Scotland loses out in IT company birth and death cycle

Gravitational pull towards London and South East has strengthened in last six years, Experian figures reveal

London and the South East have gained and Scotland has lost out in the cycle of IT company births and deaths over the last six years, data from Experian reveals.

Nearly half (48 per cent) of IT start-ups launched since 2007 have picked either London or the South East as their home, according to information collated by the information services firm for CRN.

While that figure may not be surprising on its own, only 40 per cent of company births across the whole UK business population were in London and the South East during the same timeframe, meaning the IT sector is punching well above its weight for the region.

Scotland, in contrast, appears to be struggling in terms of both births and deaths of IT companies within its borders.

The country plays host to just eight per cent of new IT sector companies, compared to its 12 per cent share of the overall business population. Meanwhile, some 14 per cent of IT company deaths over the last six years were in Scotland, compared with the country's 12 per cent share of company deaths for the overall business population.

"Combining the birth and death proportions, it is clear that London and the South East are outperforming other areas of the UK, while Scotland has seen the highest rates of insolvencies in this sector," Experian said.

Gravitational pull

John Morrison, managing director of IT security VAR Sapphire, which has an office in Stirling, admitted there will always be a gravitational pull towards London, particularly since many start-ups have funding from overseas investors with a limited knowledge of UK geography.

But it won't all be one-way traffic in the future, he predicted.

"We are at an interesting point for Scotland with some major forces pulling and pushing on the economy," he said. "The ambitions for independence and sovereign status may create confidence and pride which will ultimately filter down to the start-ups and venture capital."

Bob Tarzey service director at analyst Quocirca, however, was worried the prospect of a referendum on Scottish independence could work against the country in its attempt to lure in start-ups, both in the IT sector and more generally.

"If you're Microsoft investing in a new research facility or a UK-start up, at the moment Scotland would be a much higher risk as you don't know whether it will be part of the EU or even Britain. London has got a lot more certainty," he said.

Tarzey argued that the Scottish tech sector in particular may be suffering as the government ploughs more investment into London.

"The government has been investing in tech hubs in the south-east [such as Old Street's 'Silicon Roundabout', pictured right]. A Scottish IT entrepreneur might well think they would be better placed to set up a tech company in London as that's where they will find the skills they need. Whereas, a manufacturing company might choose to set up in Scotland, as there's a lot of cheap hydro-electric power and cheaper labour costs."

Births and deaths

Experian's figures suggest the IT sector is not as stable in growth terms as the wider market, with firms experiencing both expansion and contraction over stability.

"This suggests a sector that is generally reacting to market conditions to a greater degree than the rest of the market," Experian said.

"Combining this with other measures, such as average employment... paints a picture of an industry where a lot of companies start up and also a lot die - but also where individual companies grow relatively fast."

In 2007, there were 175,847 live companies operating in the IT sector - equal to 4.29 per cent of the market, according to Experian's data.

Although the raw figure rose to 178,606 in 2008, as a proportion of firms in the overall market it fell to 4.23 per cent. Since then, both the raw figure and the figure expressed as a percentage grew every year until 2011, when there were 201,139 live IT firms accounting for 4.87 per cent of the population.

There were 30,792 IT company births in 2011, compared to 17,021 IT company deaths. In 2012, the number of IT company deaths rose slightly to 17,891. Because there is a delay in finding out the industry sector of a company until it files its first accounts, Experian's data on IT company births in 2012 is incomplete - although the firm expects the number to rise on an annual comparison.