Note: the column generated some useful and enlightening comments on The National site from Mark Sorsa-Leslie, an entrepreneur who had direct experience of Finnish state support of his start-up in the 2000s. I append it for interest below the fold of this blog.
Innovation can be at the heart of our nation if we give it the help it needs
LEADING business-friendly female Scots politician caught giving public money to risk-laden private enterprises! Or: Nicola Sturgeon’s announcement this week of a £78 million, helping smooth the way to Scotland as an “innovation nation”, no less.
You may well roll your eyes back till the scary white bits show – particularly if you’ve been the subject (or more accurately object) of some “innovation” programme in your workplace. But roll them back downwards: this really matters.
Like any other developed-world economy, Scotland needs to find a way to raise itself steadily out of its own deficit hole, the sides made slippery with fiscal, demographic and many other challenges.
Making new stuff that the planet wants to buy or use is at least something we can actively get on with. It’s also based on a national resource which is in potentially infinite supply: the imagination and energy of our people.
But there are some unresolved dilemmas at the heart of innovation policy that we’re steadily working our way through in Scotland. One key debate is about where best to put public money, in order to generate the most powerfully innovative companies. The two contending approaches seem to be “upstream” and “downstream” innovation.
“Upstream” innovation is recognisable from the pages of Wired magazine, or movies such as The Social Network. Nesta, the innovation charity (to which, let me disclaim, I am contracted as a curator) describes “upstream” as the combination of “cutting-edge university research, entrepreneurial finance, and fast-growing new businesses, especially but not only in the technology sector”.
The metaphor means, I guess, that innovation comes best from incredibly fertile and powerful initial conditions. Innovation is a ground-breaking force, bursting through the crust of convention and complacency, providing a new flow of possible products and services.
You can see how this fits with the heroic-entrepreneur narrative that frames American innovators such as the electric-car pioneer Elon Musk, or the late Steve Jobs (the Apple founder about to be mythologised in a film by Danny Boyle).
Where public money comes into this model is an acute question. The economist Marianna Mazzucato – who now finds herself both on Sturgeon’s Scottish Council of Economic Advisers, and on Corbyn’s Economic Advisory Committee – has caused a stir over the past few years with a very effective conference routine.
She holds up an iPhone (which popular mythology says sprung whole and entire from the hippie capitalist brain of Mr Jobs). She then itemises all the parts of its machinery and software which relied on state-funded, blue-skies primary research – a lot of it (but not all) from the US defence budget.
Private companies don’t have the capacity to make these visionary techno-scientific commitments. Yet, as entrepreneurial enterprises, they benefit from using the fruits of this public research.
Why, asks Mazzucato, can’t the state also be an entrepreneur? Just like the venture capitalists, why can’t the state get a direct return on its investment – and particularly from these potentially mega-profitable companies who have directly benefitted from state-sponsored science?
Looking at Scotland today, you can imagine Professor Mazzucato’s ideas finding traction. This week we found Scotland has more top-rated research universities per head of population than any other country.
Read any reporting on innovation in Scotland, and you can see how much this country is abreast of the 21st century’s most transformative sci-tech. Medical neuroscience, gaming, renewable energy, genomics ... The building-blocks of an age of plenty and wonder are right at the heart of our ancient universities’ research interests.
So “upstream” innovation, as in the Silicon Valley model, would seem to fit the way things are in Scotland. But we’re missing something – indeed, quite a few things.
One is that we don’t have America’s (or even London’s) density of venture capitalists, those San Fran moguls who are willing to risk their private investments in university start-ups, but also know they have a vast internal market in the US – one that can absorb failure and amplify success.
So for small nations, the state has to step in as investor – as it does in many other successful small and innovative countries, like Finland, Estonia or Israel. Yet as readers of this paper may keenly appreciate, the Scottish state currently lacks some of the necessary powers required.
