![](https://www.siliconrepublic.com/wp-content/uploads/2014/12/200405/3254carolinewardlehotorigin.jpg)
The writing is on the wall for the indigenous Irish software industry as we know it. While most of the industry remained funded and in business during a murderous business glut that lasted three years, the stark reality of poor sales, lack of scale, dwindling finances and the current impasse over the Business Expansion Scheme (BES) means that firms that have survived thus far could be out of business in 12 months.
According to the annual HotOrigin report on Ireland’s Software Cluster 2004, although more companies made it into the hallowed “over €10m” sales category in 2003 than in 2002 and even more plan to in 2004, the sad truth is that 70pc of the indigenous software sector – which employs 18,000 people in 900 companies – are reporting revenues of less than €1m a year.
According to Caroline Wardle of HotOrigin (pictured), co-author of the report, only 8pc of Irish indigenous software companies are making revenues in excess of €10m. Another stark truth is that there were a similar number of company failures in 2003 as in 2002, when the technology decline was in full swing.
Globally, after three years of decline the software sector achieved a strong recovery during the second half of 2003 and in the first quarter of 2004. However, while IT spending has increased on the back of increased corporate profits, it is still difficult to close sales: lead times are long and the sales processes are rigorous.
With sales of less than €1m a year, the Irish software sector does not have the scale or reach to cope with long lead times and rigorous sales processes.
Wardle was keen to emphasise that in 2004, consolidation – the merging of companies in similar spheres – is occurring across the globe in the software sector. This procedure is considered to be the way forward to achieve scale and better performance for the Irish software sector. The only problem in this regard, she said, is that owners of companies are reluctant to concede that consolidation is the solution. “It’s a question of egos getting in the way,” Wardle warns.
One of Ireland’s best known technology entrepreneurs, Cyril McGuire of Trintech, said recently: “There is a need for consolidation. There are too many small companies burning up capital and operating in what is still a tough environment… instead of having 20 weak companies targeting a particular segment, it would be better to have at least three capable of competing on the world stage.”
According to Wardle, unlike recent Iona and Trintech flotations, the prospect of floating a company on the Stock Exchange is no longer a real option for indigenous software firms, and so the only exit strategy really left is the trade sale. “It has been really tough to raise money, and most have been looking to trade sales as the exit option. Some are tired and have had enough; others agree that it’s the way to take the company to the next level.”
Nonetheless, Wardle says that the biggest concern facing subscale indigenous software companies is that of funding. According to Ion Equity’s recent Techpulse report, €154m was invested in tech firms in 2003, compared with €253m in 2002 and more than €500m in 2001 and 2000. According to Wardle, the number of deals done in 2003 was “static” at the same level as 2002.
It emerged in recent months that the European Commission forced the suspension of the BES because it believes that state aid issues arise from the investor tax relief components of the BES and Seed Capital Scheme, which were extended to 31 December 2006 and had the limit increased from €750,000 to €1m by Finance Minister Charlie McCreevey TD in the recent budget.
The BES was originally scrapped and was only restored following relentless lobbying by the ICT sector in Ireland. According to Wardle, the BES was the only way that many firms could raise much needed finance and that the Government must fight to keep it. She said that 26pc of software firms raised money last year through the BES scheme.
“The irony is that in the UK private investors can get tax breaks of up to €150,000 each if they invest in start-ups and in France private individuals can invest in venture capital companies. It’s wrong that the BES was stopped in Ireland if other countries are getting away with it. As a result, I think that the number of start-ups will decrease dramatically next year if the BES is scrapped and we are potentially seeing a lot of companies going under,” Wardle warned.
On a positive note, Wardle was pleased to note that the number of start-ups for the moment has returned to 2000 levels. However, the only sectors within software that appear to be attracting both increased spending and funding opportunities are telecoms and financial services. “Another positive factor is that the number of companies engaging in joint research with colleges and universities has increased to 38pc from 33pc last year.
“In terms of technology trends, across the board companies are definitely making the transition to the service-based model of selling software – such as the application service provider (ASP) model used by Salesforce.com,” she said.
“I think it’s fair to say that the industry has a feeling of cautious optimism. Spending, although drawn out, has returned and while funding and exits are tough to achieve they are starting to turn around. But the main danger is that companies have disappeared and will continue to unless they can achieve scale by consolidating,” Wardle concluded.
By John Kennedy