Enterprise Ireland HPSU manager Niall McEvoy fills us in on how he measures a start-up’s potential.
Niall McEvoy strikes me as an optimist. A man who can spot silver linings peeking from behind clouds and opportunities in a crisis. It’s an outlook suited to someone tasked with spotting potential.
As manager of high-potential start-ups (HPSUs) in the ICT sector for Enterprise Ireland, McEvoy is part of the team responsible for sniffing out Irish start-ups set for rapid success. No doubt, he thinks all 80 that Enterprise Ireland funded last year are ones to watch (though we did manage to get a shortlist of six out of him).
I was introduced to McEvoy’s optimism ahead of Enterprise Ireland’s annual Start-up Showcase. For obvious reasons, this year’s event was hosted online. This was a huge challenge for an event that would usually welcome about 600 people to meet and network in Croke Park. But McEvoy is quick to highlight the immediate benefits of going virtual.
Without the limits of venue capacity, this year’s Start-up Showcase was open to an even bigger audience. “People that are thinking of being a start-up, people that are at pre-seed stage, at [Competitive Start Fund] stage, at accelerator stage that are wondering what the hell this is all about” – all could now join in, according to McEvoy.
“This year, for the first time, the opportunity to be able to share the stories and share the journey with potential entrepreneurs of the future is a real positive from having a virtual showcase,” he said.
While the pandemic may have opened up opportunities for early-stage entrepreneurs, concerns have been raised that the appetite for funding them is shrinking. In a risk-averse environment, brand new businesses are struggling to secure the backing they need. Recent figures from the Irish Venture Capital Association show that investors are putting their money on safer bets during the current crisis.
Yet, again, McEvoy is optimistic. He readily accepts that 2020 presented a much tighter funding environment, particularly in the months that directly followed the declaration of a global pandemic. But what he sees on the horizon is recovery.
“It delayed some of the deals that were closing but, over the course of the year, we saw a lot of the institutional investors coming back into the market quite readily. And we saw angel syndicates again becoming more active in the latter half of the year,” he said.
McEvoy is hopeful that this recovery will continue as the environment is improved for investors. This is an ongoing process with reliefs such as the Employment and Investment Incentive Scheme (EIIS) currently under review. Just last week, Tánaiste and Minister for Enterprise, Trade and Employment Leo Varadkar signalled that changes to EIIS and capital gains tax can be expected in Budget 2022.
“We’re very hopeful that the environment for private investment will improve significantly over the coming 12 months,” said McEvoy.
‘It is a vibrant enough market and good projects will always get funded’
– NIALL MCEVOY
Just today (25 February), it was revealed that PitchBook named Enterprise Ireland as the world’s most active VC investor by deal count. And in terms of its early-stage contributions, the stats do show that Enterprise Ireland is one of the largest seed-stage investors in Europe by volume of transactions.
“That puts every Irish start-up in a great position from the off. They have somebody there who will hopefully be at the table with them and ready to join them on that journey not just for start-up but also for follow-on funding,” said McEvoy. “It is a vibrant enough market and good projects will always get funded.”
But how do you tell the good from the less likely to succeed? This is where the dark art of identifying potential comes into play.
3 signs of a high-potential start-up
Essentially, a high-potential start-up is defined as a young company with the potential to create 10 jobs or generate €1m in sales within three years. How that potential is determined rests on three key areas: the team, the scale of the opportunity and the funding plan.
First, the team. “It boils down to the individuals. You’re backing individuals on their ability to execute a specific plan,” said McEvoy.
Sometimes this can really be individual, when it comes to sole founder teams, and in that case HPSU funding would support the build-out of a management team. The ideal high-potential start-up, though, has a founding team with complementary technical and commercial experience coupled with strong domain knowledge.
“They understand the nature of the problem. They’ve seen the problem in the real world and they’ve seen it within customers and that’s what’s driven them to do this,” explained McEvoy.
These teams must also demonstrate opportunity for scale. “We’re looking for businesses that can grow internationally. It would be a key feature of all the businesses that we support that they have set out to build a global business and that the opportunity is global,” said McEvoy. “In the first instance, they may validate the model domestically in terms of domestic customers. But the plan is always to go global because that’s where the scale of the opportunity is.”
Finally, there’s the funding plan – which isn’t just about fundraising. “It’s about how they’re going to fund the business in its totality,” McEvoy explained. While investment is money in the door, potential can also be gleaned from sales revenue. “We’re looking at the revenue model. We’re looking at how quickly customers can be acquired.”
A rapid route to recurring revenue is a big plus. For example, SaaS businesses with a strong subscription offering that can quickly generate a monthly revenue stream. “If every customer, every piece of revenue that comes in has to be won each time for every contract, that’s harder to scale,” explained McEvoy.
‘There’s hundreds of alumni that we’ve learned from’
– NIALL MCEVOY
Of course, when you’re making bets on start-ups, not all will live up to their high potential. But McEvoy was ready with stories of those that have exceeded these high expectations.
Online ordering platform Flipdish, for example, received HPSU funding from Enterprise Ireland in 2017. Since then the business has been “absolutely flying”, according to McEvoy, announcing an incredible 300 jobs late last year and a fresh funding round of €40m earlier this month. “It’s a great story and they’re growing fast,” said McEvoy.
Another example is Brightflag, a company providing legal billing software that was initially funded by Enterprise Ireland in 2014 via the Competitive Start Fund for early-stage businesses. “We supported Brightflag at that real early stage with the €50,000, and then they went on in 2015, and indeed after that, to get further high-potential start-up funding. And they raised €23m in the last number of months.” And this round of funding helped create 60 new roles across Dublin, New York and Sydney.
Glofox co-founder Conor O’Loughlin shared his HPSU experience from the class of 2015 on a panel discussion at the Enterprise Ireland showcase. This team have been “growing their revenues rapidly”, according to McEvoy, leading to job creation and further investment, including $10m added to its Series A last year. Demonstrating the global ambition expected of HPSUs, this investment is being used to accelerate the company’s growth in the US market.
Founder such as O’Loughlin are brought back to share their stories with the new HPSU cohort in order to guide them toward the same success. “[We] use that alumni to support the existing entrepreneurs,” said McEvoy. “And we have lots of experienced development advisers in the team who have been on this journey on multiple occasions with lots of clients. There’s tons and tons of experience there. There’s hundreds of alumni that we’ve learned from.
“But for every new entrepreneur doing it for the first time, it is the first time and it is daunting. So we try to help them overcome the challenges and the hurdles that they face.”