National innovation strategy 2023 to 2033

8. Innovation-Led Entrepreneurship And Commercialisation

'It is vital that we ensure the outputs of Scotland's world-leading innovation have a clear pathway to market. Through successful commercialisation of the end-products our innovation, return on innovation investment can be maximised and the potential benefits to society of that innovation achieved, both nationally and at a global level.'

Deborah O'Neil, Founder and CEO NovaBiotics

'Pre-seed funding is just one of many challenges that need to be tackled to help our ecosystem achieve its full potential. In order to scale, we will also need wider access to scale-up capital; mechanisms to train, attract and retain specialist talent; more incubation space (particularly laboratories); and better representation of women and other under-represented groups in our founding teams and boards. We, alongside partners across the ecosystem, are working on these challenges, but we need continued support and re-investment. Thankfully, our experience of the creativity, expertise, and energy of our founders, leaves us in little doubt about the potential rewards of doing so.'

Professor Sir Peter Mathieson, Principal and Vice-Chancellor, University of Edinburgh

Introduction

When viewed through the lens of economic value, innovation and entrepreneurship are in many respects two sides of the same coin. The economic and social benefits of innovation can be realised only where there exists a practical means of achieving scaled, real-world application. In this chapter we explore how we can optimise perhaps the most powerful means we have at our disposal to achieve that goal: establishing Scotland's higher education sector as a hotbed for the creation and scaling of innovation-led businesses.

Despite encouraging progress in recent years, this is an ambition that has so far proved elusive to Scotland. But, as we shall see, many similarly profiled European countries appear to have cracked this problem, with higher education institutions and their alumni consistently converting cutting edge technologies into scaling companies; applying innovation to seed the creation of new markets and supporting existing industry to exploit new technologies as a means of refining product development and increasing productivity. It is essential that we learn from the strategies implemented by these economies, with the goal of replicating and then exceeding their success.

Current performance

Scotland's research and development capability is world class, with considerable expertise across a wide range of disciplines and sectors. At UK level, this has helped Scotland to perform reasonably well at translating research into spin-out companies. The Universities of Edinburgh, Glasgow and Strathclyde all appear in the UK top ten for the total number of spin-outs created since 2011. The University of Dundee appears in the UK top five for its entrepreneurial impact. Of the 211 equity deals involving spin-outs across the UK during 2021, 44 (21% of the

total) came from Scottish institutions the highest proportion of any region or devolved nation and underscoring the importance of Scottish Enterprise as an early stage investor. Over the last ten years, our institutions have also produced some of the UK's most significant spin-out exits and investment rounds, such as Exscientia (University of Dundee) and ENOUGH (University of Strathclyde).

This success is indicative of an encouraging movement that is building in Scotland's higher education sector. Increasingly we are seeing institutions prioritising both the commercialisation of research and the provision of enhanced support for broader entrepreneurial activity in the form of staff and student-led start-ups. Similarly, following publication of the Cumberford/Little Report, many of Scotland's colleges are beginning to interpret their role in innovation more expansively, with several developing more ambitious and sophisticated programmes to catalyse entrepreneurialism amongst staff and students.

As well as carrying the potential to be a rich source of financial revenue and reputational capital for Scottish higher education, this movement can also be seen as responsive to a shifting culture in which post-pandemic learners no longer view institutions purely as a means of acquiring a degree, but as prominent entrepreneurial ecosystems in their own right: places where they can meet co-founders, experiment with cutting edge technologies, learn best-in-class start-up technique and ultimately create the innovation-led businesses necessary to drive Scotland's economic future.

While this progress is welcome, it is crucial that we continue to accelerate momentum. To achieve that it is important to guard against complacency and examine Scotland's performance in a global context. As Figure 10 below demonstrates, Scotland produces 50% less spin-outs than the rest of the UK relative to the percentage of HEI research funding, with consequent impacts on the quantum of investment capital raised by Scottish businesses. While it is difficult to source reliable data comparing Scotland's performance on spin-outs with other European nations, it is plainly observable that the exceptional individual cases noted above could reasonably be described as outlier successes rather than as products of a entrepreneurial campus system that can relied upon to consistently generate high growth innovation-led businesses.

