Regional spotlight: Why the future is bright for Scotland’s tech industry

Edinburgh, one of the key tech hubs in Scotland

Scotland is celebrated for its exports of textiles, whisky, salmon, and shortbread. Yet it is Scotland’s technology industry that is driving the next wave of economic growth, with some seeing it as having the potential to become the UK’s Silicon Valley.

Scotland spans nearly 78,000 square kilometres, including the mountainous and loch-filled region in the northwest and the built-up areas closer to the English border.

While it has eight cities, its tech activity is heavily concentrated in three: Edinburgh, Glasgow and Aberdeen.

There are more than 850 high-growth tech businesses in Scotland, according to research firm Beahurst, with 38% of those headquartered in Edinburgh. Combined, these startups raised £454m in 2021, and £312m in the first half of 2022.

Entrepreneurs in the region are optimistic about its potential. According to the annual Scottish Startup Survey, 93% of businesses based in Scotland said it is a good place to launch a startup.

“Scotland has gone from strength to strength as a tech hub. Its future growth looks strong and it’s only a matter of time before it produces its next tech titan,” says Steve Harris, UK head of technology sector, SME & mid corporate at the Bank of Scotland.

But what makes Scotland a fast-growing tech region, and how did it get to where it is today?

Silicon Glen

Over the centuries Scotland’s economy has evolved from an industrial powerhouse in the 1800s to one centred around heavy industry and shipbuilding.

From the 1940s, electronics companies flocked to Scotland. In the following decades, semiconductors become a crucial part of Scotland’s tech industry, earning the triangle between Dundee, Inverclyde and Edinburgh the moniker Silicon Glen.

This attracted a wave of overseas tech giants, including IBM and Honeywell, to establish a presence in Scotland.

However, the tech crash during the late 1990s to 2000 sent ripples across the Atlantic that hit Scotland’s high-tech industry, resulting in mass layoffs at electronics companies and shuttered factories.

Over the last decade, there has been a resurgence of Scotland’s tech industry and a diversification away from electronics manufacturing.

There is now a focus on fostering local innovation – although Scotland continues to attract overseas tech companies. US tech giant Amazon, for example, established a software development centre in Edinburgh back in 2004 and has consistently expanded it in the years since.

Hardware to software

Scotland’s diversification away from hardware manufacturing has paved way for a booming software industry. The country is particularly strong in AI, cybersecurity and fintech.

According to FinTech Scotland, there was a 27% increase in the number of fintech companies based in the country in 2021.

Meanwhile, Dundee-founded Rockstar North, the developer studio behind the Grand Theft Auto series, has put Scotland’s gaming industry on the map.

Compared to other parts of the UK, Scotland’s tech industry is nascent, with half of the companies at the seed stage.

Funding across the UK slowed down in the second half of the year, but plenty of tech startups in Scotland continued to pick up funding, including life science company Cytomos, health tech company PhysioMedics and pension platform Guiide.

The unicorn may be Scotland’s national animal, but it has produced just three companies that have reached the much-vaunted metric of a $1bn private valuation.

One of these is BrewDog, which as a craft beer brewer does not fall under the remit of tech company. The second is FanDuel, an Edinburgh-founded gambling company most recently valued at $20bn.

Edinburgh-based Skyscanner is therefore Scotland’s only true tech unicorn. Founded in 2001, the travel search agency was acquired for £1.4bn in 2016.

While Scotland has fewer unicorn companies compared to other regions in the UK – in particular London – there are four Scottish companies identified as ‘futurecorns’, high-growth companies expected to hit the $1bn milestone in the near future.

Three of these – Amphista Therapeutics, NuCana BioMed and Roslin – are biotechnology companies, while Interactive Investor demonstrates Scotland’s fintech strength.

These companies, and the many other scaleups undergoing periods of rapid growth, show that Scotland’s tech industry is one with high potential. Some, including Raising Partners founder Helena Murphy, believe that Scotland – and Glasgow in particular, can emulate the success of Silicon Valley in the US.

Scotland tech industry support

Scotland’s devolved parliament has put tech at the forefront of growth plans. In July 2020, the Scottish government commissioned a report, led by former Skyscanner chief operating officer Mark Logan, to review its technology ecosystem and make recommendations to improve it.

Since then, the devolved government has invested £60m into the ecosystem. Logan’s appointment as Scotland’s first chief entrepreneur has won praise from the tech industry.

