Bill Jamieson: Scotland has a daunting task keeping itself on the global economic map

WHAT will be the new businesses that will shape Scotland's future? Where will our graduates find jobs? Will our economy have a place at all in the new global map?

These are big questions for Scotland. And in the middle of a recessionary slump they do not come much bigger. Politicians pay lip service to the need to encourage enterprise and new business formation. But the picture across the venture capital sector in Scotland is dire. There are many noisy victims of this recession and the curtailment of credit by stricken banks. But the silent one is our economic future.

A campaign is now getting under way to boost innovation and entrepreneurship. It cannot come soon enough. The aim is to spread a broader understanding of the sector and to press for policy changes that could help it lead an upturn. Indeed, without a resurgence of innovation and enterprise here, there may not be much of an upturn for Scotland at all.

News last week of the departure of Jack Perry from the top job at Scottish Enterprise will also cast a searching spotlight on SE's future role as an agency for high value-added business start-ups. Indeed, it may well catalyse an overhaul of the agency's role in economic policy, and in particular its role in helping to kick-start hi-tech, innovative business.

Overall, there is much work to do. Even before we entered recession, Scotland's record in business start-ups was dismal. Business formation rates per 10, 000 population have long trailed those for the UK overall. And internationally our record looks none too impressive. In 2007 Scotland invested £114 million in university spin-out projects. The equivalent figure for Israel, with a broadly comparable population of seven million, was $2.18 billion (£1.35bn) – a tenfold difference. Yet Scotland can fairly claim world-class intellectual assets, with outstanding universities.

This week sees the publication of a report on stimulating innovation and enterprise in Scotland. The report is based on a series of debates sponsored by the University of Edinburgh Business School and leading business legal firm MBM Commercial. The debates drew together senior figures from the business sector, private equity leaders, academics and policymakers. The next step will be a major public conference this autumn to engage policymakers at the highest level on proposals designed to boost early-stage investment activity in Scotland.

Prominent among the proposals for change is a call for the creation of a Scottish Innovation Fund to boost support for early-stage companies. Currently, just 0.1 per cent of GDP is spent in Scotland on risk capital investment.

One active area has been the Scottish Co-Investment Funds run out of SE. They have now been involved in 300 deals, with £45m of public funding attracting £95m from private investors. It is thought to be working reasonably well. However, there is a pending academic report on the performance of ITIs and whether the £480m allocated to this project could be more effectively spent. The spin-out success rate has not been high.

A recent SE report showed that out of 200 spin-out companies it reviewed, 30 per cent failed, 55 per cent have less than five employees while only 10 per cent achieved any level of scale.

At first glance this would seem the worst possible time for a campaign such as this. Established businesses are struggling, never mind the daunting problems facing new ones. And bank lending for business has been severely curtailed as a result of the credit crisis. Small firms tell of loans being offered way above the usual premium on Libor, sharp rises in charges and arrangement fees, and sudden and incoherent changes in lending policy.

But it is the shortage of capital that is the point. Bank lending to the business sector is unlikely to recover to pre-crisis levels any time soon. Indeed, the withdrawal of overseas banks from the commercial lending sector in the UK will take years to make good.

Yet at the same time the giant institutions such as pension funds and insurance companies are sitting on record amounts of cash. The potential amount available for business start-ups and university campus spin-outs has never been greater.

Thus there is famine at one end of the capital barbell and feast at the other. The task for the industry is to attract more venture capital activity in Scotland, improve on match-making between angel investor and entrepreneur and position itself ahead of any upturn in the economy in 2010 and 2011.

And the stakes could not be higher. MBM partner Sandy Finlayson says: "How do we make Scotland a place where our children wish to stay because it is full of opportunity rather than a place they have to leave because there is none? Just one in eight graduates from Scottish universities are expected to get graduate-level jobs this year.

"We must invest in our future if we wish to have one."

Among the other recommendations made are:

&149 a public-private body, funded by Scottish Enterprise and the Scottish Funding Council, to offer incentives to industry and university reps to match needs and capabilities;

&149 a public sector "requirement to purchase" guideline for small and medium-sized businesses (SMEs);

&149 improvement of the spin-out process for Scottish entrepreneurs to commercialise university research;

• improved match-making between "investable" entrepreneurs and informal investors in Scotland. Angel investors consistently cite the poor level of "investor-readiness" of Scottish entrepreneurs and their lack of due diligence on the investor being approached, while entrepreneurs consistently cite their frustration in accessing angels or differentiating amongst the large number of angel syndicates active in Scotland.

Dr Geoff Gregson, deputy director of Edinburgh University's Centre for Entrepreneurship Research, says: "The recommendations echo the collective voice of Scotland's leading entrepreneurs, universities and economic development leaders. These recommendations carry a central message: that it is time for Scotland to raise its game and take bold steps and to realise the wealth inherent in this country's innovative and entrepreneurial capabilities."

At UK level, Chancellor Alistair Darling announced a £750m Strategic Investment Fund in the Budget, which the industry would like to see invested through a fund of funds. The British Business Angels Association is also calling for an increase in the Enterprise Investment Scheme tax relief from 20 per cent to 30 per cent. Research shows that the EIS is a major incentive to make angel investments. It also wants the EIS scheme amended to encourage active involvement by business angels in the companies they are backing.

Part of the problem in recent years has been the low level of venture capital activity in Scotland, as business start-ups tend to be notably smaller scale than those in the UK as a whole and "below the radar" for many professional investors. The opportunities opening up in the renewables sector are substantial. But the bigger challenge overall will be to get Scotland thinking far more seriously about the huge work it needs to do to create and build the companies of tomorrow.

Summary Report on The Growth Series, available from sandy.finlayson @mbmcommercial.co.uk.