April 23, 2013 5:28 pm

Scotland’s tech start-up capital

Jamie Coleman of TechCube, a technology incubator company based in Edinburgh with some of the founders and start-up companies©Gary Doak

Meet the future: venture capitalists are increasingly interested in entrepreneurs such as those based at TechCube, an incubator run by Jamie Coleman

The flowering of philosophical thinking in Edinburgh at the end of the 18th century earn­ed the Scottish capital its “Athens of the North” epithet. In the 21st century, the aspiration of several thinkers in the Scottish capital is to ape Silicon Valley.

There is some logic to this. Out of the near 1,600 university spinouts in the UK since 2001, 504 were from Scottish universities and almost half of those (244) were from Edinburgh university despite the country’s much smaller population and student numbers. This puts Edinburgh alongside Cambridge, another British city that investors and technologists around the world have long been interested in, and London, home to many of the UK’s digital start-up clusters.

More

On this story

On this topic

IN Entrepreneurship

Edinburgh is emerging as a start-up city because of the interplay bet­ween its strengths in academia, a tradition of those who have made money in the city to employ that wealth in helping others and a close-knit community that helps to build networks.

“We are big and we are good,” says Colin Adams, the university’s director of commercialisation, whose job is to help turn ideas generated at the institution into moneymaking ventures. Based in an office in the Infomatics Department, he adds that the size of the university’s computer science research bud­get is topped only by Stanford University, the Massachusetts Institute of Technology and Carnegie Mellon University in Pittsburgh.

He says that “it is becoming fashionable” for tech companies in Edinburgh, most of which trade internationally from the outset, to make a point of saying they were set up in the city.

A short walk across The Meadows park from the university’s main campus is TechCube, an incubator programme founded by Olly Treadway that provides office space, networking opportunities and mentoring support to several promising young digital businesses. Many, but not all, were start­ed at the university by computer science graduates.

The building where TechCube is based is a brutalist tower next to an arts complex. But it is clearly the kind of space that tech entrepreneurs and developers like: it resembles the start-up spaces in Silicon Valley or the Shoreditch district of London, known as Silicon Roundabout.

TechCube residents include Fanduel, a four-year-old fantasy sports tournament operator, whose customer base is entirely in the US. It employs 50 people, expects to increase revenues from £5m to £15m this year and is backed by Pentech Ventures, one of Edinburgh’s few technology venture capital firms.

A tradition of angel investment

With a population of less than half a million, Edinburgh is a compact city, similar to Cambridge, its English start-up peer.

Like Cambridge, the Scottish city capitalises on a close-knit network of investors and established business owners who act as mentors as well as financiers for new enterprises.

Archangels Informal Investment, an investment club of about 150 wealthy individuals, was set up by two Edinburgh businessmen in 1992, making it even older than the current angel networks that are a key part of Silicon Valley’s vibrancy.

The tradition of angel investing, and their consequent experience, means Edinburgh angel investors are generally superior in the money and mentoring they can offer, says Sandy Finlayson, senior partner at law firm MBM Commercial. They also have a more patient approach to funding new businesses than venture capital firms, he adds.

Nigel Eccles and his wife Lesley, respectively Fanduel’s chief executive and marketing director, moved to Edinburgh from London while he still worked as business development manager for Johnston Press, a publisher. “We loved the city, but not the job,” Mr Eccles says.

Fanduel recently raised $18m from a combination of angel funding, venture capital and Scottish Enterprise, the government business-support agency. But others have found equity funding more difficult to find.

Joe Tree, founder of Blipfoto, which allows users to create photo diaries to share with friends online, has raised £678,000 from angel investors, but says it is nearly impossible to raise institutional money. “VC-level support in the main just isn’t here,” Mr Tree says. The silver lining is that companies are forced to find ways to generate revenues from day one, he adds. “It really narrows what you can do here but then again, it focuses your mind as a founder.”

Jamie Coleman, TechCube’s shaven-headed, goatee-bearded managing director, says he recently met up with a big European VC firm that had visited the city with an eye on setting up an office. He is confident that VC money will come when it sees the quality of the start-ups, but admits the evolution of the cluster may take a while. “This is a 10-year play to make Scotland do this more,” he says.

Nevertheless, Mr Coleman worries that the banking, accountancy and leg­al professions, which have for generations provided the main employment in the city, have fostered a nine-to-five mentality among employees that fails to prepare them for the new jobs created by tech start-ups. In addition, he says: “There are a huge number of people with coding skills in the banking sector here but they lack the soft skills, which makes them unemployable.”

Another TechCube resident, Duncan Johnston-Watt, whose four-year-old software company Cloudsoft is looking to open a US office, says it is the name that Edinburgh start-ups are beginning to win for themselves that counts: “What is more important than the local talent pool or Edinburgh as a cultural capital is that it is fast being seen as a catalyst for innovative start-ups capable of being world-beaters.”

Some businesses are helped by the Scottish government’s policy of providing financial support, most notably through a programme set up by the previous Labour administration to match­ private funding raised by young companies.

Never far below the surface in conversations in the city at the moment is the subject of next year’s referendum, in which Scottish residents will vote on whether Scotland should separate from the rest of the UK. Although unlikely to have a direct effect on founders and investors in Edinburgh, the mood among them seems to be that Scotland is better off as part of the union, albeit with more power to self-govern on top of the powers already won through devolution.

That might be because a number of them come from south of the border or overseas. The star of Edinburgh’s technology start-ups is Skyscanner, the fast-growing online airline fare tracking service.

Gareth Williams, co-founder and chief executive, was raised in England and started business in London in 2001. He moved the business to Edinburgh in 2004 largely to be close to his new wife’s family. But once there he found “the quality of the software developers in Edinburgh is second to none in the UK”.

Sandy Finlayson, a senior partner at MBM Commercial, a law firm specialising in advising high-growth companies, has been involved with entrepreneurs for decades, having advised many of the city’s most successful tech start-ups.

In his office on Princes Street, from where the Georgian New Town looks across The Mound to the Old Town, he explains why the city is attractive to entrepreneurs. As well as a healthy angel investor culture, there is the infrastructure of a capital city with good transport links and the intellectual liveliness of an ancient university city. Finally, he declares, Edinburgh’s rugged beauty makes it a more appealing place to build a fast- growing business than the UK’s other digital start-up clusters.

He gestures out of the window at the majestic view up to Edinburgh castle. “Who needs Shoreditch, when you can have this?” he asks.

This article has been amended to reflect the fact Jamie Coleman was not the founder of TechCube.

Related Topics

Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.