Stephen Trombala - corporate finance partner at leading law firm Shepherd and Wedderburn
Scotland has an impressive history of innovation, not least technological, and the current wave of entrepreneurial spirit in this sector is attracting the attention of a growing number of US investors.
Entrepreneurs are the lifeblood of the Scottish economy and early-stage scalable businesses are crucial to its future. Digital technology is Scotland's fastest-growing sector and is predicted to grow twice as fast as the Scottish economy overall between now and 2024, according to a report by Skills Development Scotland and the Scottish Government.
In recent years, the impetus has increased and Stephen Trombala, a corporate finance partner at leading law firm Shepherd and Wedderburn and one of the country’s most highly regarded legal advisers to tech businesses, points to some highly visible global success stories.
Skyscanner, the pioneering travel metasearch engine company founded in 2004 by three IT specialists in Edinburgh, sold in 2016 for $1.75 billion to CTRIP, the largest travel company in China. Meanwhile, FanDuel, the web-based fantasy sports provider, which was also founded in Edinburgh, is now based in New York following its acquisition by Paddy Power Betfair. Trombala advised FanDuel from its inception to its sale last year.
Major US corporations including Blackrock, the world’s largest asset manager, as well as banks such as Morgan Stanley and JP Morgan Chase have established significant presences in Scotland, taking advantage of an exceptional digital technology skill base. JP Morgan selected Glasgow Technology Centre, based in the city’s International Financial Services District, from 30 European locations as its technology hub, citing the fact that the Scotland is a magnet for large fintech companies.
Edinburgh’s thriving tech ecosystem has also attracted the world’s largest online retailer. Amazon’s Development Centre in Edinburgh devises and grows innovations for Amazon around the world and small teams of developers and designers run major parts of Amazon’s business, technology and operations, from interactive User Interface (UI) design to large-scale distributed systems and machine learning.
These are clearly exciting times for US investors eyeing opportunities in Scotland and Trombala says the current wave of innovation makes him the most optimistic he has been in the past decade.
That innovation is underpinned by a strong support base that includes more than 1,500 technology companies and world-class universities that are producing 15,000 graduates each year in digital technology disciplines.
Among the many incubators, accelerators and tech clusters that have multiplied over the years is Codebase, the largest technology incubator in the UK, which has three core sites in Edinburgh, Stirling and Aberdeen and whose tenants have raised $582 million in investment.
“Some of the new wave of tech companies are acting as incubators themselves by allowing smaller companies to share working spaces in their offices, which means there is a valuable cross-fertilization of ideas and the new-start companies also have the benefit of the wisdom of the guys in the larger companies,” says Trombala. “And when you have a lot of these people working together in the same space that can only be a very positive development.”
Trombala points to the impact of the City Region Deals in driving collaboration and innovation in the tech sector. The City Region Deals are agreements between the Scottish Government, the UK Government and local government designed to bring about long-term strategic approaches to improving regional economies.
“The University of Edinburgh and Heriot-Watt University are both benefiting from the Edinburgh City Region Deal, which means $1.6 billion to deliver economic growth across the region.
“Much of this is going into universities and one of the first beneficiaries is the Bayes Centre at The University of Edinburgh, one of five data-driven innovation hubs in Edinburgh and south-east Scotland, at which world-leading data science and artificial intelligence teams are collaborating with industry to drive data-driven innovation.”
Essentially, the center is, he says, the hub of computing science and mathematics at the university, which is also home to the Edinburgh Parallel Computing Centre (EPCC), a supercomputing center that has gained a global reputation for leading-edge capability in all areas of High Performance Computing (HPC) and Big Data.
“Through their incubators, the universities are beginning to engage with business to energize young businesses,” says Trombala, who adds that at the Bayes Centre Wayra, Telefonica’s open innovation platform, now brings 20 start-ups a year into its new artificial intelligence (AI) and blockchain-focused accelerator programme. Launched last year, the programme provides advice and mentoring to take ideas to investment stage, resulting in spin-outs and start-ups using AI and blockchain.
“This is its first venture in Scotland and the joint programme with the University of Edinburgh, supported by Scottish Enterprise (Scotland’s main economic development agency) will provide spin-outs and start-ups with a unique ability to scale, through direct access to Telefonica, the Spanish telecommunications giant, in the UK and globally,” says Trombala.
While the cohorts of start-up companies in Scotland’s accelerator programmes have the undoubted advantage of mentoring and various levels of support – from business experience to affordable workspace – there is also a vibrant early stage-investment zone in the Central Belt of Scotland, which stretches from Edinburgh in the east to Glasgow in the west, he says.
“A lot of credit has to go to the Scottish Investment Bank (the investment arm of Scottish Enterprise) because it provides matched funding to a lot of the early stage – and later stage – investment and the bank will continue as a co-investment partner all the way through the various rounds of financing.”
The Scottish Investment Bank (SIB) makes commercial equity and loan investments alongside a range of private sector funders. Equity funding often provides vital capital in the early stages of a high-growth company where alternative sources of funding are not as appropriate, with SIB potentially providing equity funding of up to 50% for companies that have a gap in their overall funding package.
