It’s time to end Ireland’s CGT and share options scandal, urges Draper Esprit’s Brian Caulfield.
“The first thing is, Ireland is a great place to be a company and actually, a pretty great place to be a start-up company, in many respects – but it is a dreadful place to be an entrepreneur.”
Brian Caulfield has been outspoken and critical about the feeble attempts at reforming Ireland’s capital gains tax (CGT) regime for entrepreneurs and recently slammed the latest reduction in CGT in the 2017 Budget as “peanuts”.
‘If somebody starts a company and lives on beans for three years while they are bootstrapping their business and creating hundreds of jobs … when they sell the company, they deserve some recognition for the sacrifice that has gone into that’
Caulfield has a perspective on entrepreneurship, investment, share options and job creation that most ministers and politicians can only guess at.
A partner with Draper Esprit, a subsidiary of the $9bn Draper Fisher Jurvetson venture capital syndicate, Caulfield spearheaded the £100m flotation of Draper Esprit on the Dublin and London stock exchanges last year.
Before he was a venture capitalist, he was an entrepreneur, so he has seen both sides of the coin.
Caulfield worked in a number of indigenous financial technology companies, including Peregrine Systems and Trintech. He sold Exceptis Technologies, an electronic payments company, to Trintech in November 2000 for $26m. Six years later, he sold Similarity Systems, a data quality company, to IT giant Informatica for $55m in cash.
Caulfield also served as interim CEO of Belfast mobile cloud firm Aepona. Intel acquired that company for $120m in 2013.
At Draper Esprit, he has led investments in tech firms such as Movidius and Datahug.
Caulfield will be on stage next week at the Bank of Ireland-backed Startup Grind in Limerick, where he will tell his personal story and offer insights into successful entrepreneurship and tech investing.
Entrepreneurs in Ireland deserve better
At his core, Caulfield is still an entrepreneur. And he doesn’t like how entrepreneurs are treated in Ireland, especially if they are expected to be the job-creation engine for the decades ahead.
“We still tax entrepreneurs more and not less than PAYE workers, and I hope that the macropolitical situation and the potential negative impact on FDI might finally convince the Government that we need a policy for entrepreneurship that extends beyond the efforts of Enterprise Ireland.
“We need to think about how we can create an all-around environment that supports entrepreneurs and drives local entrepreneurship.”
One of the things Caulfield is personally involved in is an entrepreneurship and innovation initiative at Trinity College Dublin. “This is incredibly important because not only can you teach people to be entrepreneurs, but you can help uncover the latent entrepreneurs, give them skills and validate entrepreneurship as a career choice for people.”
When it comes to CGT, he believes the system in Ireland is out of kilter with reality.
“CGT on entrepreneurial gains is way too high. I have no problem if CGT was at the present level in terms of speculative gain. But if somebody starts a company and lives on beans for three years while they are bootstrapping their business and creating hundreds of jobs … when they sell the company, they deserve some recognition for the sacrifice that has gone into that.
“Not only that, but if they were adequately rewarded, they are more likely to recycle that investment by investing or building more businesses.
“But if I could pick one big reform, it wouldn’t be a reduction in CGT I would go for. The first thing we need would be a radical reform of taxation of share options, which, frankly in Ireland, is an absolute scandal and a real barrier in terms of your ability to attract talent from abroad.”
The innovation journey
Caulfield’s hallmarks are his patience and wisdom. He has walked the walk and therefore can talk the talk, but what is exceptional is his approachability and the time he gives to people seeking investment or advice. The key aspect here is that no matter how short he is on time, he gives honest feedback. Sometimes brutally honest, by his own admission.
He has seen the highs and lows of tech life. He has presided over spectacular successes and admits to overseeing complete failures.
‘I think the really fundamental thing that separates the successful entrepreneurs from the many who are not successful is a kind of relentless focus on the customer’s problem’
At one point, just before the dot-com crash in March 2000, he was almost involved in an IPO that would have made him hundreds of millions if he had allowed Exceptis to merge with a bigger US company.
Instead, he opted to sell the company to Trintech for a fraction of what the investment bankers were telling him and, to this day, believes it to have been the right choice for the company and its investors.
The Trinity graduate began his career as a computer programmer and postdoctoral researcher. “I was a pretty good coder but I was always interested in the business side of things. I was also really good with people.
“Even though I was only in my career for a few years, I found myself getting involved in project management and customer management. But I had no plan to start a business; in fact, I was always a little suspicious of people who said their life was following some grand plan.”
