As eager as I was to immerse myself in this story on funding companies from start-up through to later stage, the more I learned the more I began to feel queasy about the harsh realities of getting companies off the ground in this country. Recent entrepreneurial polls showed the Irish economy to be one swimming with individuals keen to get companies off the ground.
Even better, the much talked about “red badge of courage” mentality — often associated with US entrepreneurs that once they fail with one venture, consider themselves to be “experienced entrepreneurs” and get back out there to try again — seemed to be rubbing off on Irish entrepreneurs that keep on trying.
However, from knowing people who run their own businesses to those who tried and failed, starting a business in Ireland is hard work. First of all you need money, lots of money at least to get you started. Talent and bravado are simply not enough, and the months of long days and long nights (possibly spent wondering why they pursued the idea in the first place) can be soul-destroying and challenging when trying to hold together a small team against the adversity of dwindling cash reserves and credit.
While Ireland, proportionate to its size, is now one of the best funded in terms of venture capital, the actual venture capitalists themselves are still being conservative following the technology downturn of recent years and understandably are loathe to invest too freely. Banks, often give the impression of being pro-business, but again the reality is that persuading a bank manager to invest in a business idea is no mean task. And then there are friends and family, and many a small Irish business can attribute the faith and trust of others to being either material or an inspirational support in the early days.
The so-called “friends and family round”, otherwise known as the Business Expansion Scheme (BES) was the vital link for many companies, particularly in the technology space, to get off the ground and build themselves up to a sufficient scale to attract the attentions of venture capitalists or possible mergers and acquisitions. The scheme allowed individuals to invest in a company and have the amount cancelled against tax in the following year. It was an innovative way of incentivising investment in small companies.
The BES was about to be abandoned last year by Finance Minister Charlie McCreevy TD and following much lobbying from the ICT industry he decided to not only restore it until 2006 but increase its cap on the amount allowed to be raised from €750k to €1m. McCreevy also introduced research and development tax credits following lobbying from the same sector.
However, in recent months, after McCreevy communicated his 2004 Budget to the EU, the EU forced him to suspend the BES scheme and its sister Seed Capital Scheme because it believes that state aid issues arise. McCreevy complied.
According to industry sources, the effect that this will have on the ICT sector and other business areas where entrepreneurs require that much-needed boost will be very damaging and could impact on the number of start-up companies we are likely to see in the year ahead.
Fine Gael’s enterprise spokesman Phil Hogan estimates that 500 jobs could be lost through the scheme’s suspension. Enterprise Ireland (EI) says it is working closely with the Department of Enterprise and Employment and the Department of Finance to resume the scheme as a priority. EI warns that if the current position persists it will create a serious barrier for entrepreneurs at a point when the development of their businesses and securing international sales requires early-stage risk finance not available from other sources.
HotOrigin’s Caroline Wardle warns that with other forms of funding drying up, many software players that made it this far could be out of business in 12 months and that the number of software startups could decrease dramatically in the year ahead.
But Wardle pointed to an even more disturbing irony. UK private investors can get tax break of up to £150k sterling each if they invest in startup ventures. In France, private individuals can take investments in venture capital companies. In fact, nearly every other member of the EU has a scheme akin to that of the BES that incentivise investment in young companies and reward investors through tax breaks.
This begs the question — why is Ireland being singled out? Is Europe trying to get back at us in other ways because of the generous tax breaks we are perceived to have given overseas investors?
And another question — why have we given in so soon? Is it because of Ireland’s presidency of the EU that we must appear to be towing the line and satisfying the bigwigs in Brussels?
These questions need to be answered and more backbone is needed if we are going to have a startup culture worth talking about in the years ahead. The reality is that the BES was and still is the vital link in the chain between success and failure for many young companies in this country.
By John Kennedy
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