He also notes the well-established and active network of Angel investor syndicates.
LINC Scotland, the Scottish Angel Capital Association, regularly invests in companies in the enabling technologies, digital media and health tech.
“At business start-up stage there is a significant cohort of companies coming through that the SIB and angel syndicates have supported,” says Trombala. “The challenge then is for those companies to develop their businesses and demonstrate to larger funds that they are a good larger investment opportunity for them.”
While homegrown tech success stories Skyscanner and FanDuel achieved the rarefied unicorn status (a privately held startup company valued at over $1 billion), he believes there is similar potential for an increasing number of Scottish companies – should they have the ambition and courage to seize the opportunity.
“Take FanDuel as an example of innovation that began in Edinburgh, which nobody in the US would have foreseen. The founders built a fantasy sports platform and realized the financial potential in it by taking it to the biggest market in the world – the US.”
And there are others that have succeeded by going down the same route – Two Big Ears, an Edinburgh-based company that specializes in spatial 3D audio in cinematic and gaming experiences was founded as recently as 2013 and was acquired by Facebook three years ago.
He points to other companies with a global footprint and the potential to upscale considerably. One, TVSquared, has more than 700 client brands in over 70 countries, including in Europe, the US and Japan, who use the company to measure and optimize TV performance, giving advertisers a deep understanding of TV’s business impact. Shepherd and Wedderburn’s Trombala advised in a $7.7m funding round last year that brought the company’s equity funding to more than $19.7m.
He also identifies Cortex Worldwide, an Edinburgh-based company that provides cloud-based digital marketing solutions and trades in the US and Europe. “These are Scottish businesses to watch as they are already trading abroad and are great next-stage companies,” he says.
The future for Scottish digital technology is very promising. Even the specter of Brexit, the UK’s imminent departure from the European Union, does not trouble Trombala unduly in this regard.
“I can’t see Brexit having any impact whatsoever regarding innovative companies raising money because they have one thing in common: their businesses are all global applications so, generally speaking, whatever happens in the UK is really inconsequential.
“The one risk investors are identifying is the issue of immigration. Will these companies still be able to get as many highly skilled people to working within their organisation if immigration into the UK becomes more difficult?
“The UK Government is, however, proposing a skills-based immigration system and there’s no reason to believe that companies won’t be able to get the right people, even if they are not coming from Europe.”
Trombala believes there are an unprecedented number of positive developments in the tech sector that that will produce a great many new tech businesses, whether in fintech blockchain, AI or Big Data. “I really do think we will see another wave of innovation and the cohorts that emerge from all that activity will have great opportunities and grow great businesses.”
Edinburgh the technology hub
Shepherd and Wedderburn’s Stephen Trombala believes Edinburgh has significant advantages for entrepreneurs starting and growing a company in the digital technology sector, not least because of its ambition to become the data capital of Europe.
Among UK cities, Edinburgh was second only to London in attracting digital technology investment in 2016, with $205m of inward investment coming to Scotland’s capital. International tech companies such as Amazon, Cisco, Oracle, Microsoft and IBM have created bases in the City Region, which will benefit from the $1.6bn City Region Deal over the next eight years.
The Scots’ reputation for prudent and ethical business practices is also attractive to US investors. “Becoming the data capital of Europe could involve initiatives such as data ethics: what it means to use data ethically, and automated decision making (e.g. whether or not to employ someone, grant them a loan or offer them insurance), and that will become more important as more data is gathered about us,” he says.
The University of Edinburgh’s School of Informatics is a world-leader in computing science research and teaching – and commercialisation of innovation. The largest, longest established and highest quality informatics research group in the UK is a key asset for Scotland’s IT sector and shows the value of networks driving innovation.
There are other sound reasons for choosing to invest in the city. According to Invest Edinburgh, the City of Edinburgh Council’s investor support agency, between April 2017 and March 2018 there were 29 recorded foreign direct investments in the Scottish capital. Foreign investors were encouraged by the fact that 63.9% of the city’s workforce in employment is educated to degree level or above and the city’s reputation as a leading European financial center, with more than $644bn assets under management.
Research released in January this year ranked Edinburgh as the UK city with the best prospects for economic growth in 2019. The Vitality Index, which is compiled by national property consultant Lambert Smith Hampton (LSH), identifies those destinations best placed to support future economic growth and provide opportunities for businesses to expand over the coming year. Its comprehensive assessment of the health of UK towns and cities takes into account education, entrepreneurialism, affluence, productivity, growth and environmental factors.
Of Edinburgh’s rise to the top, Ian Davidson, head of LSH’s Edinburgh office, said: “It is an educated and increasingly affluent city and has a thriving social scene. Access to a substantial and diverse workforce underpins business success and expansion here and supports the city’s wider growth.”
Edinburgh’s reputation as a technology cluster, combined with the city’s thriving entrepreneurial ecosystem and a mature financial services sector, mean it is poised to become one of the world’s top ten fintech hubs.
“Now more than ever there are really good reasons to be excited and optimistic about the future of tech – particularly in Edinburgh, says Trombala.