VCs must get better return on investment


21 Jun 2004

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Irish venture capitalists have invested over €1bn in local companies over the past decade. However, so far the investment has yielded a return of only €58m from 39 companies, leaving the local venture capitalists hard pressed to prove the importance of such funds to corporate investors, banks and pension funds.

According to the latest figures from the Irish Venture Capital Association, investment by Irish venture capitalist companies recovered in 2003 to reach €255m made in 187 companies.

Quoting figures from a broader European venture capital analysis by PricewaterhouseCoopers, support for the Irish technology sector by Irish venture capitalists remains very strong, with 96pc of 2003’s investment being made in technology companies.

However, on further analysis, 70pc of the total invested during 2003 – some €175m – went into the management buyouts of prominent players like Riverdeep, Alphyra and Conduit.

Of the remainder, venture capitalists invested €33m in 106 start-up companies, up from €27m a year earlier. Venture capitalists invested €46m in expansions and other types of investment, down from €76m in 2002.

Divestments/exits realised by the industry in 2003 were €58m from 39 companies, of which €15m was write-offs.

The amount raised in 2003 by Irish VCs was €60m. While this was substantially less than the €201m raised in 2002, the amount raised from Irish sources actually increased from €17m in 2002 to €60m raised in 2003. This capital was raised from a variety of banks, pension funds, Government agencies individuals and corporate investors. “This reflects continuous strong support for venture capital from Irish funders in the context of a very difficult international fundraising environment,” commented Shay Garvey (pictured), the new chairman of the Irish Venture Capital Association.

In an interview with siliconrepublic.com, Garvey warned that the industry will have to work harder to yield returns to entice investment from pension funds and banks going forward. At present, existing investment in venture capital by pension funds is less than 1pc. Garvey warns that although venture capital funds can demonstrate a greater return on investment than the stock market for pension players, it still is not enough to convince investors.

“The truth is that from scratch, when there was no venture capital industry in Ireland, over €1bn has been raised by the various funds. However, in terms of a return on investment, only €58m has actually been yielded from various exit mechanisms. The venture capital industry will have to work a lot harder to yield returns.

“The good news is that there’s a lot of capital and goodwill towards start-ups, but for existing companies, unless they are making solid revenues and can demonstrate traction in the marketplace, they are not going to attract money to fund expansion.”

In conclusion, Garvey said: “More start-ups than ever are being funded, venture capitalists have up to €250m in available cash to invest and the rate of investment for 2004 appears to be already exceeding that of 2003. However, the stark truth is that over €1bn has been raised in the last 10 years. Some 25pc of that has already been written off and only 39 companies have generated a return of €58m. In the coming years the venture capital sector will have get its act together and show real returns.”

By John Kennedy