Catch me on the Startupification podcast!

20th December 2020

I joined Matt and Steven for an episode of Startupification to discuss alternative finance, Zebras, bankification and how we can direct our efforts towards solving problems. Give it a listen here.

The women changing how we think about business

28th November 2020

I was honoured to be asked to contribute to this article in The Scotsman by Laura Westring, alongside some amazing women creating positive change in the world of business. Read what we have to say here.

Thoughts on the 'Scottish Technology Ecosystem Review'

27th August 2020

"In May 2020, Cabinet Secretary of Finance Kate Forbes asked Mark Logan, tech entrepreneur and former Skyscanner COO, to conduct a short-life review into how Scotland's tech sector can contribute to Scotland's economic recovery following the COVID-19 pandemic." This report was released on 25th August 2020.

I have some questions about the assumptions made - about who we are and where we want to go.

There is much to admire in the report. I certainly have no objection to greater focus on digital and business skills for our young people, who already live between real and online worlds, and for whom the only certainty will be change.

Equally, many of the suggestions on ‘ecosystem infrastructure’ are welcome. Serendipity is the silent heroine of many start-up stories – of co-founders finding each other, of problems shared being problems solved, of ideas formed at the intersection of different experiences. You cannot compel serendipity, but you can welcome her in by bringing people together – in the “market squares” that the report champions.

I like the idea of capturing the value of interventions beyond P&L, being patient in our assessment of outcomes, and considering them at the global, not local scale. It's almost as if some value can't be captured in financial terms… Which brings me to my first point.

What are we trying to achieve?
The paper outlines its definitions, noting that 'tech' can be problematic to define as most modern businesses are tech-enabled in some way. The review specifies tech start-ups as those that require a high degree of software engineering and are iterative, rapidly scalable, data-driven etc, referring to these latter qualities as "The Silicon Valley Playbook" and Silicon Valley as the competition.

The problem with uncritically accepting a definition created by your competitors is that you also risk accepting their assumptions, such as what success looks like and what compromises are tolerable. The Silicon Valley Playbook is powered by venture capital (VC) funding, which invests in a portfolio of high risk, early stage businesses on the understanding that most will fail and a few will deliver huge returns via an IPO or acquisition. (Need a primer?) One side effect of this approach is producing companies massive beyond the dreams of monopoly law, that create wealth only for the privileged few and willingly sacrifice the public good for growth. Another is that many good ideas are wasted in the attempt to grow too big, too fast. There will always be challenges and compromises, of course, but why would we just accept that no improvement can be made in these definitions and visions of success? It doesn't have to be like this. We could be... y’know, innovative.

Which means we need to start from first principles, rather than making assumptions about what can be achieved (which is a problem of scope, rather than necessarily the content of the report). Is this really just about jobs and wealth? Who for? Can we not aim higher and broader than that? Innovation is a laboratory of dreams, not just an economic engine. It solves problems. It should not be kept siloed from the National Performance Framework, from the Sustainable Development Goals, from the well-being of people and planet. Scotland has of course already made a great start on this with programmes like CivTech, which gets only a glancing mention in the report, and voluntary initiatives such as Digital for Good and Scottish Tech Army. These should be central, not peripheral.

How do we achieve it?
Secondly, by accepting the Valley start-up definition, we risk ending up in the same place we started - throwing money at a very niche subset of businesses that fit the Silicon Valley mould and completely ignoring other potentially impactful, profitable businesses. That would be fine if there were a separate review for those other businesses, but there never is. VCs are the first ones to tell you that very few companies are a fit for venture funding and other companies should seek alternative investment, but no-one takes responsibility for building or improving those alternatives.

Interestingly, the paper does mention creating "many more tech businesses of other sizes along the way" to building unicorns. This is interesting precisely because it moves swiftly on to acknowledging how many will fail on the way. 'Other businesses' in this funnel are either baby unicorns-in-waiting or they’re going to fail - because of the VC fund mechanics described above. They are not simply hunting unicorns here, they’re farming them. If you take VC, you commit to scaling big and fast, and either hit huge success or die trying.

To put this in context, I'm a venture scout for a seed fund in London and I see very few Scottish companies for whom VC is the right route. In that regard, we agree. However, I consider the scarcity of VC-backable companies to be significantly less of a problem than the scarcity of organised funding options for those other businesses. VC is a niche asset class – not every start-up needs it, but most need some form of investment. And current other investment options are as heavily gatekept as VC, disorganised, incomplete and/ or require excessive hoop-jumping and contortions on the part of the entrepreneur.

To be clear, by 'other businesses' I do not mean non-tech businesses - tech businesses can, do and should exist outside of The Silicon Valley Playbook. We already have a whole bunch of them in Scotland. It perhaps used to be true that tech businesses could only be built with massive investment, in the 80s and 90s, but we see enough bootstrapped success these days to imagine what could be achieved with smaller injections of capital and/or less expectation of an exit. (If you have time for a long read, do make yourself a cup of tea and get into Investment Memo: Earnest Fund 2 for an excellent thesis on this topic.) It is not outlandish to create a plurality of successful, sustainable tech SMEs. You’ve heard of Germany’s Mittelstand? Meet the New Mittelstand.