A serious, multi-billion national innovation investment bank is what nation-state independence would have allowed us to set up. The “Scottish Business Development Bank” – mentioned in the SNP’s May manifesto and building on Scottish Enterprise’s small fund – is an on-off project that doesn’t look like it will remotely hit the mark.
As for this week’s announced fund, the STUC’s Stephen Boyd – a sharp watcher of innovation policy – welcomed its arrival. But Boyd also cautioned it was “a mistake for the First Minister to present the new fund as a potentially transformative measure. It’s nowhere near the scale necessary to overcome Scotland (and the UK’s) most damaging structural problem: the failure of the financial sector to support growing, innovative businesses with patient, committed capital.”
The new fund is clearly flowing in at the other end of our watery metaphor – what’s called “downstream” innovation. Downstream innovation doesn’t wait for the next paradigm-changing new invention, but looks much more closely at what existing companies in the marketplace need from R&D.
Downstream innovation tries to redirect university departments away from what Nesta calls “curiosity-driven basic research”, towards “more applied research and technological development and deployment”. It also expands the meaning of innovation away from the techno-Eureka! moment. Downstreamers look for new ideas that work at the level of daily business practice – pricing, location, marketing, etc.
Now I understand the hands-on spirit here, a Scotland that “CanDo” (the official branding for the “innovation nation”). Whatever Scotland is, it ain’t no Cupertino, CA. So what do we actually have, and how can we make the best of it?
The Nesta research identifies one more advantage small nations have: the ability to sweep up people in a “national mission” for innovation. A story that says ideas are encouraged from society, culture and daily life, as well as from the labs of brainiacs, is to be entirely welcomed.
Hugh MacDiarmid’s old aspiration for this kind of society still inspires me: “I never set een on a lad or a lass/but I wonder gin he or she/Wi’ a word or a deed’ll suddenly dae/An impossibility”. Look out for the Unusual Suspects Festival later this month in Glasgow, which aims to foment this everyday culture of innovation.
However, just a wee hold-on-a-minute. We don’t want any unnecessary inferiorism here; the implication that radical, world-changing innovation is “no’ for the likes o’ us”. Go online and you can find an overly-cute web cartoon from Scottish Enterprise that preaches the downstream message, under the headline that “innovation isn’t rocket science”.
But we should still find a way for innovation to be rocket science as well. In recent years, Scottish scientists have zoomed in to the tiniest scrap of our biology (Ian Wilmut divining the process of cloning with Dolly the Sheep), or zoomed out to the most fundamental particle of our cosmos (Peter Higgs’s anticipation of the Higgs-Boson).
We should try to support the stream of innovation at its sparkling, elemental, daring source, as well as conduct our trade routes across its wide forths and basins. An “ImagiNation” – the free thought of scientists and artists, supported to follow their curiosity – should always sit behind an “Innovation Nation”. The makar and the maker are fellow visionaries in Scotland’s future.
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Mark Sorsa-Leslie: Having grown a venture-backed company in Finland from 2007-2012, I can tell you that it would not have been possible without the Finnish govt making sure there was early-stage funding available.
We were able to receive direct equity investment from Finnvera, the Finnish equivalent of Scottish Investment Bank, without the dreaded "match-funding" catch-22 that Scottish public bodies require. Sure, in later rounds we needed to bring in match-funding, but not at the start. Or, take the "Young Innovation Company" programme run by TEKES, the Finnish equivalent of Scottish Enterprise. This provided up to €1Million of funding for your business as a 75% grant on any business costs. The grant could be used in conjunction with the equity investments to boost growth of the business - and be used for all business activities - not just R&D. This is important, because many businesses fail not because they have a great product, but because the target market never gets to hear about it. Being able to spend money on marketing/lead generation is crucial.
Finland also realised around 2006 that they needed to increase the transparency of the market of venture finance and created services like TechnopolisOnline.com that made it easy for companies to find the right backer and VCs to find potential investment targets. They learned this from Israel, where the same technique allowed that country to create 250 NASDAQ listed technology companies in 10 years.
