The Friday Interview: Cathal Friel, chairman, Irish Software Association

26 Nov 2004

Good communicators will always have one or at most two ‘big ideas’, knowing that the more ideas you try to promote, the less will be the impact of each one. That might be why Irish Software Association (ISA) chairman Cathal Friel (pictured) boils down all of the issues facing the Irish software industry into a couple of succinct messages.

One of these is the dearth of seed funding. Speaking at the ISA Annual Awards recently, Friel argued that the main reason that the indigenous software sector was not a lot bigger was that this type of funding was in very short supply. What was needed, he said, was a “wall of money” – of the order of €1bn – to fuel the growth of tech start-ups in the economy. “There is a direct correlation between the amount of early-stage venture funding allocated to the industry and its ultimate success,” he asserted.

His solution is for the Government to introduce some tax-based mechanism to free up large amounts of venture funding for start-ups, whereby individuals are encouraged to reinvest some of their property profits into the IT industry. What Friel would really like to see is the formation of a massive venture capital (VC) trust or trusts into which investors would pool their money.

Using their skill and experience, the venture capitalists would then decide what technology firms to invest in on behalf of their clients – much like any other fund management operation. Friel believes that if investors were given the right tax breaks the trust could literally amount to billions of euro.

Friel argues that entrepreneurs are currently being asked to risk too much and that “soft money”- risk capital but not too ‘risky’ risk capital – needs to be made available to encourage them to take the leap. “Our research suggests that the key motivating factor that will encourage you or me to give up our jobs is that there has to be a lot of money provided for that start-up to reduce the risk for the first two years. After two years, hey presto, you’ll have the venture capitalists fighting over you but in those first two years you’ll have a very high attrition rate.”

His ‘proof of concept’ for his idea lies a thousand miles away in Israel. He points out that that small war-torn country has nevertheless managed to produce a thriving domestic technology sector that employs 150,000, compared with just 20,000 in Ireland. While acknowledging that other factors such as massive government spending in areas such as defence have fuelled the explosive growth in Israel, Friel believes that funding lies at the heart of Israel’s success story. As he noted at the awards: “Between 1998 and 2003, the Israeli VC industry invested more than US$10bn in IT start-ups whereas in Ireland over the same period we invested less than US$1bn. The result: Israel, 150,000 jobs; Ireland, 20,000 jobs.”

This issue preoccupies him so much because he believes that we have become over reliant on the multinationals that have helped drive the Irish economy forward in recent years. As the balance of the global economy gets increasingly polarised between low cost on the one hand and high value on the other, Friel believes that Ireland will be hard pressed to retain a lot of the multinationals in Ireland and that a stronger domestic technology sector will be needed to take up the slack.

“We’re flagging to the Government that if it wants to create a long-term IT industry in Ireland, it needs to accept the reality and inevitably that a large proportion of multinationals will move along,” he says.

The good news is that we have time to adjust our strategy as we will continue to attract more US giants to Ireland for at least another year or two. But then the drain will begin, believes Friel, and all the ‘screwdriver’ operations of the Eighties will be gone and those remaining will be highly skilled niche operations.

By building up a strong domestic technology sector, Friel is not necessarily talking about creating technology powerhouses that make a splash in the US market and go on to be listed on the Nasdaq. This would be nice, of course, but very hard to attain. Again, he says, we should look to emulate the Israel where there are “quite a number of multinationals but also a huge underbelly of successful medium-sized firms”.

But Friel has another key message and one ever bit as intriguing as his earlier property-into-software pitch. This is the proposed development of an Intellectual Property Services Centre (IPSC) to be based in the digital media district in Dublin. The idea, which again got its official airing at the aforementioned ISA Awards, has been developed over recent months by the ISA’s Competiveness Committee under John Shiel and Bernie Cullinan.

The idea is to make Dublin an international centre for patent registration in the same way that the Irish Financial Services Centre became a financial services hub. “The carrot is that patents would be filed for free. That would hoover in people from all over Europe: if they want to file patents they would come to Dublin,” says Friel, who adds that centre would in time become a magnet for patent lawyers, standards bodies and other IP-related activities.

Although the detail has yet to be worked out and a lot more research needs to be done in the coming months, Friel is convinced that the IPSC “could be one of the most successful things we do in the software sector.” By the time that proposal has all its bells and whistles attached, no doubt Friel will have another on the launchpad, primed and ready to go.

By Brian Skelly

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