the field of long-term asset management; often managing precisely the pools of capital that are best suited to patient investment vehicles of the kind noted. The Scottish industry is therefore ideally placed both to shape and benefit from such initiatives.

The details of this work will be announced as part of the renewed and consolidated Innovation Investment Programme in early 2024.

Case Study – Blue Innovation in the Highlands and Islands

Innovation is central to the future success of Scotland's economy – and just as important to rural areas as it is to our towns and cities. Highlands and Islands Enterprise (HIE) supports business and community growth across a diverse and beautiful region that covers half of the country, yet is home to less than a tenth of the country's population.

HIE's investment and strategic input over six decades have helped grow nationally-significant sectors such as tourism, food and drink and creative industries. At the same time, it has placed the region at the forefront of advances in areas where technological innovation is fundamental, including renewable energy, life sciences and, most recently, the space industry. In each case, the natural capital of land and marine assets has provided opportunities for business investment and growth, creating high-value employment and training opportunities and attracting more people to live, work, study, invest and visit.

A priority area is the blue economy, with Scotland's seas seven times larger than the land area and marine sectors with significant up-scaling and rapid growth potential. The breadth of expertise, weather and oceanographic conditions of the Highlands and Islands combine to offer a unique innovation environment for the development and sustainable growth of sectors as wide-ranging as aquaculture, biotechnology, offshore wind and wave energy.

Marine industries such as these have made a significant contribution to rural and island communities and to Scotland's economy for many years and will continue to do so in future. In Shetland, for example, they accounted for an impressive 19% of the total GVA and 17% of employment. And their significance goes beyond business growth, with marine natural capital providing adaptation opportunities in the face of climate change and creating prosperity and resilience in rural communities.

The Scottish Government also recognises the importance of this area through its Blue Economy Vision and approach, emphasising that innovation, investment in Scottish supply chains, sustainability and international trade will help harness opportunities for the marine sectors.

New technologies and scientific knowledge are critical to inform innovation in the blue economy. Two partners within the University of the Highlands and Islands – the Scottish Association for Marine Science (SAMS) and UHI Shetland – have deployed an innovative device called an imaging flow cytobot (IFCB) in Shetland waters. The first of their type in the UK, the cytobots detect and analyse phytoplankton – microscopic organisms that play an essential role in marine ecosystems.

The instruments were funded through £185,000 from HIE, the Scottish Government's Islands Green Recovery Programme, and £234,000 from the Natural Environment Research Council.

Hailed as a game changer by academics, the IFCB uses novel imaging technology and artificial intelligence to gather and live-stream data on plankton communities that reveals water quality and the overall health of the marine environment. Crucially, this provides an early warning system for the aquaculture industry, allowing proactive husbandry measures to protect stock from naturally occurring harmful algal blooms. It is expected that the datasets will help inform models on the impact of climate change and could inform mitigation adaptive actions.

Aquaculture is a prime example of a blue economy sector where there is increasing innovation activity that encompasses a range of expertise, such as in digital and data, engineering and biotechnology. Investment in innovations such as the IFCB demonstrates HIE's continuing support for new ways to inform future and sustainable growth across all sectors of our economy.

Case Study – Roslin Cell Therapies

The University of Edinburgh has an ambition to help Scotland evolve into a thriving deep-tech ecosystem, supporting innovative companies working on solutions to society's biggest problems. Last year, the University directly invested in 25+ early-stage ventures and total investment into companies connected to the University doubled to over £100 million.

Roslin Cell Therapies Limited ('Roslin CT'), is one example of such a venture. Founded in 2006 as a spin-out from the Roslin Institute, it specialises in advancing regenerative medicine through high-quality cell therapy development and manufacturing. Such therapies are already providing life-changing opportunities to treat cancer, genetic disorders, and other diseases. The company was supported in its early development by Scottish Enterprise, the Roslin Foundation and the University of Edinburgh, with its initial manufacturing based in the University's Centre for Regenerative Medicine. Led for many years by CEO Janet Downie, the company grew into a globally recognised player in cell therapy manufacturing, partnering with an international customer base of blue-chip Pharma and Biotech companies and employing over 100 staff in Edinburgh.

In December 2021, following a period of sustained growth, Roslin CT received investment from private equity fund, Global Healthcare Opportunities Capital ('GHO'). The deal (in excess of $100 million) provided the company with the resources to expand its activity from an enlarged base in Edinburgh, providing further high-tech job opportunities for graduates and experienced hires. The transaction also provided the University (and the other partners) with substantial proceeds from their shareholdings which will be reinvested in other university-linked opportunities.