In days of yore, the latter half of the Nineties that is, it seemed as if anyone with half a brain who could come up with a clever idea for a website they could build a business plan around had a hope of becoming the next Steve Jobs or Bill Gates thanks to venture capitalists who were only too eager to help.
A whole new gold rush and tulip auction was under way and if you weren’t thinking on an entrepreneurial level then you were an exception. The rest is history.
However, in spite of the resultant tech market crash, the stimulus that those times wrought is still with us. Increasingly we’re reminded that exports and a thriving community of entrepreneurs in all areas of business constitute the cornerstone of Ireland’s future economic prowess.
As well as this, the number of new entrepreneurs coming onto the scene continues to grow. Take one rough barometer – more than 150 companies were entered into Ernst & Young’s Entrepreneur of the Year Awards last summer, a 50pc increase on the previous year’s number. According to partner-in-charge at Ernst & Young Ireland, Enda Kelly, out of all the 25 countries in which the awards are held, Ireland had the highest incidence of entrepreneurs.
Despite this, all does not bode well for the entrepreneurial classes of Ireland. The inspirational children of the Celtic Tiger enjoyed a rather short-lived youth. Athlone-based pharmaceutical firm Elan caught the Enron flu and has been investigated for misrepresenting potential sales as revenues and has seen its stock value crumble accordingly. E-learning firm SmartForce, recently acquired by SkillSoft, suffered a similar fate, after landing in lawsuit hell for misrepresenting potential sales as existing revenues in order to fatten its share price. FTSE100 club member Baltimore is no longer on the chart, whilst enigmatic highfliers Alphyra and Riverdeep are looking to de-list from their respective stock exchanges in favour of management buyouts (MBOs). It seems exit strategies aren’t what they used to be.
As well as this, Enterprise Ireland in recent weeks announced its net decline in jobs in sponsored firms for 10 years, some 4,000 to be exact, chiefly in tech firms.
In the absence of cushy exit strategies and a growing list of one-time favourites fading into obscurity, what is going to save our future and still growing entrepreneurial classes?
The core problems to be addressed are numerous. There is still a perception that Ireland doesn’t have the cash to seed start-up companies. The badge of failure is a painful de-motivator. Ireland is seen as not being big enough for a firm to attract early adopter customers as a test bed, so young Irish tech firms feel they have to get overseas, and quickly. This brings with it the distinct disadvantage of being in a new market, where selling technology is a complex, long-term game that many simply don’t budget for. Another problem is that original founders of firms here prefer to be the one in charge, reluctant to pass the buck onto someone experienced or market savvy who might actually win some business. And when it comes to fresh blood, there is an obvious technology transfer problem in our colleges and universities – a few such as Iona, Havok and Trintech owe their origins to college research projects. We need more of this.
Roll back the tapes to 1992 and cue the scene of a lab in Trinity College Dublin. Computer science professor Chris Horn offers his small team cups of tea as it works its way through the finer points of getting disparate computer systems and networks to talk to each other as part of an EU-sponsored project. Three years later, the same team, now a fledgling start-up known as Iona Technologies, inks major deals with Sun Microsystems and Boeing. It was only when the company went public on Nasdaq in 1997, in what was the fifth largest software IPO ever, that people began to realise the hidden gems sitting in our colleges.
Oddly the lesson was never learnt and only now are we hearing talk about applied research and actually pumping money into sponsoring campus companies and building on-campus incubators. The next problem, according to Iona CEO Barry Morris, is to get these projects out of academia and into the marketplace. “I talk to lots of small software companies that are sitting in incubator units in some university trying to work out how to go from there to get their first customer,” he says. “Typically we have people with technical backgrounds with bright ideas, but we don’t have the experienced executives sitting on their boards telling them their market is in the US or that they need to hire a big sales giant.”
Perhaps one reason why the indigenous technology sector felt the cold winds of change more severely than it might have was that during the times of dotcom glory and inflated investment in hare-brained schemes no one in Ireland thought about getting the best out of campus companies. That came late, but not too late, as the creation of bodies such as Science Foundation Ireland (SCI) with some €635m to invest in mostly college-based companies could yet prove to be a worthy move.
One facet of what SCI brings to the table is grants of up to US$4.35m per year to help link collaborative, internationally competitive research clusters with industry.
Apart from the colleges, let’s look at the talent. Despite the looming war in the Gulf, a flat (expect it to get flatter) tech market and cuts across most government departments, it’s still somewhat trendy to be an entrepreneur. People still want to be their own bosses and get rich along the way.
Recently addressing the 2002 BPW Irish Business Woman of the Year Awards, O2 chief executive Danuta Gray said that more and more Irish women are becoming entrepreneurs. “Currently 7.5pc of Irish entrepreneurs are female and Ireland fares particularly well when compared with countries like the UK (4.5pc) and Belgium (3pc). However, there is still room for improvement and Irish women need to be encouraged to achieve their full entrepreneurial potential,” she said.
As well as this, Enterprise Ireland CEO Dan Flinter said that his organisation envisages investing in 20pc more companies in 2003 than in the previous year as the pipeline of new companies grows.
The overriding problem is money and where to get it. Banks are limited in what they can do for a start-up firm. Government grants can only do so much. Equity is the overriding problem and solution facing Irish entrepreneurs. Business angels (guys that got rich and wanted to play sugar daddy to the next possible Microsoft) that were thick on the ground in 1999 and 2000 have gone back to the south of Spain to nurse their charred feathers.