Whilst Scotland can evidence world class research and development capability, the Royal Academy of Engineering's 2022 Spotlight on Spinouts report highlights that only 12% of university spinouts that successfully secure funding include female founders, with only 4% boasting all-female founders (compared to 75% for all male founders. This is an issue of fairness but also an opportunity cost for the country - we are missing out on the economic and wellbeing benefits of a larger and more diverse innovation base.

That is why our future work on optimising the commercialisation of research and the production of spinouts will have a strong focus on increasing the visibility of our institutions' female founders, facilitating diversity of opportunity and of thought.

Ineffective translation of academic and public-funded R&D into the business population is also reflected in HESA spin-out data.

Scotland's efficiency in producing spin-outs* fom research is roughly 50% lower then the rest of the UK, and this translates to the quantity of capital the spin-outs raise.

It is also important to acknowledge that the contribution of higher education institutions to a vibrant start-up nation does not end at the production of spin-outs. Staff, student and alumni led start-ups are an equally crucial component of success and in this domain international comparisons are clear. The University of Stockholm, for example, has produced ten companies valued at more than $1 billion, with a further 13 scale-ups identified as having 'unicorn' potential over the next 5-10 years.

Elsewhere, each year PitchBook publishes global rankings that compare universities by examining the number of graduate and undergraduate alumni who have founded venture capital-backed companies, based on an analysis of more than 144,000 founders. The latest rankings show that undergraduate alumni from the University of Lund have created 182 companies raising a total of $3.4 billion, with University College Dublin alumni producing 170 companies that raised a combined $2.4 billion. The postgraduate rankings reveal a similarly strong performance from European institutions with e.g. Esade Barcelona alumni founding 185 companies that have raised a total of $6.9 billion. It is notable that only one Scottish institution, the University of Edinburgh, appears in either list, ranking at 62 in the postgraduate rankings.

We have an opportunity to improve significantly on this position. Many of the commercialisation support programmes of the Scottish Government and its agencies, the UK Government and Innovate UK operate independently, risking gaps, duplication and missed opportunities for collaboration. We also face challenges in catalysing activity at the scale required, and at an appropriate level of concentration, to deliver the optimal benefits for our economy. There is good collaboration in the university sector, but the underpinning capacity required for truly transformative initiatives is often limited. Our success in a limited number of cases may be masking underlying weaknesses in our approach while other nations are extending a lead.

Addressing these issues will involve taking a systems view of Scotland's capacity and potential to translate our excellent research into commercial value – whether through the creation of a successful spin-out company, the licensing of a new technology, or the development of university-business partnerships that advance knowledge and enhance prosperity. All of these routes carry significant economic potential and it is incumbent on all relevant partners to ensure that each is functioning as effectively as possible.

This performance is reflective of the analysis of Scotland's broader entrepreneurial landscape outlined in both the Scottish Technology Ecosystem Review (STER) and NSET. In STER, the Chief Entrepreneur argues that entrepreneurial ecosystems exist in one of two states. The preferred state is where the ecosystem has passed through a 'tipping-point' in its development, defined as the point at which it hosts a critical mass of viable start-ups and scale-ups. At this point, it is argued, virtuous network effects begin to operate spontaneously, making the ecosystem anti-fragile, continually strengthening without requirement for state intervention. Examples of these effects include:

• Recycling of executive and technical talent from successful later-stage companies into a critical mass of viable early stage companies; significantly improving the experience level in those businesses and increasing the likelihood of them being successful. These businesses in turn recycle others into the ecosystem. In short, success begets experience and experience begets success.
• External talent is attracted into the ecosystem. This leads to the creation of more start-ups and more successful ones at that. This in turn attracts more talent and a virtuous cycle again establishes itself.
• Investment firms start to pay greater attention to the ecosystem and spend more time within it. This brings more capital and expertise into the ecosystem, which leads to more and stronger businesses, again attracting more investors, entrepreneurs and talent.

STER argues that while Scotland's entrepreneurial ecosystem has never been stronger, it remains in a pre-tipping point state. That is to say, it does not consistently produce a stream of start-ups that reach sustained profitability, including a significant proportion that do so at scale; with consequent economic benefits through the creation of high value jobs, increased tax revenues and extending our country's tradition and legacy of economic innovation.

It seems reasonable to conclude that the same is true of the entrepreneurial performance of our higher education system, indeed this is logical since each is part of the broader whole.

