Ireland 2.0: Now is the time to rethink Ireland’s software sector

27 Nov 2008

The earliest Irish software companies can be found as far back as the Sixties, but it was over the past 20 years that the industry gathered momentum, scaling dizzy heights but also familiarising itself with the harsh realities of industry downturns.

Sadly, as brilliant first- and second-generation Irish software companies came within reach of a coveted international breakthrough, fate intervened; their star reached its zenith and they were either acquired or disappeared.

As we approach 2009, Ireland needs its indigenous industries to rise up, generate jobs and become world-class competitors on the global stage.

Will a new generation of Web 2.0 software players that are ready to embrace the cloud-computing revolution provide this nation with the global IT giants it needs for the future?

The indigenous Irish software sector employs 16,000 people out of a total ICT population of 90,000 workers, many of whom work for the global multinationals. Ireland is respected and renowned internationally as a mini-Silicon Valley/Seattle, featuring household tech names such as Dell, Apple, Intel, Hewlett-Packard, Microsoft and Oracle, to name a few.

Despite this renown, the story of the Irish software industry is bittersweet. Brilliant executives and technologists with vision have dared to dream the dream that many indigenous industries are only now beginning to understand.

Companies like Iona Technologies went as far as Nasdaq, and Trintech is still listed on the US stock exchange. Baltimore Technologies entered the FTSE 100 and seemed unstoppable until it fell foul of the 2000 tech downturn. Brilliant companies win business in Asia, the Far East, the US and all across Europe, but all too often acquisition is the common thread that makes great names disappear.

Euristix was bought by FORE Systems in 1999 for US$81m, a figure which doubled when FORE was bought by Marconi weeks later. Banking software player Eontec was acquired by Siebel in 2004 for US$108m. And earlier this year, Iona Technologies was bought by Progress Software for US$162m.

What Ireland needs is an aggregation of stand-out technology firms with turnover of over €100m a year.

But lest we forget, 30 years of a native software industry, although blighted by all-too-early trade sales, has yielded one useful result: entrepreneurs who have made it are more likely to invest in other start-ups than in property because they’ve caught the bug.

A new world

Look closely on the ground and you’ll discover technology graduates and other tech industry executives who are not blindsided by cubicle culture or the cosy existence of life in a multinational, and who are consumed with entrepreneurial fervour. Networking events such as BarCamp, MobileMonday, PodCamp, Connector and OpenCoffee are host to a growing community of young start-ups eager to share knowledge and vision.

The software world has shifted towards a new model of selling software as a service (SaaS), and a brave new world has opened up in terms of Web 2.0 technologies like social networking, as well as new markets for applications thanks to Apple’s iconic iPhone and Google Android. Web 2.0 software companies such as PutPlace, Cubic Telecom, Wubud, Locle and Muzu TV are relentlessly travelling the world and striking up alliances.

A new wisdom has also entered the fray. The words ‘trade sale’ no longer have a negative connotation, as these entrepreneurs view each sale as increasing extra liquidity into a market where venture capital is focused on second or third rounds rather than seeding firms. Entrepreneurs always back other entrepreneurs. The recent purchase of PollDaddy in Sligo by Automattic, the company behind blogging software WordPress, was roundly applauded by the Irish Web 2.0 community.

Could the glass ceiling finally be lifted? Paul O’Dea of Select Strategy is a software industry veteran who has been involved in prominent Irish tech start-ups dating back to the Eighties, from Cognotec to Credo Software. He has also mentored firms such as Zartis, SteelTrace and Netsure Telecom, which was bought recently by Oracle. He is currently involved in a SaaS start-up called the TAS Group.

“The problem with the Irish software industry was that we didn’t have a lot of expertise in building companies of significant size. We’re good at creating the idea, building the product and getting to market, but then a glass ceiling was always reached. Some people say it was all about funding, but I think it was down to expertise and execution – the devil’s in the detail. That’s why I think the Enterprise Ireland and Stanford University Leadership for Growth programme has been hugely successful.

