Credit crunch will lead to spike in VC demand

12 Jun 2008

Demand for venture capital (VC) investment is expected to jump as start-ups seeking funding will find other routes such as bank loans firmly closed to them.

A study of the largest VC firms in Ireland, which represent the bulk of the €1.4bn invested since 2000, found that 70pc expect an increase in demand as a result of the subprime financial crisis as traditional loan finance becomes harder to obtain.

However, Professor Michael Donnelly, chairman of Irish Venture Capital Association (IVCA), said the sector appears to be well placed to meet any demand. “Last year, Irish SMEs raised €226m from VC funds, the highest level for five years.”

Almost two thirds (60pc) believe the current downturn in global stock markets has delayed the likelihood of a client firm pursuing an initial public offering (IPO) over the next two years.

However, almost a third (30pc) of Irish VC companies expect one or more of their client firms to IPO in the next two years. All expect that one or more client companies will be involved in a trade sale over the same time period. “Irish tech firms retain a good reputation on global markets,” said Prof Donnelly.

According to the IVCA study, the most critical external issues facing venture-backed companies in Ireland is the state of the US/global economy, cited by 40pc of IVCA members, while 30pc highlight the strength of the euro as a major threat.

The most serious internal challenge is the availability of experienced international sales executives, highlighted by over half the respondents (55pc), followed by a lack of qualified senior management in general (40pc).

And lack of an experienced management team is the main reason why VC applications are turned away. “Particularly in the current environment, VC investors continue to look at the people rather than the idea,” commented Prof Donnelly.

“The management team needs to have not only good technology but global marketing and sales potential. This is one of the big challenges facing Ireland’s technology sector.”

Despite the fall in pension fund values as a result of the Irish and global stock market downturn, just one in five of IVCA members think this will result in greater interest by pension funds in VC investment.

“Venture capital has proven to produce greater returns at lower volatility than traditional equity investment but there is still a lot of work to be done in communicating that to pension fund trustees, despite their recent experience of traditional equity markets,” commented Regina Breheny, director general, IVCA.

In terms of encouraging the development of a knowledge-based economy in Ireland, suggestions included the introduction of tax incentives to encourage senior internationally experienced executives to join Irish companies. Other suggestions included the need for more institutional investment in VC firms and the need to continue to encourage the flow of Irish technology graduates.

By John Kennedy

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years