EIE 18: The Investors View

EIE Calum Paterson SEP

With only a week until EIE 2018, Scotland’s leading investor showcase for digital technology companies, DIGIT speaks to Calum Paterson, the managing partner at Scottish Equity Partners, one of the country’s leading venture capital firms, about the opportunities, challenges and evolution of the Scottish tech sector.

Scottish Equity Partners (SEP) has been part of the Scottish investment landscape for nearly 20 years. Investing in companies across the UK and Europe, SEP nevertheless retains a keen interest in and focus on the rapidly evolving technology sectors in Scotland.

Calum Paterson, SEP’s Managing Partner has worked in venture capital and private equity for more than 25 years.  He co-founded SEP in 2000 and has been responsible for managing the firm since then, overseeing its development into one of Europe’s leading venture and growth capital investors.  He has been closely involved in many of SEP’s most notable investments, including Scottish tech ‘unicorn’ Skyscanner, where he was a member of the board of directors prior to its £1.5 billion acquisition by Ctrip at the end of 2016.  Calum was recently appointed the Chairman of the BVCA, the industry body for the private equity and venture capital industry in the UK.

In the run-up to EIE 18, DIGIT spoke to Calum about the challenges and opportunities facing start-ups in Scotland, what makes the Scottish scene unique and asked what ‘good’ looks like to the award-winning investor.

DIGIT: SEP has a long track record of investing in Scottish technology companies. What sort of changes have you seen in that time?

Calum Paterson: “The digital economy has been something of a game changer for start-up companies.  Small amounts of capital now go a long way and market feedback is almost instantaneous.  I think there is greater interest in technology investment today, but perhaps less appetite for companies with highly capital-intensive business models.

“Venture capital is now more global in outlook and more emphasis on revenue generating companies, where technical and commercial viability has been proven. Demand for growth equity has increased with the emergence of new business models and the convergence of technologies such as software as a service (SaaS) and cloud computing.  If anything, however, the start-up early stage end of the market is better served than ever, in terms of the various sources of finance available.”

DIGIT: Does Scotland’s tech sector differ significantly from the other tech hubs around the world?

CP: “Scotland benefits from having a vibrant and close knit entrepreneurial ecosystem. Organisations such as Entrepreneurial ScotlandScotlandISCodeClan and Informatics Ventures, along with incubators including the likes of CodeBase and The Data Lab, help to ensure this is a good place to start-up and grow a tech company.

“Events such as EIE also do a great job in showcasing the sector. London and the South East continue to dominate, but there has been a notable swing in recent years towards other parts of the UK, which now account for more than half of all VC tech investments.”

DIGIT: What do you see as the greatest challenges facing Scottish technology companies at present?

CP: “Scaling and internationalisation are always major issues, but I think the biggest challenge of all is people.  We are going to need an increasing pool of local digital and IT talent together, with more senior managers experienced in global growth.

“I also think there is significant room for improvement in terms of our approach to education and learning. For example, we have some genuinely world class universities but, if Scotland is going to be competitive in the future, we will need to get our priorities right and ensure our young people have fair and proper access to them.”

DIGIT: What do Scottish technology companies need to look like to meet SEP’s investment criteria?

CP: “We have a natural enthusiasm for companies in Scotland and many of our most successful investments over the years have been based here.  Typically, we invest between £10m and £20m in companies that have got to a reasonable stage of development, and are now looking to accelerate their growth and expand internationally.

“We like companies with high calibre leadership and that are ambitious. Our investments are across a range of technology sectors but we are particularly interested in enterprise software, SaaS, consumer internet and tech-enabled service businesses.

“Our approach is to engage actively with our portfolio companies to influence strategic development and help them succeed. We have a very strong network of advisory and entrepreneurial relationships to support international expansion. So, it’s important for us that the companies we invest in are positive about that kind of input.

“Our current portfolio of 25 companies operates in over 170 countries with aggregate revenues of over £1.2bn and approximately 5,500 employees.”

DIGIT: Skyscanner is one of your highest profile Scottish investments. What made that company such a success?