“Traditionally, the software industry was funded by venture capitalists whose business model was to invest in companies, then exit to make money. If that’s the core funding model, then trade sales are inevitable. But there are other ways. Dublin e-learning firm Riverdeep has, through various corporate manoeuvres, become Houghton Mifflin Harcourt, the largest educational publishing firm in the world, and that company is bringing 450 jobs to Ireland.

“Iona, in its day, was a huge success story, and today there are a number of Irish software companies making respectable revenues and profits. There are good Irish software companies that in five years’ time will be bringing in revenues of over €100m each.”

O’Dea agrees that software entrepreneurs who emerged from trade sales will back new start-ups, and says the end of the property boom might focus minds. “Property was a one-way street. That option is no longer there. Entrepreneurs who made money will go again. It’s in their DNA. Simple.”

Think globally

Jennifer Condon, divisional manager of Software, Services and Emerging Sectors at Enterprise Ireland, points out that many great Irish software companies that emerged in the late Nineties are now global businesses in their own right.

“SkillSoft, Curam, Norkom, Fineos, S3, Arantech, NewBay Software, Cape Technologies and Information Mosaic. These are all here today and doing fine. I wouldn’t be too despondent about the prospects for the Irish software sector because, globally, software is going through something of a rebirth, a renaissance. We had the Baltimore Technologies and the Iona Technologies that went their way into the public markets, and we saw how the industry took a hit in the dotcom downturn. The industry flatlined between 2000 and 2003. But it has returned to growth. In the past four years, we’ve seen growth in double digits for the Irish software sector.

“Globally, the software market is growing by 6–7pc and, locally, Irish companies are outperforming the market. We’re focused on seeing these companies scale up. In Israel and Finland, local software companies account for 80pc of the local tech industry, and we’d like to see that situation arise here. The biggest challenge is getting companies across the barriers of €50m to €100m in annual revenues.

“What the Irish industry has going for it is the sheer volume of experienced executives we have built up. In addition, the hundreds of millions invested by Science Foundation Ireland are soon going to start resulting in research coming out that will sow the seeds for a whole new generation of start-ups, so we’re optimistic for the future.”

Condon also points out that the software market around the world is no longer centralised around Silicon Valley, and that it’s a world market. “We’re not in this business to be second best. There’s a lot we can learn from Silicon Valley, but in the heel of the hunt, we’re all in a global market. Silicon Valley is the competition.”

Ireland’s oldest tech company, System Dynamics, was founded in 1968. According to managing director Tony McGuire, Ireland had none of the advantages of Silicon Valley or our competitors in mass markets such as the UK or Germany, or even Israel with its massive military tech spending.

“Leadership, environment and funding are vital to the future of any software industry. If you put them all together, then I think Ireland was the worst place to start an IT company.”

Despite the proliferation of US multinationals, local firms did not have the example of a large indigenous player to learn from. “How many multinationals actually provide the environment for the schooling that entrepreneurs of the future need to learn?

“In fact, Ireland had the opposite: massive multinationals hiring good people and armies of quiet millionaires walking around unwilling to take a risk. So, for much of the history of the sector, there was no funding around as a result of a natural environment. The natural leaders had to look elsewhere. And getting to markets like North America absorbed capital very quickly.

“We’ve got to develop future industry leaders, and if there’s no one around to invest in the early stages, as well as future rounds, how are they going to develop? There is a role to be played by Enterprise Ireland in taking start-ups to stage two or three. Entrepreneurs should maybe stop trying to develop their own small businesses. Why don’t they band together and create decent-sized companies?”

Putting plans in place

One of Ireland’s best-known Web 2.0 emerging players is PutPlace, a tech firm that allows individuals to store and organise all their favourite documents, emails, music and digital pictures online. Despite PutPlace being considered a newcomer, its founder Joe Drumgoole set up his first software company, Generic Software, in 1987.

He doesn’t buy into the notion that the indigenous software industry is underdeveloped. “You build a software industry one brick at a time. We’re still only laying the foundations. You can’t build the Eiffel Tower on a mud flat.”

