Accelerating a Tech Startup Ecosystem: Lessons Learned in South Yorkshire
Blog feature by Darren Balcombe – Deputy CEO of Capital Enterprise.
The first time I heard the term “entrepreneur ecosystem” was in 2013 whilst establishing an Innovators Hub in Sendai, Japan, after the devastation caused by the Tōhoku earthquake and tsunami several years prior. At the time, there was little discussion around the theory of how ecosystems grow and develop but nowadays the topic is front and centre. Numerous academic studies, reports and papers exploring tech startup ecosystems are published every year, exploring everything from where these ecosystems come from to how they can be grown and sustained. Here in the UK, the government’s Levelling Up agenda has also drawn focus to regional tech ecosystems and the conditions required to help them grow.
I thought it would be timely to share lessons we’ve learned at Capital Enterprise from running a major tech ecosystem project in South Yorkshire, TEAM SY. The acronym is short for Technology Ecosystem Acceleration and Market-Making South Yorkshire, and is part-funded by the European Regional Development Fund, with ourselves and Barnsley Council as delivery partners.
First, however, it’s important to understand the nature of the challenges faced by South Yorkshire’s entrepreneurship ecosystem and where Capital Enterprise sits in this.
A shared sense of challenge
TEAM SY was the first major Capital Enterprise project to be delivered in South Yorkshire, and so it was important to establish and build relationships with key stakeholders in the region. We had been exploring collaborative projects with Barnsley Council for some time and it became clear that there was an appetite to develop a new programme that could scale up existing planning with Barnsley Council’s Enterprising Barnsley and Digital Medical Centre (DMC) services. This planning would eventually lead to the TEAM SY project, with Barnsley Council acting as a valued delivery partner. It is not just partner organisations that make projects like these possible, but also the contribution of individuals, and I would like to thank Tracey Johnson (head of all things digital ecosystem at Barnsley DMC) for her contribution to making TEAM SY a success.
Capital Enterprise has a long track record of piloting, testing and delivering programmes that accelerate the growth of early-stage startups. Since 2015, we have supported over 4400 early-stage businesses, helping to create over 6300 high-value jobs. As a not-for-profit, adopting a collaborative approach is an essential part of how we operate and we have a track record of successfully partnering with over 100 organisations in support of early-stage founders.
Acting as a neutral convenor, we undertook a consultation with stakeholders from South Yorkshire’s tech entrepreneurship ecosystem over a period of nearly 12 months. This was essentially a listening exercise where it became clear there was a sense of shared challenge around four major issues (see the Synergy Project for more detail on the ecosystem challenges).
1) Lack of tech startups in the region
2) Lack of a coherent mature startup ecosystem
3) Lack of startup acceleration programmes
4) Lack of investor activity and investor ecosystem
Below I will outline how we faced those challenges and the approach taken to overcome them. TEAM SY is not a silver bullet, if anything it’s more of a shot in the arm, but it goes some way to addressing the need for specialist startup support, signposting, network building, clustering expertise, and pipeline development. The longer term systemic changes required to evolve South Yorkshire into a world class startup ecosystem will take a considerably longer time. Because we wanted to focus on the entire ecosystem, we weren’t looking at how to support one university, one local authority or one particular startup accelerator. Our goal was how to create the conditions for a more sustainable and successful startup ecosystem, a catalyst from which we can build and continue to support ambitious tech entrepreneurs.
- Lack of Tech Startups in the Region
A big challenge for the tech ecosystem in South Yorkshire is the shortage of tech startups in the region. Without a strong pipeline of entrepreneurs, it’s even more difficult to create a strong and viable tech ecosystem and market.
While the digital and tech sector in the South Yorkshire region plays an increasingly important part in local economic growth, with 8,695 digital and tech businesses in the whole of Yorkshire and Humberside representing over 27,100 jobs (2019 Tech Nation report), only 365 new tech startups were created in South Yorkshire in 2019. That translates to just 3.7% of new businesses overall in the region, a proportion below the wider North and national average. Additionally, of these 365 new tech startups, it is likely that only 3-5% will have the ambition and capacity to become highly scalable and investable tech startups on whom the growth of the ecosystem will depend.
The “M” of TEAM represents the market-making activities undertaken in order to bolster the pipeline of entrepreneurs, tech founders, and start-ups.
We developed the concept of a Super Connector, an experienced entrepreneur-facing networker, someone from the ecosystem who can act as an advisor, a talent spotter, relationship builder, advocate and champion. As well as being entrepreneur-facing, they have built solid relationships and connections with other industry sectors by helping to uncover, identify, and support a funnel of ambitious entrepreneurs to enrol in the acceleration programmes. Engaging with entrepreneurs and being a visible presence at events, workshops, meetups, accelerator open-days, demo days and investor lounges, the Super Connector plays an incredibly important role in strengthening the pipeline. Being able to join the dots, acting as a trusted friend, advocating on the entrepreneur’s behalf to the wider network, and connecting them to opportunities really does go a long way.
