Broken connection

IT WAS a date that often had aspiring technology entrepreneurs quaking in their boots as they plucked up the courage to ask a panel of hard-nosed, no nonsense investors for thousands, sometimes millions, of pounds.

But Connect's annual investment conference, the Dragons' Den-style event organised by Connect Scotland, was a day that few technology start-ups dared to miss as it brought venture capitalists from across the UK and, on occasion, foreign shores to Edinburgh for a day of serious spending.

This month, however, as the latest up-and-coming Scottish tech firms started to turn their minds to how they could best pitch their inventions ahead of this year's event scheduled for October 31, an unexpected e-mail dropped into their inbox.

After 12 years, and helping to attract more than £220m of private equity investment to Scotland's technology sector, Connect Scotland announced it was having to close its doors and had made all seven of its staff redundant. It blamed a change in the marketplace since it first set up shop in 1996 and an inability to secure enough new investment to guarantee its future.

According to Calum Paterson, managing partner of venture capital firm Scottish Equity Partners, the news that one of the stalwarts of the sector had fallen was met with disbelief by most of Scotland's technology community. "Given the nature of the organisation, it was never going to be awash with cash but we were never aware of the seriousness of the situation," he says.

But as budding techies rip up their pitches and return to the drawing board to plan how to attract the investment they need, many in the sector are still scratching their heads about what went wrong at Connect. Can it be revived? What will its closure mean for the Scottish technology sector?

According to Scottish Enterprise – which some say was curiously silent in the wake of Connect's announcement – the networking firm's problems began as early as last year. Accounts filed at Companies House show Connect was labouring under mounting debts, and by the end of March 2007, its losses had amounted to over £110,000.

A spokesman for Scottish Enterprise blamed its problems on the changes in the technology investment market since the dotcom boom in the late Nineties, and competition from the plethora of other networking organisations which have sprung up in Scotland as it seeks to increase its economic growth rates by pushing key sectors – technology included.

Aware of its problems, Scottish Enterprise says that in December 2007 it provided a guarantee to Connect's lenders and worked with its board, led by the serial technology investor Ian Ritchie, on drawing up a new business plan.

"Unfortunately the application was unsuccessful as have been other attempts by the company to secure its long-term viability," the spokesman said. Despite Enterprise Minister Jim Mather recently declaring that he intends to draw up a formal technology policy to boost Scotland's capabilities in this area over the next 15 years, Scottish Enterprise said it would not be "appropriate" for it to fund a private sector networking company "unilaterally". A spokesman for Mather, meanwhile, said the minister had no plans to intervene despite his aspirations for Scots technology firms.

"The Scottish Government shares Scottish Enterprise's disappointment that Connect Scotland is shutting down. However, support for Connect is an operational matter for Scottish Enterprise," the spokesman said.

But according to many in the technology world, the public sector is partly to blame for the demise of one of Scotland's leading networking groups.

Gary Colquhoun, chief executive of Fibre Photonics, an optical fibre firm based in Livingston and a Connect member, argues that over the years, the public sector has jumped on the networking bandwagon. Government funding programmes such as SEEKIT – which promotes knowledge transfer between small and medium-sized businesses – are often accompanied by a "slew" of free networking events. As a result, he says, private sector companies that charge a nominal fee for their services have struggled to compete, particularly as the number of start-ups and investment opportunities have started to shrink.

"It became the norm that networking events were free. You could go to a networking event every night if you wanted to," he explains. "Anyone doing it from the private sector like Connect might have found it very difficult to compete."

Barbara Blaney, Scottish director of the BioIndustry Association, argues that a lot of public sector funding over the years has gone towards programmes which duplicate what was already being done successfully by the private sector.

"Have you not got a situation where the public sector pushed a private sector company out of business?" she asks. "When you put things on that are free of charge funded by the public purse, it does have an impact on other people's business models. It's public sector displacement and we have seen it before. When we are all planning events we need to make sure we don't clash."

Paterson, of Scottish Equity Partners, suggests that in some instances public sector agencies even end up competing with one another. "The public sector ends up competing with itself half of the time. There's still a lot of sorting out required," he says.

But with so many networking organisations around, will Connect's presence be missed? Ed Angus, of Fuel Cells Scotland, a business based in Rosewell, Midlothian, which showcased its hydrogen fuel cells at last year's conference, says the closure of Connect has created a big gap in the market, which other groups and statutory agencies do not fill.

"It was an organisation providing a need which no one else could provide," he said. "It brought investors in fairly large numbers in from beyond the borders of Scotland. It brought those investors to them (the tech firms] rather than them going to investors which is, of course, always more difficult. Scottish Enterprise never managed to fill that type of role. None of the banks, solicitors, venture capitalists were able to do that sort of thing because they were only pitching on behalf of themselves."

Colquhoun, of Fibre Photonics, agrees: "It allowed us to get exposure on the ground in Scotland at a venue where you are going to get all walks of life there. That's certainly an invaluable service that doesn't happen anywhere else. There's certainly nothing of that scale that brings 750 delegates to Scotland."

In addition to the annual conference, Colquhoun says many tech firms benefited from the 'behind closed doors' events that Connect organised, bringing together investors and businesses from a variety of different sectors to share experiences and exchange advice.

"That doesn't happen from the likes of the trade bodies," he said. "Beyond their conferences, nothing really happens."

Scottish Enterprise and the Scottish Government have both ruled out further intervention in the funding crisis but, according to the BioIndustry Association, others in the sector are interested in taking over some of Connect's activities. Blaney said her association is keeping "an eye" on the situation.

"They have done a huge amount of extremely valuable work and I wouldn't like to see it disappear off the face of the Earth," she said.

Software trade body ScotlandIS was also quick to step in last week, saying it was keen to fill the gap left by Connect's departure.

But with the number of UK buy-out deals across all sectors falling to a 15-year low in the first half of the year, technology experts say the sector will have its work cut out for it, especially without the likes of Connect to hold its hand.

"The number of investors looking for investment opportunities at the present time is quite small," says Angus, of Fuel Cells Scotland. "It's really not as attractive as it was in the past."