Entrepreneurs holding out for better times are letting start-up opportunities slip by
WHEN HIGH-TECH entrepreneurs gather these days - at trade shows and the like - the conversation soon turns to the state of the technology marketplace. “When do you think things might return to normal?” is atypical comment. Well, I’ve got some bad news. I’ve been working in high growth technology companies for 20 years and I can tell you this -watch my lips - THIS... IS ... NORMAL .
The fact is, growing new technology businesses is tough, and it always has been. The past four or five years have been wild and crazy and quite abnormal, but normality has now returned.
The formula for successful technology innovation is straightforward enough. A technology breakthrough can provide opportunities for the development of new products or can open up new markets. Ideally these will be products which larger companies will find difficult to make or to bring to market -maybe because they are too disruptive to their existing product offerings.
If it all works out, the start-up company manages to carve out a strong market position for its new product and, in many cases, ends up being acquired by one of the market leaders. Along the way, jobs are created and considerable value can be generated. Often, the acquired company becomes a key division of the acquiring corporation.
The problem with this formula is the risk involved at all stages in the process. There are risks that the new technology may not result in an effective product or that a market for the new product might not exist. New technology ideas tend to blossom at the same time, so one of the biggest risks is that other start-up companies develop more effective products or, more commonly, large companies will use their market power to eliminate competition from innovators.
Then there are the people issues. Will the technologists be able to develop the management and marketing skills required to develop the business and work effectively with experienced management when the company does grow?
The combination of product risk, market risk and management risk means a very high level of risk indeed. Also, since the new company will require investment in order to develop and bring products to market, that risk must be shared by backers, normally venture capital providers.
It is not an exact science, growing new businesses, and there will always be successes and failures. Indeed there will usually be a few failures before success is achieved.
So, given all this, should we even bother? Why don’t we just continue as the branch factory economy - providing skilled workers for the Scottish factories of multinational corporations?
One reason is that there are fewer and fewer of these inward investment opportunities available. We just cannot expect international corporations to decide suddenly that Scotland is the ideal site for their new R&D centre. The branch factory jobs that do come here tend to be relatively low skilled administrative and assembly ones, and can be just as easily moved elsewhere.
So we need the dynamic of new company formation, to generate the Scottish businesses of tomorrow, or to create a key R&D centre which a multinational will acquire, and grow, here in Scotland.
The trouble is, the popping of the dotcom and telecoms bubbles has resulted in a massive loss of confidence. It has become very difficult to provide funding to start up a business. Many business angels and early stage investors are too busy trying to realign and recover their existing investments to have much time for new ones.
Ironically, this is a good time to start a business. Historically, the best time to start companies has been during a slump. There is less competition, valuations are realistic and the next recovery in the business cycle is likely to come just at the right time.
This is why the announcement last week of the £20m Scottish Co-investment Scheme is so welcome. It will provide cash to invest alongside other sources of funding, encouraging a variety of sources to provide finance of up to £500,000 for start-up companies. Crucially, it will provide assistance in making projects investor-ready.
With a bit of luck, we might hold our nerve here in Scotland and continue to generate new innovative companies, while others are more preoccupied about when “normality” might return.