Startup accelerators usually target companies that have been operating for approximately 1-3 years, who may have 1 or 2 pilot customers, potentially a team and going for the first scale. The economic benefits of these types of tech businesses starting and scaling in the region bring obvious benefits, but we also wanted to address the pipeline issue and target the earlier stage entrepreneur. To do this, we encouraged the development of pre-accelerator programmes. Pre-accelerator programmes support early-stage entrepreneurs or “wantrepreneurs” to develop an idea and move it to commitment or what we call “first product.” Pre-accelerators offer support in the form of 1-2-1 business coaching, mentoring and workshops to help the acquisition of new skills and understanding of market opportunities. We hope those graduating from pre-acceleration could then go on and be ready to access the next stage of growth support, whether initial seed funding, non-equity based finance (such as grants and loans) or entering an accelerator programme.
- Lack of a Coherent, Mature Startup Ecosystem
The South Yorkshire support ecosystem for startups is somewhat fragmented, with businesses unsure of what support was available, where to turn to and where they fit. Despite being somewhat intangible, the level of interconnectivity between companies, investors, and entrepreneurs is an important component in the ecosystem’s future success.
As described above, the Super Connectors play a critical role in building these relationships within the ecosystem. A neutral broker, acting as the glue sitting between all of the existing business support operating on behalf of the startup ecosystem, they respond to the need for a central point of information. By enabling communication across the region, they can signpost businesses to the best source of support and help newcomers (whether literal or figurative) find their feet.
The Super Connector team has been critical to the success of TEAM SY, not only in the role of supporting entrepreneurs but in advocating for and on behalf of the region. The Super Connector team has helped both entrepreneurs and acceleration programmes to “soft-land” by building the case to launch in South Yorkshire and then offering a warm welcome by connecting them to key stakeholders, local networks, institutions and opportunities.
- Lack of Startup Acceleration Programmes
The digital and tech sector in South Yorkshire has seen very positive progress over the last few years with programmes such as Y Accelerator, IoT Tribe, TwinklHive, and tech-focussed projects such as Kollider, Sheffield Technology Parks, Barnsley Digital Media Centre, the Advanced Wellbeing Research Centre, and the Advanced Manufacturing Innovation District arriving in the region. Together, this indicates growing demand for space for tech businesses. This foundation of business support activities, programmes, and providers are the underpinnings on which TEAM SY got its start.
Tech accelerators have a significant positive impact on the development of startup ecosystems. Startups that graduate from programmes can expect higher survival rates, more employees, and better funding. They also have positive spill-over effects on the wider ecosystem.
Here at Capital Enterprise, we know first-hand the impact tech accelerators can have from our experience working on ecosystem development in London. Between 2016 and 2019, we ran a programme match-funding the operation costs (primarily salaries) of 12 London-based accelerators and startup programmes including the likes of Seedcamp, Techstars, EF, Startup Bootcamp Insurance and IOT, Emerge Education, Collider, TAN, The Bakery, Deep Science Ventures, Seraphim Capitals Spacecamp and the SOSV-backed Rebel Bio. These accelerators supported 475 tech startups, 220 of which went onto raise follow-on money. The total raised to date by those 220 startups, from VCs participating in their follow-on rounds, is just over £1.3 billion pounds and they have gone on to create in excess of 5000 high-value jobs. Pretty significant!
Accelerators also act as beacons to attract and retain entrepreneurial talent in the region. They plan an important role for investors as well, by creating an opportunity to discover qualified talent, allowing them to get to know the startups and follow their progress before committing money.
Tech Accelerators are the backbone of TEAM SY and increasing the concentration and clustering of these programmes has been a key goal. We encouraged and incentivised accelerators to set up and start in the region by offering to match-fund the cost of programme delivery, primarily the cost of salaries. In doing so, we have attracted world-class acceleration programmes as well as co-developed programmes in collaboration with local stakeholders. By creating a dense and intense programme of pre-acceleration and acceleration programmes, we aim to generate the critical mass of activities necessary to raise lasting interest from both entrepreneurs and investors and embed a culture of acceleration and investment into the South Yorkshire startup ecosystem.
TEAM SY has been made possible thanks to the incredible partners we are working with to deliver startup accelerator programmes. We currently have 15 programmes delivering across a number of verticals such as IoT, GovTech, HealthTech, DeepTech, TechforGood, AI, Investor Readiness, Entrepreneurial Leadership, and Underrepresented Founders. In a follow-up article I will dive deeper into the types of programmes being delivered in the region, but you can take a look for yourself here.
