Entrepreneurs running for the exit

13 Oct 2004

First Tuesday gatherings – a monthly networking event for firms trying to woo venture capitalists – would in the days of the dotcom frenzy boast up to 1,000 casually dressed people in a crowded nightclub listening to many companies say why they deserved ample venture capital money. Last week’s event was a more sombre affair; a mostly male audience of around 40 suited entrepreneurial types listening to half a dozen companies belt out business plans.

I diligently noted product overviews, profit projections, profit margins and customer acquisitions – gradually drifting in my mind to imagine sitting in front of the television beside a roaring fire – when suddenly something clicked. “Exit strategies” cropped up as delegates started wondering why the current crop of money hopefuls were planning to sell their companies in the same year that they planned to turn a profit. As a venture capitalist put it, in an exasperated but polite manner: “What’s the hurry?”

2004 was a hectic year for mergers and acquisitions in the tech sector. Dublin firm Eontec’s sale to Siebel for €108m and Spectel’s all-cash sale to Avaya for US$103m indicate that Irish technology moves still merit promise on the international stage and promise infinite riches for long-harried management teams.

At last week’s First Tuesday, the long road for indigenous tech firms was demonstrated by Ntera, a young campus player hoping to help make Ireland’s mark in the emerging nanotechnology sector. The company’s CFO Laura Shesgreen told the audience that Ntera recently raised €9.5m in venture capital.

This brings to €30m the funds raised by the company in several rounds since starting up in 1999, ploughing most it back into research and development in the anticipation of market demand for the product in 2005 or 2006. “We expect to break even in 2005,” Shesgreen told the audience.

Asked about exit strategies, Shesgreen felt that companies do best by building businesses and sticking to long-term strategies, but added: “If the price was right we would consider it. But right now our focus is on purely building the business.” Ntera’s ‘work in progress’ state was evinced by the fact that the company has yet to appoint a CEO.

Another firm present at the event was Activitybreaks.com, a Northern Ireland firm that provides niche adventure holidays in alliance with partner Ryanair. Company director Katy Knox said that the company – which raised €750k in venture capital in the past six months – is currently bringing in sales of €1m per annum and that sales are rising at the rate of 60pc a month out of a target market of €7bn in the UK alone.

Projecting a turnover of €45m for 2007, Knox wasted no time telling the audience that the company was looking to make a trade sale in 2006 or 2007. “A period of three years from now would be enough to build up turnover and our customer base,” Knox argued.

Supposing the realisation of these impressive goals, there seemed to be an inordinate amount of emphasis on exiting otherwise successful and healthy businesses. I asked myself: why not stay for the long haul? Troubled, I put the question to a colleague the next morning and he agreed that I wasn’t the only person with such views watching the tech sector. Moments later notes from an interview with Gerry O’Connor of Dublin-based software firm Zarion flashed up in my email.

As O’Connor profoundly put it to my colleague: “I would be disappointed if every software company took the approach of selling out.” He gave the recent examples of Eontec being bought out by Siebel and of Spectel being acquired by Avaya. “Was that a success for the software industry or a failure? You don’t get that in the US. Very few entrepreneurs say: ‘I’m going to build a business to €10m and then I’m going to sell’. It’s not in the mission statement,” he said.

O’Connor added: “I question where the Irish software industry is going – we have all this investment and initiative and we’ve got lots of good innovative companies. There’s Trintech and Iona, but where are the other ones? We’re in danger of seeding and establishing the global software industry.”

Wondering if we were being too hard on young tech players that don’t see any evil in trade sales, I put the question to John Shiel, chairman of the Irish Software Association’s competitiveness committee, a venture capitalist with Executive Venture Partners and a veteran of trade sales having sold his own e-learning company to SmartForce a few years ago.

Shiel was philosophical, believing that business owners with their minds on a trade sale or exit are an encouraging target for venture capitalists as exits are essentially venture capitalists’ bread and butter.

“It takes a longer time to get a product to market than it takes to build up sales volumes. What we’re looking at investing in are people who are strong promoters of their company and committed to bringing it to a point but see an exit as a realistic option rather than becoming ‘lifestyle business owners’ – those who drive the Mercedes, play golf every Friday afternoon, never want to own less than 99pc of the company and plan to keep the succession in the family. They have other motives than scale. What the Irish IT sector needs is scale and getting a company to a point where international technology companies are moved to acquire them is a way of achieving that scale,” he mused.

“The ultimate proof of concept for a technology company is that it has the capability to scale their company to heights that get them noticed in the food chain. Then again,” Shiel concluded, “the last couple of years have been tough. The guys are tired, they’ve been working their butts off and it would be a huge relief for them not to have to worry about money. And an exit is a huge relief. Someday they’ll wake up and money won’t be a problem!”

By John Kennedy