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Does Scottish fintech promise the return of ‘Silicon Glen’?

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Ask international financiers about Scotland and they’ll probably bring up one of two memories – RBS’ collapse into public ownership during the 2008 Crash; and golfing at Gleneagles. But do you think of Silicon Glen?

Fewer will remember Scotland’s halcyon days as Europe’s top manufacturer of computer chips and ATMs back in the late 1990s. And while that industry has long since moved eastward, fintech is promising the revival of “Silicon Glen” and a new place for Scotland on the global tech stage.

Whilst uncertainty was an issue at the start of lockdown with some investment decisions put on hold, things are looking much brighter now”, says Mickael Paris, Marketing Director at Fintech Scotland. Last month, the third annual Scottish Fintech Festival provided a platform to celebrate what appears to be a resurgent and resilient industry. “We’ve seen some great examples of fintech investment success in recent months: Encompass [a RegTech firm at Series A] received a £4.2m investment and Exizent [an institutional tool for bereavement services] recently announced a raise of £3.6m.”

Mickael assures me that these successes are not the only examples from the past year. FinTech Scotland represents over 100 companies, the vast majority of which have been trading for less than five years. Twenty were started in just the past year, with many continuing to expand despite the disruption of the pandemic. The cluster has also received high levels of public funding, including a £22.5m investment by the UK Global Open Finance Centre for Excellence in July, and support from the Scottish Investment Bank.

Whether this support is enough to send the industry into orbit, however, has been called into question by a recent report commissioned for the Scottish Government by Mark Logan. The author will be best known for his five-year term as Chief Operating Officer for SkyScanner – Logan knows a thing or two about attracting high-calibre private investment at the later stages of capitalisation, having helped grow the travel search engine to an exit valuation of $1.75bn by 2016. Here is one of his verdicts on the Scottish tech ecosystem:

“The cap tables of Scottish start-ups can be off-putting to some external VCs because they look different to those that the VCs are accustomed to seeing elsewhere. Specifically, they often include a large number of passive investors (because of earlier syndication) instead of, for example, one or two active angel investor and some VCs, as is more typical. Those cap tables also frequently include a relatively large percentage that is public money.”

Logan was trying to explain the structurally poor track-record of firms on the venture capital stage – crucial for bringing start-ups beyond seed-level funding into Series A and beyond. His identification of a high number of “passive investors” (like angel investors) and high levels of public-sector support formed part of a wider critique on the industry’s disadvantage compared to other regions in the UK, including “low pitching expertise” within start-ups and “poor discoverability of prospects”.

These structural factors are reflected in the numbers. TechNation’s latest annual report into the UK tech industry identified only £200m in venture capital for Scotland’s entire tech industry compared to over £10bn in the UK as a whole, nearly half of which has gone into fintech. Only £93m has been invested in Scotland’s “emerging tech” over the past five years – including the recent explosion in fintech start-ups.

Indeed, sceptics within the industry have highlighted a lack of later-stage funding opportunities as a blow to the region’s competitiveness. “Everyone has been agreed for years that Scotland needs a self-supporting eco-system… At the moment it is too narrow” said Alan Faichney, serial tech director in an interview with Digital Business Magazine last month. “Take Scottish Equity Partners, which has been marvellously successful but now invests in London and Cambridge because there just aren’t enough suitable prospects here.”

We took some of these claims to Mickael Paris, who agreed that Logan had raised a “fair point”:

“Whilst public money is very welcomed by entrepreneurs to get their ideas off the ground… it might put some investors off and we need to look at this as well as how to provide better support to those entrepreneurs around choosing the right type of funding for them.”

When asked whether that funding structure was encouraging investors to look elsewhere in the UK, however, Paris disagreed:

“Our proximity to London is actually a great strength for Scottish fintechs… What we’re witnessing is not an exodus from Scotland to London, in fact quite the opposite. Many companies including Modulr or Previse [both B2B payment platforms] started in London and moved most of their operations to Scotland.”

So, too, has the cluster become home to big international names including FNZ, the New Zealand investment platform, and Avaloq, the Swiss open banking platform which moved its research to Edinburgh in 2012 and became a founding member of FinTech Scotland. The presence of these unicorns suggests that the infrastructure – including world-class research facilities and talent pools – is proving attractive. This makes the relatively poor lift-off rate of homegrown fintechs, however, only more difficult to understand.

A lot could change, of course, as market confidence begins to recover. “There is a lot of ‘dry powder’ in private equity and venture capital funds… There is an appetite to find the right fintech, to understand the shift and how fintechs can support that”, said Oliver Henderson, head of EY’s financial strategy in Scotland, last month. Henderson presents the region’s strong public funding presence as an advantage: “Growth capital of £5m-plus has always been more challenging… This is something we perhaps have not seen enough of in Scotland yet. [But] if you raise a certain level of private capital funding, SIB [Scottish Investment Bank] will often join the funding round to offer additional support.”

Only the next few years will tell how far that additional support will be needed, and whether the pledges of international creditors to invest in the region will be kept as demands on their capital increase across the UK and beyond. The region’s emphasis on social enterprise and not-for-profit innovation may count as a strike against Scottish fintech from a purely commercial perspective in the near future – and if there is any lesson from modern Scottish financial history, it is that success will be associated with self-sufficiency, not the public purse.

Author: Oliver Rhodes

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