Scottish technology ecosystem: review

Chapter 5 – Recommendations – Guiding Principles and Focal Areas

In this section, we set the context for the review recommendations. We first state the strategic principles leading to the recommendations, which have been derived from our earlier analysis. We then present a set of focal areas under which the recommendations are grouped, based on these principles.

Strategic Principles

The recommendations presented in this document are guided by the following principles, which are derived from our analysis of the Scottish tech ecosystem presented earlier.

1. What we mean by Improving Ecosystem Output: Improving the ecosystem means increasing the creation rate of profitable, scaled tech businesses and reducing the average time taken for viable individual start-ups to reach scale. A desirable side effect of so doing is that more viable businesses will be produced at various other scales too.

2. The ecosystem has three main dependencies: education, infrastructure and funding. All three are important, but we have listed them here in order of descending importance. What this means is that doubling our investment in (the right kind of) education, for example, will produce more successful scale-ups than doubling the availability of early-stage funding. Between these two, the importance of infrastructure is the extent to which it acts as a platform for the formal and informal education that our ecosystem participants require.

3. Interventions that accelerate the ecosystem towards the tipping point: There is a tipping-point within tech ecosystems after which certain virtuous network effects establish themselves, and at which point the ecosystem is essentially self-sustaining. Scotland’s tech ecosystem has not reached this tipping point, whereas, for example, London and Silicon Valley have. Therefore, the treatment of Scotland’s ecosystem must be different from post-tipping point ecosystems. The collective purpose of the interventions that we make in the ecosystem must be to take our ecosystem towards that tipping point, at which time interventions and support can be tapered back.

4. Avoid artificial stimulation of start-ups that should be allowed to fail: Our interventions must only be for the purpose of acceleration towards the ecosystem tipping point. In particular, interventions by government must be carefully chosen in order to avoid creating a dependency culture within the ecosystem. Most start-ups should fail; the employees of those start-ups that do fail usually move on to other start-ups, which are strengthened by their greater experience gained first-time around. This is a key principle of tech ecosystems generally. Our goal is not to artificially arrest this natural process, but instead to ensure that those start-ups that would have succeeded in a post-tipping point ecosystem also succeed in ours.

5. Target ‘global’^[29] ecosystem optimisation, not local optimisation of its parts: Interventions and support for our ecosystem must be made according to the principle of “global over local optimisation” of the ecosystem. We also embrace the principle that, in the context of this optimisation approach, small interventions made at a certain point within the ecosystem can often have a profoundly positive impact on the overall performance of the ecosystem. Conversely, headline-grabbing interventions don’t necessarily lead to headline-grabbing results, when measured in terms of overall ecosystem outputs.

6. Measure Return on Investment (ROI) of interventions in relation to the overall ecosystem: Related to this point, a key principle is that investment made at a certain part of the ecosystem usually won’t manifest the resultant value in that same area. For example, investment in infrastructure will not yield a local value return to that infrastructure. It will instead manifest as output from the ecosystem as a whole (in terms of more successful
start-ups and scale-ups). Therefore, support given at a certain point in the ecosystem should not be measured on local Profit/ Loss (PL) criteria, or similar. Although this would be locally convenient from the point of view of measurability, it undervalues or disregards completely the value created by that part of the ecosystem. This requires us to adopt more novel approaches to measuring ecosystem value.

7. The ecosystem must learn from outside itself: In the Internet age, just as all potential customers are much closer than before, so are all competitors. Scotland’s ecosystem must therefore encourage international best practice within its start-ups and scale-ups if they are to compete with the world’s best (which they must). In our pre-tipping point ecosystem, we will not achieve this by only learning from each other or by iterating on improvements atop our own local best practice. When we talk about Education, it must include a large element of best practice coming into our ecosystem. There is no room for historical complacency on this point.

8. Focussed approach, focus on core horizontal capability, avoid over-dilution of support:
Our recommendations are intended to establish a core, world-class Internet Economy start-up capability, that spans all software tech and market domains. This is because the same
start-up and scale-up techniques apply across almost all tech and market domains. Consequently, we do not make sector-specific recommendations, either in specific market domains or in specific niche technology domains. Various initiatives already exist, both publicly and privately-financed, to organise around specific domains. All of these rely on, in turn, a strong foundational ecosystem, which is the focus of this review; the job is only done when we can execute at a world-class level within our selected domains. However, we do make a general recommendation on the identification and support of emerging market-specific domain ecosystems.

9. Balanced portfolio: In general, interventions in the early stages of the ecosystem funnel or its dependent areas (education, infrastructure and funding) will have greater eventual overall impact. This is because interventions made at the start of the funnel affect all later stages too. Conversely, investments made in later stages will yield a return sooner, because tangible start-up success only manifests from the middle of the ecosystem funnel onwards. Therefore, our interventions should constitute a balanced portfolio across this spectrum to bring about both early improvements and long-term high growth.

10. Focus on building-out a world-class backbone implementation of core capability: There already exists in Scotland today a range of novel and creative acceleration programmes and interest groups from our innovation centres, through public and private start-up accelerators and sector-specific interest groups. We applaud the work that these groups do, and the contribution that they make to the ecosystem.

One approach that we could have taken in this review is to recommend further financial support to each and all of these bodies above current levels. We have not taken this approach. In general, these groups are already sufficiently funded and operating well. To further support them on a wide scale, on top of routes to funding that already exist, risks over-dilution of resources and would lead to returns that are, at best, incremental on the status quo.

Instead, our approach is to bring particular focus to those areas of the ecosystem that, together, constitute the basis of a strategic “backbone” implementation of our core ecosystem capability. In doing so, we have chosen to recommend providing support to those in-scope ecosystem participants that are most advanced in their current provision of services towards that backbone core capability. We note that, in each of those cases, a gap exists between current provision of services by each given participant and the level of provision required to meet the strategic goals of this review. The recommended approach, therefore, is to provide staged support in return for the participants in question closing the identified gap on service provision.

Another cause, and consequence, of this approach is to limit the number of recommendations to five main focal areas, with a relatively small number of detailed recommendations being presented in each focal area. In so doing, we hope that this will provide greater focus for stakeholders in actioning them.

Focal Areas

Recommendations are grouped according to five main focal areas, summarised in the diagram below and described thereafter.

Foundational Talent Pipeline
This focal area groups recommendations for interventions and improvements at School and University level as well as “funnel wideners” such as Codeclan, extra-curricular organisations, and the attraction of external talent and experience into the ecosystem.

Tech-Scaler National Backbone
This focal area concerns building a national network of “Tech-Scalers”, combining best practice in incubation, acceleration and education, and including integrated grant funding.

International Market square
This focal area groups recommendations designed to enhance Scotland’s market square activities across all levels of scale from small meet-ups to international conferences.

Integrated Ecosystem Grant Funding
This focal area groups all recommendations designed to align public grant funding support to the above areas. The emphasis in this category is on achieving close alignment to the ecosystem’s needs.

Investment Funding
This focal area groups all recommendations designed to better support the flow of investment funding to start-ups.

In the next section we present the specific recommendations of this report, grouped under the above categories.