Finding the next unicorns 

Scotland’s tech sector has a well-earned reputation for exciting and successful start-ups which have attracted the attention – and wallets – of billion-dollar corporations.

In recent years, Skyscanner and FanDuel are just two of the high-profile names added to the honour role of home-grown talent acquired by major global players.

Stephen Trombala, partner at Shepherd and Wedderburn, believes there’s more to come and the sector’s prospects for growth are undiminished (even with challenges like the post-Brexit landscape to overcome).

Shepherd and Wedderburn was adviser on the FanDuel sale to Paddy Power Betfair last year, and also advised on financial technology (fintech) deals with an aggregate value of more than £650 million last year. Trombala says there is a growing list of global players wanting to invest in these Scottish success stories.

“The start-up scene here is vibrant, as is early-stage financing,” he said. “But companies looking beyond ‘series-A’ funding need to attract capital externally and that has historically been a challenge. Companies have to seek larger development capital pools outside Scotland, and there’s been a significant influx of capital from the US, the Far East and Europe.”

This funding challenge has led some companies to sell rather than attempt to grow on their own. However, far from being a negative for the industry, Trombala believes the influx of capital is helping fund the next wave of growth.

He said: “We’ve seen one wave of people building businesses, doing very well, then selling. They are then reinvesting back, not just in terms of capital, but in experience.

“I’d expect the next wave of companies that come through the next cycle to do even better, there are more people on the ground who’ve good experience in growing these businesses – and they will probably have more ready access to larger levels of capital.”

“The main pitfalls are when companies don’t structure themselves appropriately and they can find their ability to grow quickly is heavily impaired. We work with the founders of these businesses to allow them to grow more quickly, whatever their ambition is.”

In addition to Skyscanner (sold to Ctrip in 2016) and FanDuel, there are other notable acquisitions in recent years in the areas of gaming, IT network security and financial technology (fintech).

Key to the tech sector’s development has been backing at a public policy level. The Edinburgh City Deal saw £300 million invested each by the UK and Scottish Governments. A lot of this investment has been made into the university sector and the high-quality research and graduates is an important factor in the tech sector’s future growth. Recent projects have included the National Robotarium, a collaboration between Edinburgh and Heriot-Watt universities, and the AI and Blockchain Accelerator, a partnership between Wayra (Telefonica’s open-innovation platform) and the University of Edinburgh, which aims to welcome 20 start-ups a year and help them grow their companies faster and prove the commercial viability of their technology.

What about the challenges? With such levels of investment there is always a risk of a bursting bubble, and Trombala admits there have been “very large multiples” paid for businesses when his firm has been acting on the sell-side. However, he adds: “Time will tell whether these multiples are indicative of us approaching the top of an M&A bubble, or if the prices paid are justified. But so far as the Scottish tech scene is concerned, those sorts of sales are great news.

“On the face of it, the sellers get a full price, and the overseas purchaser acquires some core technology and a skilled local workforce – resulting in further investment into the local economy. It’s genuinely a win-win scenario.”

Even the major headache of the last few years caused by Brexit doesn’t give too much cause for concern. “The Brexit effect may have a chilling effect on the access to personnel”, says Trombala: “because many graduates are Europeans or from the Far East, coming here to study. I guess that could impact on the numbers of quality of graduates coming through.

“But in business terms, we don’t see that having a chilling effect at all. In fact, the relative weakness in sterling over the last couple of years has driven more transaction flow and interest in the sector. Overseas investors or corporates can see opportunities here that look relatively inexpensive to them.”