A good example that showcases our approach is The IoT Engine pre-accelerator programme. This public-private programme is delivered in partnership with Enterprising Barnsley (and based at Barnsley DMC), TEAM SY, and Connexin, an innovative technology company specialising in building and operating award-winning Smart City Infrastructure to support the Internet of Things. Thanks to this TEAM SY-brokered and back-programme, Connexin has invested in the region by deploying LoRaWAN infrastructure with the help of an £80 million investment from NAME OF COMPANY, as well as basing its own staff in the region to offer our startups technical expertise and mentorship. Taken together, this has created an incredible opportunity for startups to develop test next-gen products for the Internet of Things.
- Lack of Investor Activity and Investor Ecosystem
Startup ecosystems do much better when supported by private investors. Strong ecosystems have a pipeline of startups supported by angel groups, angel investors, and seed investors investing at the early stage. Again, it’s a funnel issue. Without investment and support in the early stages, it’s difficult to have successful outcomes at later stages.
Although capital investment in tech companies in Yorkshire has increased by 51%, Sheffield for instance has had 7 times less scale-up investment than Cambridge and 100+ times less than London (TechNation 2019). More needs to be done to unlock investment opportunities for early-stage companies.
Funding startups at the earliest stage can jumpstart a virtuous circle of events. The offer of seed capital for a new business could allow them to develop a prototype, for example. The company may then demonstrate that its product or service can do the things it was intended to do, attracting clients and customers which in turn creates a profitable venture. Those businesses at the seed stage receive more from their investors than just capital – they are seeking experienced mentors, introductions to customers, someone to support them through the development stage and onto future fund raises.
Recently we have seen positive progress with the launch of the Northern Gritstone Fund, soon to be a £500m fund backed by the Universities of Leeds, Manchester and Sheffield to invest in academic spin-outs and spin-ins. This focus on testing, commercialising and developing research from universities and businesses is much needed. Another key priority is targeting support to businesses looking to raise at the pre-seed or seed stage, especially from funds with the risk appetite to commit to deploying capital and valuable resources.
Capital Enterprise has solid early-stage investment experience. We have provided management support to startup seed investment funds, primarily the Mayor of London-funded London Co-Investment Fund (LCIF) which invested nearly £23m capital alongside over £180m from the private sector into the pre-seed and seed rounds of 149 London based tech startups as well as the AI Seed Fund. We have experienced first-hand the power of the co-investment model at making funding available to early-stage startups, and encouraging the development of the start-up ecosystem through co-investments with local and national investors.
It’s no surprise, then, that we are strong advocates for the creation of a South Yorkshire Co-Investment fund: a fund that leverages both public and private sector funding to provide startups with sufficient cash flow to cover the costs for a 12-18 month period with approx £200-£250k of funding. The co-investment model would mean half is offered by the co-investment partners and other market investors at a 1:1 ratio, effectively doubling a public sector funding pot.
The creation of a South Yorkshire Co-investment fund would have a significant impact on the region. Enabling startups operating in high growth sectors to make the crucial transition from the startup to the growth phase means those companies will have the potential to create high-value jobs. Furthermore, startups gravitate towards geographies where funding is available. By requiring them to maintain a principal presence in the region, a South Yorkshire co-investment fund will encourage businesses to stay in the region.
By adding funding on top of the high-quality startup acceleration programmes that already exist, a diverse mix of entrepreneurs and advisors, affordable coworking spaces, and startup talent combine to make South Yorkshire an appealing place for startups to consider starting and scaling.
In response to the need for early-stage investment activity, and in lieu of a co-investment fund, we collaborated with NorthInvest, a not-for-profit angel investment organisation to build an angel network, syndicate and hub that can support and increase the investing capacity of angels. NorthInvest works to champion the South Yorkshire startups looking to raise investment by bringing their angel network together with angel investors in the region to facilitate investor syndicates. They also help identify and educate potential angel investors in the region, boosting angel activity whilst sharing upcoming investment opportunities. By partnering with NorthInvest, we hope to attract and create a network of investors that would not otherwise have considered investing in the region.
Capital Enterprise is also delivering a Funding Readiness programme to help startups prepare to win funding. The programme helps businesses understand growth funding requirements, supports them to source and raise the right growth funding from the right funders, and prepares them to connect with investors and pitch them successfully. By increasing the pipeline of startups graduating from startup accelerators and the proportion of investment-ready businesses in the region, we hope to increase the likelihood of businesses achieving their funding targets and raise the level of private investment available to South Yorkshire-based startups.
If you’ve made it this far, I hope this provides a better understanding of how we approach the development of a tech startup ecosystem in South Yorkshire. In a future article, I will share more on the startup acceleration programmes we have developed, and the founders and startups we are supporting.