Actions

This analysis is not intended to be gloomy. On the contrary, our higher education sector is the envy of the world and the gap between current and potential performance is undoubtedly one of our greatest economic opportunities. If we succeed in concentrating this capability on innovation-led entrepreneurship, then the potential scale of the consequent economic benefits are profound.

In this final section we explore the interventions necessary to translate potential into performance. In doing so, we will proceed in full recognition that it will not be sufficient to simply mimic international best practice in a Scottish context. Each of the international successes cited in this chapter are the product of those institutions' unique heritage and evolutionary path. Scotland's institutions are rightly proud of their own cultures and traditions, which have seen become globally renowned for research and teaching excellence. We will therefore identify common attributes of world-class entrepreneurial systems and will seek to work with the sector to apply them flexibly in a Scottish context.

7. We will design a new Research Commercialisation Framework for Scotland.

This Framework will set out the principles and interventions that will drive progress on research commercialisation learning, where appropriate, from international best practice. Through developing the Framework, we will establish a specific and coherent package of support for commercialisation, addressing gaps in evidence, coordination and, over the lifetime of the strategy, funding. Linked to our innovation funding review, and other initiatives such as UKRI's work on commercialisation, this framework will help Scotland to:

• develop and embed the entrepreneurial skills, capabilities, culture and mindset necessary to commercialise research.
• promote good practice in the exploitation of university IP – from licensing arrangements through to spin-out support and ownership terms.
• build effective and impactful collaborations between researchers and businesses.
• secure the full range of economic and societal benefits that can flow from commercialised research – including research in the arts, humanities and social sciences, and work undertaken by research institutes.
• widen the opportunities for people from diverse and underrepresented backgrounds and communities to participate in commercialisation.

The Scottish Government will work closely with the higher education sector and the Scottish Funding Council to develop this Framework, also working across enterprise agencies, colleges and with universities and businesses over the course of the next 12 months.

Alongside government action, it is crucial that all players in the system are connecting and exchanging good practice, guidance and evidence. Universities Scotland's Research Commercialisation Directors' Group (RCDG) will continue to play an important role in driving progress in this area here, and we will work closely with the RCDG to develop our detailed proposals for research commercialisation. This will include exploring options for developing consistent approaches to, and guidance for, handling the intellectual property that arises from both publicly funded research and inward investment, as set out in our Inward Investment Plan.

8. We will publish a comprehensive plan to establish the Scottish higher education system as a world-class hotbed of start-up creation and scaling.

In line with the analysis in this chapter, both STER and NSET highlight the economic

importance of world-class 'entrepreneurial campuses'. To that end, the office of the Chief Entrepreneur has commissioned Professor Joe Little and serial start-up founder Ross Tuffee to produce a detailed, systematic plan aimed at raising Scotland's performance to a world-class level. This work, informed by a deep understanding of international best practice and collaboration with Scottish institutions is almost complete and will be published in the coming weeks. While it is important not to overly pre-empt its findings while they are being finalised, the report is rich in solutions proposing a series of interventions focused on key attributes found in the world's best systems. These include:

• the importance of senior leadership which inspires and drives an entrepreneurial agenda, underpinned by appropriate KPIs.
• a credit-bearing curriculum which delivers a high-quality entrepreneurial education across all faculties, including degree programmes focused on business creation and scaling.
• the availability of high-quality, scaled incubation spaces on campuses, providing access to world-leading extra-curricular support and, where appropriate, access to early-stage seed funding.
• deep integration of the entrepreneurial campus system with Scotland's broader innovation infrastructure such as the Techscaler network, innovation centres, the Net Zero Technology Centre and the National Manufacturing Institute for Scotland.
• a detailed examination of the more complex needs of spin-outs, including reforms of institutional approaches to technology transfer; equity retention, governance, revenue royalties and business acumen.

9. In line with our ambition to realise increased economic value from research and development, we will work with the higher education system and the Scottish Funding Council to evaluate the sufficiency of Scotland's current investment in applied research, knowledge exchange and broader research projects, aligned to the innovation priorities identified in this document, where they possess significant potential for commercial application.

10. We will work closely with universities to design and develop a £100 million Scottish Innovation Fund to invest in early stage start-ups focused on deep science and other emerging technology areas – an ambition that underpins and reinforces the success of the broader interventions proposed throughout this document.