CP: “I think there have been a number of things that have contributed to the Skyscanner’s success, including a great product, a first-class team and strong execution. A customer-first mentality has been embedded in everything it has done and I am sure that having long term, patient investment also helped.

“The fact that its business model was highly capital efficient meant that Skyscanner was able to retain control of its own destiny. In the early days, Skycanner was focused on travel search across budget carriers and chartered airlines in Europe. It saw the opportunity to take it much further.

“Our investment was intended to help the company extend its reach across all airlines globally and to scale the company internationally. It did that.

“Skyscanner now employs over 900 people and is firmly ranked as one of the world’s top online travel brands. The founders, management team and employees deserve great credit for what has been achieved.”

DIGIT: Do you think Skyscanner’s success has had an impact on other technology companies in Scotland?

CP: “Skyscanner’s phenomenal growth, £1.5 billion acquisition by Ctrip and its ongoing success has had a very positive impact, for sure. Amongst other things, it has demonstrated that it is possible to build a global technology business, headquartered in Scotland. So, that should be source of inspiration to others.

“Skyscanner has remained operationally independent and committed to its Edinburgh and Glasgow offices. Many of the company’s employees participated in the company’s financial success and were rewarded for their efforts in scaling the business. That should encourage others who work in the tech sector and those who are considering doing so.”

DIGIT: With EIE in mind, what advice would you give to technology companies currently seeking funding?

CP: “External funders tend to have their own specific investment criteria (size, stage, sector and geography) and it is important to find the right one for your business.

“It is a long-term partnership between investors, founders and management teams. Investors typically take a seat on the board and an active interest in the strategic direction and operational priorities of the business. So, it is important the goals and aspirations are aligned right from the very start. Relationships are more important than money.”

DIGIT: What are the most common errors you see young companies making when they come looking for funding?

CP: “Our focus is on revenue-generating growth stage companies, rather than on start-ups and early stage businesses, but there are a couple of areas worth noting.

“The first is valuation. Founders often consider equity dilution in isolation. It is at least as important to also evaluate the experience, integrity and capability of the investor who is offering you terms. Look at the whole package.

“The second is management.  At the core of every successful business is a strong team. The skills and experience required to drive growth may however change over time and a good investor can help with this.”

DIGIT: Is EIE considered a significant event within Scotland’s technology sector?

“Yes, absolutely.  What sets EIE apart is the programme of intensive mentoring and support that the 60 participating companies receive. Weeks of comprehensive pitch training, coaching, boot camp and investor readiness events all ensure that when each company takes to the stage at EIE their proposition is as clear and attractive as possible to the audience of investors.

“EIE is a great opportunity for Scotland to showcase its best innovative early stage companies to investors from across the world.”

DIGIT: What are the most interesting areas in the global tech market for you as an investor right now?

CP: The UK is establishing a strong reputation in artificial intelligence (AI), with some very notable deals. Pitchbook have recently announced that there were 309 European VC investments in AI and machine learning in 2017, with a total value of €1.2 billion.

“Centres of excellence such as the University of Edinburgh, placed 14th in the 2018 world university rankings for computer science, should produce future investment opportunities in AI, machine learning and beyond.

“Fintech is another interesting area, with the UK’s established financial services industry ripe for innovation.  The UK and Ireland accounted for almost half of the fintech deals in Europe in 2017 and three of the top five largest investments in Europe in 2017 were in financial services.  Given Scotland’s strengths in financial services, we would hope to see some exciting fintech companies emerge in the future.”

EIE 18

EIE, Engage Invest Exploit, is Scotland’s premier technology investor showcase. It features the most innovative data-driven tech companies emerging from Scotland, the UK and beyond. Visitors to EIE can:

  • network with fellow investors and entrepreneurs
  • meet 60 pitching companies seeking investment
  • hear from industry thought leaders through our carefully selected keynotes
  • experience the vibrant tech scene and ecosystem that is putting Scotland on the map for technology innovation

EIE 18 takes place at Edinburgh University’s McEwan Hall on April 19th 2018. Registration has closed and only a very few standby tickets remain. Find out more on the EIE website.

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