However, even if we indulge a moment and look at the issue from the direction of Silicon Valley, we should be looking at the trends emerging now. If you’re going to stick to the curve, at least try and get ahead of it. And what we’re seeing from the Valley now is the ‘Diffraction of Venture Capital’, in the words of The Family’s Nicholas Colin. VC is being unbundled as providers get entrepreneurial on the provision of capital. New options are emerging for different costs, growth engines, revenue streams, assets and industries. We should be looking to Indie VC, Earnest Capital, TinySeed, Lighter Capital, Clearbanc, Pipe etc. At the early stages, convertible instruments optimised for both outcomes preserve optionality – you can access investment without committing to the unicorn path. Later, why fund customer acquisition with expensive VC money when it’s a predictable transaction? You can get a modern merchant cash advance for that.

And yet the report says, "Given the favourable SEIS and EIS tax incentives available at the early-seed and seed stages, we do not consider it practicable to create further financial incentivisation to invest at the early-seed stage."

Given the restrictions of SEIS and EIS around innovating with investment, have we considered creating further financial incentives that enable different instruments? If there is a genuine desire to create viable businesses at different sizes AND create local wealth, we should reconsider investor returns for the ‘friends & family’ and early angel investors in the start-ups that are never going to be unicorns. If you don’t expect every start-up to exit or die, it is absolutely possible to build in structured exits for sustainable companies, enhancing investor liquidity and recycling.

In the report, ‘alternatives to venture’ are mentioned in founder education but never explored. It couldn’t be clearer that these are an afterthought, not a priority. We need to acknowledge that there is no ‘one size fits all’ approach to start-up funding and even if there was, venture capital should not be it. We need to enable our entrepreneurs with a whole spectrum of funding options that align company and investor needs at different ages and stages.

Who participates?
The paper does consider gender inequalities but unfortunately falls into the common trap of alleviating the symptoms and not addressing the cause. For example, the recommendation of an investment vehicle specifically supporting female founders is very nice - but if it reproduces the same expectations and environment that rejects female entrepreneurs in the first place, it won’t be the catalyst that realises their full potential.

In the words of Kelly Bewers, on the subject of the Rose Review into female entrepreneurship:

"The entrepreneurial capital definition assumes that VC investment is the aim for all female entrepreneurs in the UK, and therefore to increase the proportion of funds flowing to them, we need to make sure it’s women making the investment decision (financial capital), give female founders a mentor (social capital) and send them on a coding course (human capital). I’m being reductive, but this paradigm asserts that our current system for backing ventures is fit for purpose, therefore solutions focus on how we enable women to access it, rather than questioning the system itself. Of course, more women in VC is great – no feminist could argue with that – but that doesn’t address the patriarchal attitudes and structures that create inequality in the first place. If my business gets backed by a woman, that doesn’t mean the ten men who turned me down would make a different decision when the next woman pitches to them.”

Beyond entrepreneurial capital: why some female founders are choosing to be ‘under-represented’, Kelly Bewers, Pioneers Post, 13th July 2020

Again, let us design a spectrum of funding solutions that suit the needs of different entrepreneurs at different stages. And let us design with women in the room. Indie VC, one of the alternative investors mentioned above, reports that 50% of the teams they’ve funded are led by female founders. Likewise, Clearbanc reports that it backs 8 times more women than the VC industry average.

The report doesn’t address other excluded groups, which is disappointing, given the cultural moment we are in. Except, that is, to dismiss existing wealth and educational inequalities:

"The very earliest-stage start-ups have very low operating costs and typically fund themselves by traditional means (founders, friends-and-family, the occasional angel investor, etc.). In this respect, Scotland’s tech ecosystem is not particularly worse-off than any other. It could be argued that this funding mechanism locks out potential founders from more disadvantaged backgrounds. However, in these very early stages of a start-up, it remains a difficult problem to attract other sources of funding to an unproven founder with a non-demonstrable idea, even if there are more investors in the ecosystem."

Scottish Technology Ecosystem Review, 25th August 2020

So let me see if I have this straight: Scotland needs to build a world-beating start-up ecosystem through a range of significant interventions that will produce the best founders, engineers and companies - but when we identify an issue where every ecosystem is equally rubbish, we're just not going to bother? If we were being truly entrepreneurial here, surely identifying an area where others are leaving value on the table would be an absolute gift?!

Referring back to Silicon Valley, the report notes that Stanford University has produced a lot of high profile start-ups, but it's worth remembering that higher education in America is presupposed by wealth - Stanford's students are more likely to have enough family financial backing to take risk. We have more of a social safety net here in Scotland but starting up - or joining a start-up - straight out of school or university is still a risk that many cannot take. Grants for Codeclan attendance are one thing, but enabling people to start-up is not an insurmountable problem either – an expansion of fellowships to allow people to live while they explore an idea could be a great use of grant funding.

It is strange that the report acknowledges that "gender role stereotyping removes almost half of our best future engineers" and "It would be economically and societally beneficial if Scotland was to lead on addressing this aberration", but then mysteriously forgets this argument for the potential founders and ideas we're losing to financial disadvantage or other types of exclusion. It’s all about people. People have all the resources of entrepreneurship within themselves – ideas, skills, energy and capital – to varying degrees. Connecting more people so they can share their resources, and then enabling them to build is key. And the more people of different life experiences we include in our ecosystem, the more under-served markets our start-ups will address, and the more social and financial value will be delivered.

Allow me to gather these threads together. Innovation, embodied in entrepreneurship, solves problems. Not just the problems of how to create jobs and wealth and tax revenues, but all types of problems – from daily irritations to global challenges. If you set out to design an ecosystem, you’re deciding what gets built, what problems get solved – and whose problems get solved. If you copy another ecosystem, then you already know what this will look like and who will benefit, and you can't be surprised if you also create the same problems. But if you design a range of support, connection and investment that enables anyone to solve the problems they see, you open up a whole world of possibility – you invite serendipity in.