Under pressure to venture out

5 Jul 200731 Views

Asume nothing. That’s entrepreneur Peter Smyth of RedMere Technologies’ advice when it comes to Irish technology companies seeking finance today.

“Assume people don’t understand the market. Communicate the value of the market you are targeting, your team and the value of the technology. Fundamentally that’s what we did.”

RedMere is one of the few Irish technology companies successfully raising finance. This is an environment where buyouts are yielding greater returns than venture capital (VC). According to the European Venture Capital Association, 68pc of investments in 2005 were buyouts. Seed capital is increasingly rare for start-ups, and existing VC players are hard at work raising new funds for the next decade of investment.

Raising these new funds from pension funds and Europe, for example, is proving difficult because a dozen players are seeking funds at the same time and sluggish investment performance since the technology downturn of 2001 has meant few breakthrough success stories.

VC firms I spoke to believe the majority will succeed in reaching their target by the end of the year. At least two prominent VC deals are due to be announced in the coming weeks.

RedMere is carving out a name for itself in the consumer electronics market and recently landed its first big customer, electronics giant Molex.

Last year RedMere closed its first round of funding to the tune of US$8.5m led by Celtic House Venture Partners of Ottawa and London and included syndicate partners Enterprise Ireland, Dolmen Securities and Enterprise Equity as well as follow-on investment by seed-round investors.

The company received a further US$5m in April from Edgestone Capital Partners, a Canadian private equity firm, along with additional reinvestment by the original investors including Celtic House.

RedMere opted to chase the money overseas, rather than wait for local funding. “Early-stage investors invest in teams, that’s our perception,” says Smyth (pictured). “It’s about the value of the team and a combination of the market and the technology. The Irish market is small so I believe it is important to go international from the outset.”

Michael Reilly, a former CTO of JP Morgan Chase who also headed up a VC fund in New York and sits on the board of RedMere, says that with all the Government investment in science and innovation the time is right for VC.

“It would be unfortunate for the local industry and indeed investors here if the funds didn’t appear. The timing is good for another round of funding.”

A strong management team is vital for securing investment, says Tom Keane, a co-founder of Cork-based NitroSell, an e-commerce company in the process of creating 51 jobs. The company has attracted €3m in venture funding, including €750,000 from Enterprise Equity since it started two years ago.

“Make sure you choose the right VC,” says Keane. “Don’t go cap in hand to anybody. We deliberately courted three or four VCs and made it clear to all of them we were talking to the others. That’s the way you negotiate a good deal.”

According to Ernst & Young/Dow Jones, in the first quarter of 2007, €4.2m in venture capital was invested in young innovative firms in Ireland, significantly down from €26.3m in the fourth quarter of 2006 and the €28.6m invested in the first quarter of 2006. Only one deal was completed in the first quarter of 2007, down from four deals in Q4 2006 and seven in Q1 2006.

Regina Breheny, director general of the Irish Venture Capital Association (IVCA), concedes that VCs are having a hard time raising the new funds because a dozen others are raising funds at exactly the same time due to the opening of the €175m VC fund by Enterprise Ireland in November.

“For an industry that only started in Ireland 1994, it delivered a performance of 15.7pc up to 2005, which is good by international standards.”

She agrees that while Ireland has had success stories, none has been as high profile as Iona Technologies in the Nineties.

“Irish VCs will make the point that Ireland’s performance has been good by international standards. The problem is that it is taking longer to get Irish companies properly funded and up and running. There are great companies here, but it’s taking time for them to perform.

“The proof is in the pudding. In the past decade Irish funds have put in €1bn and international funds have matched this,” Breheny adds.

Seed capital has long been the bane of the Irish technology sector. Existing funds have been more involved with first- and second-round investments than early-stage start-ups. While there have been seed funds, these have been small and quickly over-subscribed.

But a solution may be at hand. Earlier this week AIB and Enterprise Ireland committed to investing €15m in the AIB Seed Capital Fund and will be equal partners. The fund is the first to be established under Enterprise Ireland’s Seed and Venture Scheme 2007 to 2012.

The fund will be managed on behalf of the two investors by Dublin Business Innovation Centre and Enterprise Equity and it is envisaged it will invest between €100,000 and €250,000 in seeding 50-60 promising companies.

William O’Brien, manager of the venture capital department at Enterprise Ireland, says the agency is in talks with at least two other institutions about creating similar seed capital schemes.

Despite the slow progress in local VC firms raising new funds, there has never been a more exciting time for the market in Ireland, says Don Harrington of Goodbody Corporate Finance.

He points to the decision by Trinity Venture Capital last week to announce plans to go public as a way of raising funds and also Atlantic Bridge’s involvement in the buyout of Logica CMG’s Telecoms Products business for €392m in cash.

“In terms of the ability of local firms to raise funds, I believe ACT, Delta, Serobia, NCB Ventures and Atlantic Bridge will all be around with new funds by the end of this year.

“The sector’s had a hangover from the dotcom time, but now the funds have teams of very experienced people.

“My view is the people who stick with the VC model now will make money over time,” Harrington concludes.

Mapping out a good deal

“We were a healthy, profitable business. We weren’t looking for funding but a strategic investor approached us and a deal was done,” says Richard Bryce of Dublin mapping software company, Mapflow.

In March, Mapflow raised US$5.1m in a new investment round with the potential to raise a further US$6.6m if it reaches future business milestones.

The company, which sells software to the insurance, transport and location-based services market, raised the finance in a round led by prominent Irish-American software veteran Sean O’Sullivan of SOS Ventures, who has had US$100m of investment under management in 20 other technology firms.

The deal effectively bought out original investors Trinity Venture Capital and saw founders Simon Dick and chairman Stephen Cloonan sell shares and step down from the board.

Bryce does not rule out the possibility of Mapflow raising further venture funding in order to accelerate growth. “We’ve been a profitable, cash-generative business but if you look at the average level of funding in a US company and the equivalent investment in an Irish company there needs to be some balance.

“People think of US companies as over-funded, but the perspective on the ground is that Irish companies are under-funded.”

By John Kennedy

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