A new era for venture capital investment in Ireland?

If you think about it, 20 years ago there was no venture capital industry in Ireland to speak of. Venture capital as an industry is one that needs to be thoroughly understood if we are to ever gain that goal of being the Silicon Valley of Europe.

My first dealings with venture capitalists came about pretty much at the end of the Nineties, when I got to know players like ACT Venture Capital, Delta and Trinity Capital. At that time, Iona was an acclaimed success story, Baltimore was in the FTSE 100 and Trintech was readying itself for Nasdaq.

Without venture capital, Silicon Valley just wouldn’t exist. In Ireland, venture capitalists (VCs) were regarded with a mixture of awe and frustration. They had raised funds worth tens of millions and judged shrewdly where to invest – sometimes too shrewdly and that’s sometimes I guess where the frustration would come in for guys and gals whose start-ups didn’t make the grade.

But this is where the misunderstanding would come in. Often when writing about companies securing first and second-round investment, there was often the perception of having "made it." We now know that absorbing venture investment is just the start of a longer journey and those investors have to justify a return.

I remember Niall Carroll of ACT explaining to me that venture capital usually derived a better return on investment than pension funds. In hindsight, he was spot on.

At the time, securing investment was usually followed by breezy proclamations about an upcoming IPO.

Nuclear winter

Then dot.com happened and everything dot.bombed – a nuclear winter descended on the technology industry. Baltimore was one of the first to go. In the ensuing decade, many of the technology darlings of the Nineties were acquired, such as Eontec, which was bought by Siebel for in 2004 for US$108m. In 2008, Iona Technologies was bought by Progress Software for US$162m.

About a decade on, the importance of the technology industry has never been greater but harsh lessons had to be learned about valuing technology companies and listing on stock exchanges. But what’s interesting is technology start-ups seem to be more realistic about what taking on venture capital means: shareholders want a return on investment, the investors will sit on your board, there has to be a real fit in terms of people, technology, management and vision.

One of the key laments of the technology industry in Ireland, however, has been the lack of adequate seed capital. Investments have and are being made in Series A and B rounds but getting access to the money to get the wheels turning has been a major problem of the past decade. But that is changing. Both AIB and Bank of Ireland have considerable seed funds in place.

A new dawn

Minister for Enterprise, Trade and Innovation, Batt O'Keeffe TD recently confirmed an additional allocation of €55m in Government funds for investment in high-potential start-ups. In tandem with this in July, Taoiseach Brian Cowen committed to the creation of a €250m Innovation Fund to attract foreign venture capitalists and overseas start-ups to Ireland.

In recent weeks, the Irish Venture Capital Association reported that Irish technology companies raised €76m from investors in the second quarter of 2010, an increase of 33pc on the same period last year.

The IVCA VenturePulse survey measures funding raised from domestic and international venture capital funds, from AIB and Bank of Ireland seed capital funds, Enterprise Ireland and from private investors, including angels.

Some €57m of the funds raised were for follow-on or expansion investment. Of this, 45pc was provided by Irish venture capitalists with 55pc provided through syndicated deals by international venture capitalists. These funds will be used to scale up the international business opportunities of indigenous Irish SMEs.

“The pattern is that for every €1 invested by Irish VCs, an additional €1.20 is brought in from abroad into Irish SMEs,” commented Regina Breheny, director general, IVCA. “As part of the due diligence process, international investors like the reassurance that local VC investment provides.

It's 2010, a broadband-fuelled and smartphone-toting world has created a rich tapestry in which start-up companies can create products, grow to scale or be acquired. There is also a clear sense of energy emerging from venture capitalists who as far as I can tell are taking a more interesting and innovative approach to finding and funding companies.

New models are emerging. Take Nubie.com, which recently raised €150,000 as an example. Itself a technology start-up, having been established in 2009, its premise is to provide one central online service to cater to the advice and information needs of Ireland's start-up companies. When a start-up signs up to Nubie.com, they receive customised roadmaps for where and how their business should be developing from an Irish perspective, including how to go about creating a business plan and seek funding.

Last week, the Dublin office of the international law firm Maples and Calder (Maples), with the Dublin Web Summit, have launched the second Maples and Calder Spark of Genius contest for innovative web and web-related technology companies. The competition is designed to identify early stage ventures with compelling potential. Three chosen finalists will pitch their business plans to more than 350 people at the summit on 29 October in order to compete for the prize.

Kernel Capital epitomises the sense of energy and innovation venture capitalists espouse. For example, any interaction with the company begins with filling in an online form. Do that and they’ll meet you. The Cork, Dublin and Belfast-based venture capital company Kernel Capital has funds of €190m under management and invested in 35 companies which, between them, have 113 patents. Interestingly, Kernel’s own team have separately 60 patents to their credit.

A time to begin

Niall Olden is managing partner of Kernel Capital and believes it’s a great time to start a business – access to talent and accommodation has never been more affordable and businesses are open minded about new products and technologies that make them more efficient.

“Ireland is going to build up significant clusters,” Olden observed. “For example, there's some really strong medical device clusters in the West and tremendous things are happening in universities. The University of Limerick Foundation recently invested in the Bank of Ireland Seed Fund to increase links between us, technology companies and entrepreneurs. For the size of Ireland we have some very strong clusters in various areas like ICT, life sciences and the green space to make us a significant player.”

At the Cloud Computing Summit last week, Sean Baker, one of the co-founders of Iona, made the point succinctly about the cloud computing opportunity in terms of young Irish technology companies. “Open source and cloud computing have brought the cost of cloud computing down, it is easier to go global. What we’re also seeing is young Irish software companies are more scrappier than before, Ireland is in a great position to drive the cloud.

“Irish software companies are driving this because there is no local market to speak of, they have to go global.”

It is a trying time for the Irish economy. But in this is an opportunity: people are now more open to entrepreneurship, they have to think lean and be innovative. The plumbing is there in the form of the internet and the cloud. And the evidence is clear that venture capitalists are trying new things to find the diamonds in the coal.

John Kennedy | |