Ireland could be Europe’s entrepreneurial capital

7 Nov 2003

Ireland has the potential to become the entrepreneurial capital of Europe by increasing the quality and quantity of start-ups that come on stream every year, the Irish Venture Capital Association (IVCA) has claimed. However, despite having €325m ready to invest, losses made on exit strategies and lengthening investment cycles have made venture capitalists reluctant to invest.

Speaking at the annual dinner of the IVCA, the association’s chairman Michael Murphy said that Ireland’s venture capital infrastructure had been transformed since the mid-Nineties and in the last five years €990m was raised and €665m invested in more than 600 companies.

Murphy said that significant impetus was given to the venture capital industry by Enterprise Ireland under the Seed and Venture Capital Programmes of 1994 and 2000.

He added that the venture capital industry was a major catalyst for the growth of the indigenous technology sector in Ireland, with 66pc of investment in 2002 being allocated to technology companies, compared with a European average of 15pc.

“This has not been without high risk or pain, with exits from portfolio companies more difficult to achieve due to the depressed state of the trade buyer market and some exits only being achieved at a loss to the original investors,” said Murphy, who is also chief executive of NCB Ventures. “The tech slowdown has lengthened the investment cycle, necessitating multiple funding rounds so that new projects are competing with existing portfolio companies for investment.”

Murphy continued to say that 78pc of venture capital investment over the last five years has been made in early and expansion stages of development. “Ireland has the potential to become the entrepreneurial capital of Europe by increasing the quality and quantity of start-up companies that come on stream each year. Industrial policy supports that improve the levels of awareness, infrastructure, and funding instruments, such as the Business Expansion Scheme and Seed Capital Scheme, will accelerate the level of start-up activity.”

The IVCA chairman cautioned that a number of proposed legal, accounting and regulatory changes could hinder the future growth of an enterprise culture in Ireland and the growth of the venture capital industry. “At the investee company level the onerous responsibilities already assumed by non-executive directors may be increased if the Companies Bill, 2003 is enacted. Non-executive directors add value and expertise to investee companies and there is a danger that individuals will be unwilling to serve on boards of early-stage companies,” he said.

“At the VC level the proposed Basel II rules on capital adequacy of banks could impact on the ability of banks to invest in VCs. The proposed International Accounting Standard Number 27 could ultimately require VCs to consolidate the results of investees into their accounts which would provide meaningless information to investors and place unnecessary administrative burdens on fund managers.”

Murphy said that despite a difficult few years for VC investment, particularly in the tech sector, there were signs of optimism in the market. NCB research suggests that a sustained recovery is now occurring in the US and that demand for IT and software is on an upward trend. “A sustained market recovery will help to unblock the current exit logjam. If this occurs then our members have the capacity and expertise to grow their funds under management to meet higher levels of entrepreneurial activity.”

He said that in terms of the availability of risk capital and the number the number of providers it’s never been better. “There are now over 30 venture capital funds on the island of Ireland managing €1.25bn of third party funding of which 95pc is managed by IVCA members.”

Dan Flinter, the former chief executive of Enterprise Ireland and guest of honour at the dinner, said that a key development challenge for the future will be to facilitate the emergence of a significant number of Irish companies of competitive international scale in the technology sector as has already happened in the food industry.

Flinter added that the key to doing so depended on three factors. “We must commercialise the intellectual property which is emerging from publicly funded research. We must develop deep knowledge of markets and build closer relationships with key international buyers and specifiers and finally we need to continue to support a vibrant venture capital industry, which has the capacity and desire to follow its investments if the necessary funds are to be provided for growing Irish companies,” he said.

“The track record of the venture capital industry in Ireland over the past 10 years gives a real sense of confidence that it will rise to this opportunity with energy and commitment.”

By John Kennedy