Contrary to McGuire’s view of building companies of scale by combining small firms, Drumgoole believes the smaller firms being built, sold and built again is fundamental to developing the industry going forward. “I’ve been working in the Irish and UK software sectors for 30 years and the industry is in its best state ever, notwithstanding the recession. Firms have to struggle and hustle, and I’m impressed with what I’m seeing.

“The idea that we will build a small number of firms with €100m revenues is not where the industry should be. What about a large number of small firms with over €10m revenues? We should be about creating a large number of small companies that achieve high-value exits through trade sales. The first thing that someone in the software industry does when they’ve sold their company is invest in another start-up.”

Pointing to the sale of PollDaddy, Drumgoole says such firms are connected and communicating with each other all the time. “This is the first generation of Irish software companies that genuinely reaches out to each other through networking, as well as by using tools like blogs and Twitter.”

Shane Dempsey, director of the Irish Software Association, the industry body that this year celebrates its 30th anniversary, agrees with Drumgoole’s assessment that the country boasts a strong pool of connected-up companies. “It’s about critical mass.

The country has great entrepreneurs, a large pool of multinational leaders, a strong and growing research base and also very focused and determined state agencies.

“Whether we create 10 €100m software companies or 100 €10m software companies, we’ll know when we’ve arrived. The vital thing is finding the golden thread linking the entire community,” Dempsey observes.

From his own examination of the history of the sector over the past 30 years, Dempsey found that the greatest evolutionary jumps have occurred when serial entrepreneurs like Brian Caulfield, Pat Brasil and Peter Conlon put their effort into following up their successes with more new companies.

“To really get the industry to take a massive leap forward, we need to get the serial investors and the Web 2.0 start-ups talking. They can use their capital and reputations to open the doors for further funding. Tie this in with the multinationals and our research base, and we’ll have winners. Getting this kind of linkage is important because the way we think and the way we approach start-ups is the golden thread.

“The average journey of a Silicon Valley start-up to IPO is six years. With Irish start-ups, the situation now is that it may never happen. This needs to change.

“To reverse this trend, we need to deal with the gaps in the funding journey and build structures that help start-ups get to market faster. The Web 2.0 generation of companies have demonstrated fantastic energy and willingness to collaborate. If we can add the serial entrepreneurs, the multinationals and the emerging research base to this mix, then the money will follow.”

One serial entrepreneur who continues to break open new markets is Paddy Holohan of NewBay Software. He started his first firm, East Coast Software, in 1986 when he was 20. He then played a pivotal role at Baltimore Technologies, before setting up NewBay.

NewBay, which develops digital lifestyle software for mobile operators, has struck prestigious deals with US Cellular, T-Mobile, O2, Alltel Wireless, Orange and Vodafone.

Starting a software firm in Ireland in the Eighties was a harsh but defining experience, he says. “It was hard. There was no money in Ireland, never mind any understanding of software. It’s so much easier now to start a software company because there are people around who have made money out of software.

“However, investors are discerning and won’t invest in just an idea. Ideas are cheap. Investors don’t invest in ideas, they invest in companies. They want to see a product roadmap, good structure and, fundamentally, a business. People get funded because they are focused on building a business. You’d be surprised how many people actually forget that.”

Another thing software start-ups need to realise from day one is that there is no market for software in Ireland. Firms need to get overseas to strong markets fast.

“Seed funding NewBay wasn’t a challenge because I had been around and knew enough people who made money in technology. However, raising Series B funding was much tougher.”

Holohan says it is both puzzling and disappointing why Ireland has so far failed to build a large indigenous software industry like that of Finland or the UK. “Ireland is probably the second-best place on the planet outside the US to start a software company. We all speak English and we’re an export-oriented country. The one issue I feel has come to bear is the shadow of our success at attracting multinationals, which has attracted a lot of potential talent.

“The current recession may be a boon for the software sector. When Digital closed down in Galway and Motorola closed in Cork, former executives went on a frenzy of establishing start-ups. That’s where the future may lie,” he predicts.

As Holohan says, the past 30 years have laid the foundations. Ireland has grown up fast and learned many world-class business lessons. Now it’s time to apply that learning.

By John Kennedy

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years