“With a focus on ensuring that entrepreneurship is instilled in the education and skills systems and supporting both D&I in business scaling and the Start-Up Nation Programme, Mark is the public face of a national endeavour to radically transform the Scottish economy,” says Garry Bernstein, group lead at Tech Scotland Advocates.

In July 2022, the Scottish government awarded a contract worth up to £42m to Edinburgh-based Codebase to set up seven new tech scaler hubs across Scotland. Bernstein says that this is “driving improved access to world-class infrastructure, learning and investment”.

He adds: “The addition of the Scottish National Investment Bank to a sophisticated and diverse investment landscape will complement the extraordinary success the country’s Enterprise Agencies have had as equity/debt co-investors in Scotland’s tech scene.”

Supporting Scotland’s tech growth is a network of incubators, accelerators, angel investor networks and specialist hubs. Tech incubator Codebase has supported over 500 startups, which have gone on to raise more than $4.8bn combined. Since 2014 it has grown its presence from Edinburgh to include Stirling and Aberdeen.

Meanwhile, investments made by business angel syndicate Archangels have generated an estimated £1.4bn for the Scottish economy in the tech and life science fields.

Pre-seed accelerator Seed Haus and privately financed incubator Techube are also based in Edinburgh, as are biotech and life science hubs BioQuarter and the Roslin Innovation Centre.

In Glasgow, co-working and innovation spaces Tontine and RookieOven provide focal points for entrepreneurs to meet.

“The key factors underpinning the growth of Scotland as a tech hub is the access to good talent and the ability to access support from bodies such as Scottish Enterprise,” says Reza Najafian, director at Staffscanner, a platform for temporary healthcare staff. “Staffscanner has been fortunate to attract and retain good talent within the UK. The access to the RBS Entrepreneur Accelerator was also extremely useful as we were around other startups which made the whole journey less isolating.”

There is strong collaboration between academia and industry in Scotland, with the University of Edinburgh among those running accelerator initiatives.

A thriving space sector

Never before has a rocket launched from British soil into space. That looks set to change in 2023 – and Scotland is set to be at the heart of the UK’s plans.

There are currently five spaceports in varying stages of development across Scotland. The country’s geographical position gives it access to both polar and sun-synchronous orbits without flying over land inhabited by humans, making it the “best place in the UK” for vertical rocket launches.

These advantageous factors have attracted 173 space companies to Scotland, an ecosystem that employs one in five of all the UK’s space sector jobs.

These range from rocket manufacturers to satellite makers and data analysers, with regional specialisms emerging. Glasgow, for example, builds more satellites than any other place in Europe.

Edinburgh-based Skyrora and Forres-based Orbex are both building rockets to launch small satellites into orbit, and have raised millions in venture funding to do so.

Two spaceports – in Sutherland and on the Shetland Islands – are on track to launch satellites onboard each company’s rockets into space next year.

Scotland tech ecosystem challenges

Scotland’s tech industry is shooting for the stars, but its startups face many of the same challenges felt across the rest of the UK. These include access to funding and talent.

A more specific challenge for Scotland is attracting the later-stage capital required to scale startups up from the early to later stages. Attracting this financial support amid a worsening macroeconomic outlook will make this more challenging as investors tighten their belts.

This year’s Scottish Startup Survey found that 69% of respondents have found it difficult to hire talent over the last 12 months, with engineer and developer roles particularly tricky to fill.

“The main challenges are also around staff and the ability to attract the numbers required for continued growth,” says Staffscanner’s Najafian. “Creating a stable work environment for staff is also crucial in times of uncertainty.”

But with the devolved government in Scotland prioritising tech sector growth, combined with the existing entrepreneurial spirit across the country, the future looks bright.

“This coming year will be challenging for entrepreneurs across the whole of the UK, not just Scotland,” says the Bank of Scotland’s Harris. “It is crucial that the ecosystem continues to get support to build on the brilliant foundations that’s already producing innovative companies. I am confident that Scotland will continue to demonstrate that it is a flourishing place for tech businesses.”

The Bank of Scotland’s relationship managers are experienced in the tech sector and are keen to support further growth of this vibrant industry. Please get in touch today to discuss how we might help your business.

Steve Harris is UK head of technology, SME & mid corporate at Bank of Scotland.

[email protected]

For more information about how the Bank of Scotland supports UK tech businesses, click here.

In partnership with the Bank of Scotland, part of the Lloyds Banking Group.