VC activity down 77pc in Q3

9 Oct 2003

Investment activity by overseas venture capital firms into Irish private technology companies in the third quarter 2003 was down 77pc on the same time last year, according to research by investment firm Ion Equity. Only seven companies raised funds totalling €18m during the quarter.

“Anecdotal evidence suggests that this quarter will be the low point in terms of private equity investment in Ireland’s young technology companies”, Ion Equity’s TechPulse survey for the third quarter of 2003 stated.

The €18m invested in seven deals was the least amount invested in any quarter in TechPulse records, with more than double that level being the norm. In the same period of 2002, some €77.6m was invested in 18 deals. The amount invested in the third quarter brings to €134.4m the total sum raised during the course of 49 company investments.

“It has become very challenging for Irish technology firms to raise external finance from VCs,” Dr David Fewer, associate director, Ion Equity told “VCs are being a lot slower to invest and make decisions. As well as this, companies in Ireland that have achieved first round funding haven’t achieved the revenues they had planned which makes it harder to raise second-round financing,” he added.

“Global markets have been tough in terms of hardware and software buying. We believe that this is something that is temporary. We expect that Q4 will represent a significant improvement with a reasonable deal flow that will counter the trend in Q3,” Dr Fewer said.

Although the year-on-year comparisons for the first two quarters of 2003 also demonstrated significant drops in the level of investment, a fall-off of this scale in the number of deals is a first. In the first quarter of 2003, there was a 22pc fall in the amount invested relative to 2002 but deal numbers only declined from 24 to 22. The second quarter of 2003 saw a 26pc fall in the amount invested compared to 2002, with deal numbers remaining flat at 19.

Another first this quarter is the lack of large deals relative to previous periods. No large investment round was completed in the quarter. The largest deal was an internal round in Marrakech at €4.4m. In contrast, there were three €10m-plus deals in the third quarter of 2002, and four such deals in the second quarter of this year.

Dr Fewer’s colleague Neil O’Leary, chief executive of Ion Equity, backed up his argument. “The difficult environment facing technology companies over the past two years means that many companies which raised funds over this period have not made the commercial progress they expected. Also, attracting venture capital continues to be extremely challenging. There are fewer active investors, significant resources are being used to manage existing portfolio companies, and the bar for new investments is exceptionally high,” O’Leary said.

He added that venture capital companies are looking to tick all the prerequisites – including defensible intellectual property, large global markets for the technology, strong sales pipelines and proven management teams – before they agree to commit funds. “This means that many companies have to look for continued support from their existing investors until they have fulfilled these prerequisites, and as a result, few large second and third round fundings are being closed,” O’Leary stated.

But he felt there was cause for optimism. “The third quarter of 2003 is likely to represent the bottom of the cycle, with the pipeline for the final quarter of 2003 looking closer to 2002 levels. With some upturn in technology buying markets experienced in 2003, we should see the lagged impact of this on venture capital investment activity in 2004. In addition, venture capitalists are under pressure from their limited partners to invest their funds, and are searching harder and being more creative in sourcing deals.”

Of the seven deals which were closed in the third quarter, three were follow-on fundings by existing investors, and four were first-round fundings attracting new Irish investors. No international venture capital group made a new investment in an Irish private technology company in the third quarter of 2003.

By John Kennedy