Money invested by Irish venture capital funds are projected to grow 40pc this year, double that of investment by such funds in the States and 15pc higher than the rest of Europe. According to Goodbody Corporate Finance Director Mark O’Donovan, with €500m invested in Irish venture capital funds, Ireland is the highest funded venture capital market in Europe as a percentage of GDP.
Speaking in advance of today’s Goodbody’s SummIT Technology Conference, O’Donovan said that the decline of investment in and by venture capital funds has finally stopped and that an “appetite for investment” has returned to the market following three to four years of steady decline. O’Donovan predicted that this year will see four or more initial public offerings (IPOs) by Irish firms on local or international markets in the year ahead, indicating next week’s flotation by Eircom as a case in point.
O’Donovan also predicted that there will be a considerable increase in merger and acquisition activity amongst Irish technology firms in the year ahead and that Irish technology firms could attract in excess of €100m in venture capital investment in the next few months.
“There has been a halt in the decline. In the US, US$17bn was invested by venture capitalists last year. In the last quarter more money was invested in US companies than over the previous 18 months. In Europe, some US$13bn was raised by European venture capital funds last year and approximately US$1bn is being invested in European technology companies on a quarterly basis, so the trend appears to be that things are finally picking up.”
O’Donovan recalled that when the dot.com bubble burst and the technology and communications industry went into a general decline in 2001, “angel and private investors lost their appetite for investment. Venture capitalists stopped investing and focused on their existing portfolios with the result that any investments made went to later stage companies to the detriment of early and middle stage technology companies.
“Looking at the situation from an Irish perspective, in 1997 there was US$50m invested in Irish technology companies. By 2000 ten times that was being invested in Irish technology companies. However, the three-year decline resulted in only €165m being invested last year, down 65pc from 2000 levels.
“However, as the overall technology market’s future improves, venture capitalists will be more likely to invest in what are now leaner and meaner investment opportunities. In the past three years over US$500m has been raised by Irish venture capitalists and that has yet to be invested. Between 50pc and 70pc of all investment by Irish venture capital funds is now in technology companies.”
Looking at the trend towards IPO, O’Donovan said that liquidity has returned to the world’s stock markets and 2004 as a whole will be the year that will see the return of technology IPOs. “In the past quarter, there have been 67 IPOs in the world. Of these, there were 13 IPOs by technology companies in the US and four in Europe. This quarter there are more IPOs being prepared than at any time since 2000. The technology world is keenly awaiting the looming IPOs of Google and Salesforce.com and in Ireland the Eircom flotation will have been the first since Paddy Power floated.
O’Donovan warned that the trend towards increased venture capital activity and IPO activity will not be a return to the heady days of 2000 when the Nasdaq reached an all-time high. “Fundamentally, everything has changed and businesses have been focused on growing profits. Venture capitalists will only invest in profitable companies or at least those that are proving strong revenues”, he said, indicating Cork-based Cumas which reported a €1m profit on an €11m turnover from selling FDA compliance software to pharmaceutical companies. “Hard lessons have been learned and companies are now in more profitable situations.”
He elaborated: “When the boom went bust in 2001, a lot of analysts and venture capitalists predicted that the turnaround would take six to nine months. It has actually taken two and a half years. Out of necessity a lot of companies had to address sales in order to survive. They learned that to mature was to go back to the basics of survival in business. For technology companies to sell, it is no longer about setting the trend but having a solution that gets customers a return on investment within 12 months. If today’s companies didn’t have the bad times they would not know how to react to the challenges of the market.
“What we need are more Irish technologies going the full way in terms of becoming solid and successful, and possibly pursuing an IPO and surviving. Apart from that, there will be a lot of merger and acquisition activity amongst Irish technology companies in the year ahead, and a lot of Irish companies will be acquired for amounts of between €20m and €45m,” O’Donovan concluded.
By John Kennedy
Pictured are chairman of Siemens Ireland Brian Sweeney with Mark O’Donovan, director of Goodbody Corporate Finance