Overcome the scaling challenge, urges tech investment veteran

1 Oct 2013

Brian Caulfield, partner with DFJ Esprit

Brian Caulfield has sat on both sides of the table when it comes to Irish tech investment. He has been the start-up CEO building a business; and now he’s the investor whose gut instinct and experience could decide the fate of many a young tech firm.

Caulfield is a partner with DFJ Esprit in Dublin, a subsidiary of the US$9bn Draper Fisher Jurvetson venture capital syndicate that has invested in more than 600 companies around the world. DFJ Esprit is among the international venture capital firms attracted to Ireland by a vibrant start-up scene.

Before becoming a venture capitalist, Caulfield worked in a number of indigenous financial technology companies, including Peregrine Systems and Trintech. He sold Exceptis Technologies, an electronic payments company, to Baltimore Technologies in November 2000 for US$26m. Six years later, he sold Similarity Systems, a data quality company, to IT giant Informatica Corporation for US$55m in cash.

Caulfield also served as interim CEO of Belfast mobile cloud firm Aepona. Intel acquired that company for US$120m in April of this year.

At DFJ Esprit, Caulfield has led a number of key investments in Irish technology firms, including a US$16m investment in Movidius and a US$3.2m investment in Datahug.

Recently, Caulfield led the UK & Ireland Tech Tour, which took place between Dublin and Glasgow, Scotland. At the event, 14 out of the 27 firms presenting to 60 global investors were Irish. They included Accuris Networks, Brite Bill, Inhance Technology, NewsWhip, OpenJaw Technologies, OptiWi-fi, PathXL, Rainsafe, SixMinute, Swrve New Media, Trustev, VideoElephant, Waratek and WholeWorldBand.

While there has probably never been a more active time for tech start-ups in Irish business, there are challenges. The local market is small, and there is a scarcity of follow-on funding for larger A and B rounds. When companies are looking to raise €2m to €5m or more, there aren’t too many investors around who can really fill that kind of gap right now, Caulfield said.

Seed capital in Ireland

Despite this gap, Caulfield said Ireland is strong in terms of availability of seed capital. “We have so far seed funded potentially a fantastic generation of new start-ups,” he said.

Between them, some 189 Irish technology companies raised €269m from investors in 2012. While the amount raised is 2pc lower than the previous year, the number is up 18pc from 159 companies in 2011, according to the Irish Venture Capital Association.

However, the creation of a €175m fund by the Irish Government to invest with venture capital firms and which has the potential to be worth €1bn over 10 years could be a turning point. Caulfield also sees other positives.

Talent is always a factor, he said, and he’s delighted to see Ireland is making progress in creating less restrictive work permits for technology professionals.

“I think the future is very bright,” Caulfield said. “I don’t think I’ve ever seen a more vibrant, grass-roots start-up community in Ireland in 20 years and I think there are lots of factors making entrepreneurship much more accessible: it’s cheaper and easier to start a company; it’s cheaper and easier to gain global distribution for your product.”

That being said, entrepreneurs need to remember that if they really want to build companies that scale, they need to get decent capital behind their business, Caulfield added. He cited Twitter as an example.

“There’s hardly a business in the world that is more viral than Twitter. Twitter has raised about US$3.1bn and that’s what it costs to build a real scale company. Similarly, Facebook raised an absolute truckload of money and I think if we want to raise real scale companies we need to ensure the availability of venture capital at scale,” said Caulfield.

While many in the start-up space welcome international venture capital firms’ increased interest in Irish tech companies – and indeed Irish tech companies are targeting Silicon Valley – there has been criticism that local-based venture capital firms are risk averse.

Caulfield disagreed with this assessment.

“I think the criticism of Irish VCs not taking risk is quite misplaced. Most of the Irish venture capitalists are investing very, very early stage and it’s always very risky; that’s an unfair criticism.”

He said bolstering a strong locally-led venture capital scene is vital.

“We need strong partners here to co-invest with and work on deals with,” Caulfield said. DFJ Esprit, for instance, worked with Atlantic Bridge on the investment in Movidius.

“The total size of the round was US$16m that we and Atlantic Bridge were able to coalesce additional investors around. For example, we brought one of our LPs (limited partners), Robert Bosch Venture capital, into the deal,” said Caulfield.

Atlantic Bridge brought high-profile US high net worth angel investors into the deal and DFJ Esprit was able to construct a US$16m round, Caulfield said.

“It’s a lot of work but that’s how you get to the US$16m rounds, through that kind of network and through building really strong syndicates and that’s what we’re going to have to be able to do and that’s going to be a combination of international and local.”

DFJ Esprit network

DFJ Esprit is part of a global network of 16 funds that stretch from west-coast California to Korea, China and Vietnam.

“That enables me, for example, to connect portfolio companies with LG and Samsung in Korea through our partners in Korea,” said Caulfield. “I don’t think you can expect an Irish domestic venture capital firm to deliver that kind of reach; the reason we were able to do that was because we were part of this global network.”

Caulfield sees his perspective as a former tech CEO and entrepreneur as a way of adding value as an investor.

“I was a technology person first. I was co-founder of three different start-ups, two of which (Exceptis and Similarity Systems) I was lucky enough to exit successfully and one of which had fantastic technology but unfortunately failed in 2004.”

Caulfield said he hopes those successes and failures give him credibility with today’s entrepreneurs and that when he advises them he’s not doing so from a purely academic perspective.

“I have scars on the back and many of the lessons learned that go with that.”

Caulfield said he believes Ireland has slowly but surely developed an ecosystem that is something other European countries may envy.

“I hate when I hear people talking about building a new Silicon Valley. There’s only ever going to be one Silicon Valley, but I think we’ve built a pretty strong ecosystem and we need to constantly keep working on that.

Irish asset

Caulfield said that compared to London, for example, Ireland has a fantastic asset in terms of the density of its ecosystem.

“We have companies like Facebook and Google operating cheek by jowl with Irish companies like Swrve and Datahug and that to a great extent is concentrated in quite a small area. That’s a huge asset – it creates a buzz and comparatively I think smaller start-ups are often lost in cities like London.”

Caulfield also added that in the UK, there isn’t the level of active seed venture capital investment that there is in Ireland on a per-population basis.

“It’s a much, much stronger seed venture capital sector that we have here,” he said.

The UK has extremely strong tax incentives for angel investors, while Ireland’s are exceptionally weak, he added.

“I have to say that’s a big concern, we always need to be conscious of our competitiveness with our nearest neighbour.”

Ireland needs to more competitive in terms of attracting skilled talent, which is the bane of most tech start-ups’ existence right now, Caulfield added.

“We are competitive in terms of corporation tax, but we are not in terms of tax on options and capital gains, which are a key incentive in getting people. If you want to hire a really senior US exec it is really tough to get them to move to Dublin and a lot easier to get them to move to London, unfortunately,” Caulfield said.

A version of this article appeared in The Sunday Times on 29 September

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