Supercell, the Finnish billion dollar unicorn business the publishes Clash of Clans, got started with support from both of these organisations and grew to unicorn status in less than 2 years. Why? Because they had an experienced team, a great plan and solid product focus coupled with access to early-stage funding. They applied for and got and repaid the €1million grant they received from TEKES - then paid €330million in taxes to the Finnish govt when they were acquired - fully funding all of the activity of TEKES had invested in YIC for 5-6 years.
The problem we have in Scotland is we conflate University research with the creation of growth businesses and then direct money to institutions that already have it (the Universities) rather than to the early-stage businesses that don't. We also think that only young, energetic graduates create growth businesses - the average age of a unicorn business founder is 34, (http://techcrunch.com/.../11/02/welcome-to-the-unicorn-club/) - so putting in place the infrastructure to support experienced business people wishing to create high growth businesses is the part that is missing - there's already a ton of support for graduates.
If this £78million fund is to support early-stage businesses, then great - if it just another fund that requires an businesses to work with Universities to create R&D jobs, then it will not have the desired effect.
Pat Kane: Very interesting Mark. It sounds like a clear distinction needs to be made between upstream and downstream innovaton - separate funding/strategies required. Can we conjure up the resource and confidence of a Tekes/Sitra under the macro-constraints of Devo? U may also be interested to read the Nesta report I am grappling with in this piece: https://www.nesta.org.uk/.../when20small20is20beautiful20... best PK
Mark S-L: Thanks Pat. Very interesting paper, but it misses some of the nuances of what was going on in Finland while I was there.
1. You may know this, but the Finns have a word 'talkoo', which means a collective effort to help each other without seeking explicit personal reward for your efforts. Up and down the country, there were many 'talkoot' taking place where people were helping other people get better at crafting their business concepts, presenting their ideas and getting access to finance. Importantly, this was a grass-roots movement, with energetic students and entrepreneurs self-organising to create the institutions they needed with the ready support of successful organisations, people and the government.
Out of this come initiatives like Startup Sauna. Check out this video to get a feel for this - and i've experienced it - its not marketing bullshit - https://www.youtube.com/watch?v=1jeoC_d7EMg This might be what was being referred to in the NESTA paper about the cultural aspects of being a small success nation. In Scotland, we are now beginning to see the same selfless giving from successful people coaching and mentoring new businesses. I believe this is the start of our talkoot culture.
2. If you were seeking angel investment or venture finance for your new business [in Finland] and went to speak to people in that field, the first thing you were asked was "Have you secured the free money yet?", i.e. have you managed to underpin your earliest stages with grant funding from the government. If you had not, the answer was "Go away and come back when you have". There are a few important consequences of this; first, that the business concept and market fit will be more developed by the time you really need private finance and second, that the valuation of the business will be higher. Curiously, this means the private investors receive a smaller share of the business for their investment, but were happier to invest in a "de-risked" business.
Interestingly, TEKES spends €550million with just 400 people employed - 63% of which goes to SMEs. ScotEnt employs 1400 people and uses approximately one third of its budget (circa £300m) on staff and operating costs (circa £100m) and one third on growth companies and innovation (circa £105million). This recent article really sums up well the current approach and benefits realised in Finland: http://www.geektime.com/2015/06/01/welcome-to-finland-where-most-startups-get-government-funding-and-the-payoff-is-high/ You ask, "Can we conjure up the resource and confidence of a Tekes/Sitra under the macro-constraints of Devo?" - Yes, but only if our organisations (ScotEnt, SIB) take a bottom up approach of empowering others and not trying to do things themselves.
And just for completeness, I found this great article written by Andrew Gryf Paterson on the subject of the cultural aspects of talkoot and how they apply to the information society: http://www.osuustoiminta.coop/tekstit/tre2010_paterson_networked-roots-of-talkoot-in-finland_10-2010.pdf