It was while working for Swiss company Landis+Gyr, which was about to shut down its Irish operations, that Caulfield had the inspiration to try and buy that part of the business and run it with a few colleagues.
“When you are in a redundancy situation, there are two reactions: the first is to try and find something safe like a job with a bank; I am part of the smaller minority who push out further and take on more risks. This is something my close friends recognise in me more than I do myself.
“I ended up being the co-founder of three different tech start-ups, two of which we were fortunate enough to exit from successfully, and one which, in spite of having phenomenal artificial intelligence, failed and had to be put out of its misery because the go-to-market strategy was all wrong.”
Caulfield wears his failures like a badge of honour. “I think the really fundamental thing that separates the successful entrepreneurs from the many who are not successful is a kind of relentless focus on the customer’s problem.
“The real successes are the ones who see something that is being done badly or that could be improved and that’s what great entrepreneurs do.”
It is this focus on the customer problem that he believes accounted for the success of Exceptis and Similarity Systems. Failure to focus on the customer problem, he points out, contributed to the demise of Prediction Dynamics.
The road to being an investor
There are two kinds of technology investors that are prominent on the Silicon Valley and European stage: the venture capital firms themselves and the successful founders who want to continue to keep some skin in the game.
Both Caulfield and individuals such as Niklas Zennström, founder of Skype and head of Atomico, fit this latter mould.
Caulfield’s insight into venture capital investment came early on in his career when Shay Garvey – now head of Frontline Ventures and formerly a partner with Delta Partners – supported him during a fraught time.
“Against everybody’s advice, Shay invested in us when we were in the middle of a tough situation, in the business and personally. The way he dealt with it and advised us was an incredible testament to what a good venture capitalist can bring to the table.
“In the end, it was a good experience that showed me how an investor/founder relationship can be positive. From that point on, I was very interested in one day working in venture capital as an investor.”
After successfully selling his last business, Caulfield was approached by John Tracey of Trinity Venture Capital to perform due diligence on a company called Havok, which was subsequently sold to Intel for $100m.
“I didn’t realise it at the time, but John was road-testing me and eventually asked me to join the team. I was lucky enough to end up being one of those people with a strong technology background and a lot of commercial sense.”
His insights from both sides of the table are invaluable. “I frequently say to entrepreneurs that they should be prepared to take a price discount if it means having the right investor rather than the wrong investor.
“They probably won’t have to take a discount because, at the end of the day, the market sets the price. But I cannot begin to tell you how important it is, when times get tough, to have the right investor.
“In my first business, we had three term sheets on the table and I’m glad we went with Shay and Delta. Just like in the Unbearable Lightness of Being, you cannot go back and redo your life with a different set of circumstances, but I can’t imagine how things would have turned out if we didn’t make that choice.”
‘At heart, I am still an entrepreneur. If you look at the IPO we did last year with Draper Esprit, that was a pretty entrepreneurial thing to do for a venture capital firm’
Caulfield said that one of the other things people don’t understand about venture capitalists is that most of the job involves saying no.
“We see probably 2,500 projects a year. Some of them are things we’ve seen before, but 2,500 opportunities a year cross our path and we would probably only invest in 10 or 12 of those.
“It doesn’t mean that the others were bad, they just weren’t a fit. It has to be a relationship that works.”
Caulfield said he is working at full capacity and is grateful for the addition of Nicola McClafferty to the Draper Esprit team in Dublin.
Despite his time shortage, he is happy to dispense advice and insight to entrepreneurs. “I try to be helpful. Most of the time, I have to tell people that their idea is not one for us, that maybe they are a little early in their journey, or that their price point is too low to support their sales model. I just try not to bullshit people and instead give them sincere feedback.
“Sometimes you have to be say things that are tough, that seem harsh, but hopefully it helps them along on the journey.
“At heart, I am still an entrepreneur. If you look at the IPO we did last year with Draper Esprit, that was a pretty entrepreneurial thing to do for a venture capital firm.”
In conclusion, he re-emphasises his point about share options and how he believes it is an absolute scandal in Ireland.
He warns that Irish start-ups, in the war for talent against multinationals, are fighting with one arm tied behind their backs.
“Companies, especially in tech, are struggling to find talent. Sometimes people will join a company for less money if they know they can get a good upside in their options, if they believe in the technology and they believe in the team.
“At the end of the day, tech is a team game, not an individual sport.”