A tale of two sectors

1 Mar 2007

Two countries, Ireland and Israel, each with promising tech sectors have had different levels of success in cracking the crucial US technology market.

Mark Fenelon (pictured), an ex-Goodbody Stockbrokers executive, sounds like a lonely voice in the wilderness. Ireland’s technology sector, largely buoyed by foreign direct investment (FDI), is the envy of the world. But on an indigenous front he believes we need more success stories.

Fenelon, who has established his own finance and advisory firm called Whitebridge Capital, is convinced that our FDI success has acted as a smokescreen that masks the need for better performance from our indigenous technology companies.

Time, he believes, is running out and we need to build industries of our own as the fortunes of property and FDI can only last so long. He contrasts Ireland with Israel’s indigenous performance for good reason.

From a standing start in the early Nineties, both the Irish and Israeli indigenous tech sectors were much compared: they were similar-sized countries with a turbulent political past trying to crack open the difficult US technology market.

Israel was first off the starting blocks with a brace of Nasdaq successes by 1995; Ireland followed with the flotation of Iona Technologies in 1997 on Nasdaq, raising US$140m in the process. It was game on and optimism ran high.

Since then the differences couldn’t be more stark: Israel has more than 70 companies listed on Nasdaq, Ireland has only six (out of which two are technology).

Israel has raised €7.68bn of venture capital in the past 10 years, Ireland has raised €1.75bn.

After M&A, IPO and funding activity Israel has delivered a 340pc return on investment for investors, with over €30bn returned. While there are no figures available for Ireland, Fenelon believes Ireland may have just about broken even in terms of return on investment.

“Firstly, Irish technology has a strong bedrock and companies are known for their quality. It’s not game over but we have slipped,” says Fenelon. “I don’t think we’ve faced up to reality enough. As a nation Ireland has over-relied on FDI. Companies like IBM, Intel and Google deliver well-paid jobs … but they are mobile investments.”

He believes with the Irish market flush with jobs, the hunger to innovate and create companies of scale pales in comparison with that of Israel where FDI is not so strong, perhaps due to the Middle Eastern political climate.

“If you look back to the early Nineties, Ireland and Israel had very little in terms of technology bases. They were small nations with limited natural resources and high unemployment. The genesis of indigenous technology firms was similar but the difference was that the Israeli government made significant loans available that got the venture capital (VC) industry there moving with around €200m. The Irish VC industry only started to evolve in the mid-to-late Nineties.

“Since then close to €10bn has been invested in Israeli tech firms and around €30bn has been returned to investors. That’s over 300pc return. Ireland by comparison has put in less than €2bn. My guess we’ve probably broken even.”

But it’s not too late for Irish technology success stories, says Fenelon, pointing to obvious stories like Eontec’s trade sale to Siebel Systems in 2004 for US$130m, Spectel’s sale to Avaya the same year for US$103m and Similarity Systems’ sale to Informatica last year for US$55m. All these sales yielded handsome returns for Irish investors.

“Irish technology is not in such a bad state but we are at the brink where we must either face up to hard facts and benchmark ourselves against someone that can do it. Israel is the best example to benchmark ourselves against.”

Despite lower FDI returns, the Israeli technology success story is driven by factors such as a richer pool of engineers (140 per 10,000 population versus Ireland’s 33 per 10,000 population) and major tech transfer that results from massive military research and development (R&D).

Fenelon warns against inertia that may be setting in to the Irish psyche, a complacency driven by the rich vein of wealth in the country.

“We have nice jobs, nice cars, nice homes and take nice holidays. This is the first wealth wave that has crashed on Ireland but look at countries that have been successful at FDI like Singapore, which has had massive property crashes, but has kept costs low.

“But for Ireland? The reason FDI companies are here is our corporate tax rate.”

Fenelon believes more should be done to build up the pipeline of Irish tech companies and ensure supports such as tech transfer from universities and funding supports are available. “The right decisions now could boost the value placed on a company by 30pc to 40pc.”

Enterprise Ireland’s manager of VC Denis Marnane has studied the Israeli model and puts the country’s success down to the right decisions made in the early Nineties that saw private investors buy back the State’s investment in technology companies.

“The impact this made was a very good return for investors. The investment the Irish Government made got the ball rolling. Out of seed capital of €400m invested between 2001 and 2006, Enterprise Ireland committed €100m.

“But there are fundamental differences between Ireland and Israel. There is massive investment in R&D driven by military ties between Israel and the US. Another factor was the influx of Russian Jews into Israel following the fall of the Soviet Union in the Nineties; they were mostly engineers with huge technical capabilities.

“Another aspect is that while much of the R&D took place in Israel, much of the product development took place in the US in places like Delaware. A huge amount of Israeli money in the US would have followed this. Not all of technology to come out of Israel is military but the depth of scientific and engineering knowledge is immense.”

Marnane believes that timing is the factor that differentiates Ireland and Israel. “They got more companies over the line before the bubble burst in March 2000. We would have been two years behind them in development and suffered the consequences. While Ireland didn’t suffer as badly as elsewhere, we hadn’t advanced as far up the value chain as Israel.”

Like Fenelon, Marnane believes that the game is far from over; in fact, it’s all to play for. “We’re doing a lot of the right things. Science Foundation Ireland (SFI) has a huge budget and the size of that budget can be considered a vote of confidence in the future and Irish industry’s ability to deliver.”

In terms of flotations and return on investment, Marnane says the advent of Sarbanes-Oxley (SOX) and other regulations have made markets like Nasdaq unattractive to Irish companies. “The cost of maintaining a listing on Nasdaq is immense and outweighs the advantages. There is a greater trend to go and list on London’s AIM. Even young American companies are going to AIM first.”

Comparing Ireland with countries like Israel is all relative, he believes. “There are no instant successes but if you believe Ireland as a knowledge economy is the future then you have to ensure all the building blocks are in place.

“We have SFI, we have tech transfer from colleges to businesses, we have incubators and entrepreneurs in residence, the Business Expansion Scheme and Seed Capital Schemes are in place and the key now is to put the next VC funds in place,” Marnane says.

Case study: Building blocks

Michele Quinn is director of the Irish Software Association (ISA), a lobby group at IBEC representing the interests of Ireland’s indigenous software industry.

She believes the indigenous industry has the capacity to grow from its present 16,000 workforce to 50,000 and deliver revenues of €7.5bn a year to the Irish economy by 2010.

Funding at an early stage, she agrees, is vital. “The Business Expansion Scheme and Seed Capital Schemes, if approved by the EU, will be a tremendous support for early-stage, high-innovation technology companies.

“Other supports, such as access to experts and entrepreneurs who have been through the experience of establishing and running a company to help start-ups avoid pitfalls, are also vital.”

Better exploitation of third-level research is also critical. “There is a lot of intellectual property (IP) developed by the third-level sector and also the multinational sector that can be exploited by the indigenous firms through IP commercialisation and partnering with these sectors.

“Private sector initiatives such as the IBM innovation centres and Microsoft IP ventures which encourage partnerships with indigenous technology companies are a welcome boost to the indigenous industry.”

Technology transfer from colleges to young companies, an area that Israeli tech firms excel in, has been a cause for concern. “I think we are slowly getting better in this area.

“The Government and Enterprise Ireland are heavily investing in technology transfer offices in the third-level sector. These have a strong industry-led focus which we hope will deliver a significant increase and improved process for the commercialisation of IP and tech transfer,” Quinn says.

By John Kennedy