The constant paean bellowed out by entrepreneurs to anyone with the patience to listen is that the real moneymen, venture capitalists (oft derided as vulture capitalists by grumblers) and investment bankers in this market don’t have the money, or the willingness, to seed or invest in start-ups.
Conor O’Connor, chairman of the Irish Venture Capitalists Association (IVCA), representing 25 local and overseas members active in the Irish market, disagrees. “Ireland is sufficiently capitalised in this regard,” he points out, indicating that his 25 members have some €1bn under management, of which about €500m has already been invested in approximately 500 firms. “Ireland is developing, or has developed, an entrepreneurial culture based on high-tech companies. We are not at the start or end, but are on a continuum and there is some distance to go. The high-tech industry is less than 20 years old. Most established high-tech entrepreneurs would have got their grounding in multinationals here and abroad in the Eighties. We’ve only actually had an indigenous technology sector for about 10 years or so.”
O’Connor continues: “Of the 500 tech companies backed by IVCA members, the majority of them secured their venture capital (VC) in the last five years. There is still a long way to go to move Ireland’s dependence on a non-indigenous multinational sector to a more balanced ratio. In terms of indigenous IT firms taking a significant portion of gross domestic product, we are well beyond the beginning of the journey but somewhere less than halfway.”
He goes on: “The average value of the deals done in the past five years works out at about half a million per company. There is finance out there, but the reality is that VC is a process that filters the best project from a pool and obviously those that don’t get the money will mouth off about there being no VC. This often goes back to the quality of entrepreneur out there. The ones that get the money, in my view, are the ones that cover every angle possible. Typically, where entrepreneurs fall down is where someone with a good idea will sit in front of a venture capitalist with a key element of the project that hasn’t been properly thought through. My key advice is to use as many people as possible as a bouncing board for ideas before trying to talk about money and offering equity.”
He continues: “Personally I think there is adequate capital for seeding companies in Ireland, but as an economy we are only half way on the continuum of creating a proper indigenous tech sector. We are in a process whereby the Irish tech sector has built up its capability over 20 years and the VC element of that in the past five years. Looking to the US as most of us do, the origins of the tech sector date back 60 years and the first venture capitalists really only came into being in the Fifties. That’s where Intel, for example, owes its origins.”
Sharing O’Connor’s view that the Irish entrepreneurial sector, particularly hi-tech, is now reasonably capitalised is Kathleen Quinlan of Enterprise Ireland. “From a financial aspect, the VC market in Ireland was underdeveloped in the Nineties and definitely a market failure in the eyes of entrepreneurs,” she says. “In 1995 we set up the first joint seed capital and grant fund under the National Development Plan. Last year we invested €95m that was matched by the private sector and ultimately we will leverage some €400m that can be invested in start-up companies between now and 2006. As well as this, newer players in the market, such as GrowCorp, are paying attention to rising areas such as biotech.”
Looking to the future, she adds: “In examining our efforts for the next couple of years, there is a definite problem in terms of regional spread of equity investment that we are anxious to solve. Close analysis in 2000 showed us that 80pc of VC investment took place in the Dublin area. Our funds in Enterprise Ireland going towards 2006 will have a more regional focus.”
Quinlan goes on to say that missing much of the internet and dotcom fervour worked in Ireland’s favour in that the limited available capital didn’t go on dotbombs but on more IP-based enterprises that saw the internet as just one channel out of many and were less vulnerable.
“The one concern we have about the quality of the companies coming through is that many are pure technology based on heavy research rather than products that could become near-term sales,” she says. “About a quarter of the queries we receive today from start-ups can be actually turned into real businesses and that is actually quite good on an international scale. One in every four calls becoming a real business is a high turnover for us. Some firms are better developed than others, but that’s because some are more serious about it than others,” Quinlan concludes.
Her observation about the lack of sales focus amongst start-ups is more than ironic. At last year’s Irish Software Conference in University College Dublin delegates were told that on an international scale Irish tech firms don’t know how to sell. The domestic market simply is too small to sell sufficient volumes. However, for software companies to sell overseas, a compelling message must be delivered by an organisation that looks big, safe and established. Buyers are wary of start-ups – many blue-chip companies will not buy mission critical software from a start-up. As well as this, many Irish firms that target the US or Asian markets discover to their peril the need for the complex sales and marketing skills they more than often painfully lack.
Quoted in last year’s study of Ireland’s software cluster by HotOrigin was one unnamed member of a young start-up: “Much time can be wasted trying to present to the appropriate decision makers. Our prospecting-to-contract success ratio is low and the sales cycle is often very long, often 18-20 months.” Many aren’t prepared for this, as Walter Hobbs of ACT Venture Capital pointed out: “You can trust the Irish to have the best product in the world, but we are challenged in the areas of strategic marketing, channel development and sales management.”
The writing is on the wall for Ireland’s entrepreneurial tech players. Success will not be garnered by whinging about lack of available capital – this is being addressed by and by. What the entrepreneurial classes need is more focus on detail than mere ambition as well as a willingness to derive as much competitive advantage out of the talent and technologies sitting in our colleges and universities. Technology transfer is key in this regard; Irish technology transfer offices are under-resourced and in most cases employ just one person. Most professors and graduates in our colleges today aren’t thinking as entrepreneurs, while in the US, in elite colleges such as Stanford, 60pc of the academic staff have commercial interests.
It is a great thing that the entrepreneurial classes in Ireland are growing and chomping at the bit. But many are overshooting the starter’s marks and have to start again, terrified of the shame of failure. There is no shame. Only the shame of untapped potential.
By John Kennedy
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