Case Study – Glasgow Riverside Innovation District (GRID)

'Glasgow Riverside Innovation District (GRID) Discovery' is Scotland's first whole-system innovation demonstrator. The objective is simple – to deliver high-impact innovation that can be tested in the real-world, evaluated and scaled up to the benefit of Scotland.

Real-world testbeds offer six key benefits. They:

• strengthen collaboration between public bodies, academia, industry and community.
• attract inward investment in similar and complementary technologies.
• improve delivery and efficiency of public services, and shapes policy and regulation.
• maximise the value of research activity, particularly at local level.
• reduce risk for participants, and provides space to iterate and fail.
• place the community at the centre, and promotes solutions that are specific to need.

The discovery initiative will be led by the University of Glasgow through a £12 million investment over the next four years, as part of its commitment to stimulate innovation activity and entrepreneurship. In collaboration with Glasgow City Region and Scottish Enterprise, a testbed approach embedded within the Glasgow Riverside Innovation District will draw on the breadth of the University of Glasgow's research excellence, global reach, strong civic mission and partnership approach to catalyse impactful innovative activity, at pace.

By identifying collaborative research and innovation projects from across the University, and bringing together key stakeholders including our communities, partners will work together to remove barriers and ensure that the benefits of innovation impact positively on our place, society and deliver sustainable growth for Scotland's economy. The activity and investment enabled from the testbed will be additive, leveraging further investment and supporting new start-ups, spin-offs and market opportunities. Learning and evaluation on successes and failures will be fundamental to the design of GRID Discovery, enabling the development of an evidence base around the enablers and barriers to help shape policy and regulation.

The Glasgow Riverside Innovation District Discovery projects will look to complement and support existing initiatives that already exist within Scotland, such as the Scottish Government Accelerated National Innovation Adoption (ANIA) programme, Innovation Centres and through close alignment with the broader Glasgow City Regional Innovation Action Plan. It will build on the Levelling Up Innovation Accelerator pilots which will bring a further additional £37.1 million into the innovation district over the next two years.

Case Study – Energy Transition Zone, Aberdeen

Evolving from a fifty-year legacy of a world-class oil and gas industry, the North East of Scotland is home to a wealth of talent, experience and infrastructure that presents an unrivalled opportunity for renewable energy activity. Containing the most significant concentration of energy supply chain companies in the UK, Scotland's North East is fast becoming one of the most attractive locations in Europe for development, commercialisation and investment in low carbon and net zero technologies.

At the heart of this dynamic and collaborative energy cluster is the Energy Transition Zone (ETZ). A private sector-led, not-for-profit company, the ETZ is tasked with spearheading the North East of Scotland's energy transition ambition to position the region as a globally recognised energy cluster focused on the delivery of net zero. The ETZ builds upon the region's legacy as the oil and gas capital of Europe and aims to cement the North East of Scotland's position as the net zero capital of Europe.

The ETZ comprises a 120-hectare site adjacent to the brand new £400 million Aberdeen South harbour, the largest marine port development in the UK. This includes revitalised brownfield accommodation alongside a new release of greenfield development sites which will be developed using a whole-life carbon approach to property and business.

A comprehensive investment programme is underway to deliver market-ready properties and development sites for high-value manufacturing and the wider energy transition supply chain including a Marine Gateway and the creation of specialist campuses for Offshore Wind, Hydrogen, Innovation, and Skills. The Energy Transition Zone will establish a supportive innovation ecosystem that is second to none, helping businesses grow and flourish.

Each campus will have an anchor project which will catalyse further investment.

• Energy Incubator and Scale-Up Hub (EISH) in the Innovation Campus, has secured funding from BP (£1.25m) and Scottish Enterprise (£2m), and will provide around 3,000m² of flexible industrial and collaboration space to foster supply chain community building, high-value manufacturing and research and development alongside targeted business support to drive entrepreneurship and growth.
• The world's first National Offshore Wind Innovation Centre, developed in collaboration with ORE Catapult and located in the Wind Campus, will have with test and demonstration infrastructure to deliver the accelerated commercialisation of floating offshore wind, a sector in which the North East of Scotland can become global leaders. Core funding for activities is funded from industry partners, which is being used to leverage additional funding from other sources to maximise its impact.

Having once played a leading role in the global energy transition to oil and gas, Scotland's North East is now harnessing its legacy and experience to one again take the lead in the transition toward net zero.