Investment time bomb: What will Ireland plan next for seed funding?

10 Dec 2018800 Views

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As our tech landscape evolves from solutions into deep tech, a steep nosedive in venture capital seed funding needs to be arrested, writes John Kennedy.

This morning (10 December), the Irish Government will reveal the first €75m investment from its big bet on disruptive technologies through its €500m Disruptive Technologies Innovation Fund as part of Ireland 2040. In this first tranche, 27 exciting projects that capitalise on a perfect storm of collaboration between start-ups, multinationals and the research ecosystem will get funded.

It is a welcome and timely move by the Government and a sign of much overdue joined-up thinking. But a deeper, more fundamental crisis is beginning to envelop our entrepreneurial landscape.

Last week, the Irish Venture Capital Association (IVCA), in its VenturePulse survey published in association with William Fry, revealed that venture capital funding being raised by tech firms plummeted by 47pc to €170m in the third quarter. For the first nine months of the year, funding was down 33pc to €546m, compared with €817m this time last year.

This is alarming but, if you ask me, it is in the area of vital seed funding where the real problem lies. The dearth in funding at this crucial stage – traditionally enabled largely by so-called ‘friends and family rounds’ – has been clipped by structural changes to tax policy in slavish, unimaginative adherence to EU rules.

What this means is that instead of support from friends and family going directly by these entities into businesses they know in return for tax refunds, they can only invest in broader funds, crippling the entire idea of why these rounds existed in the first place. It wasn’t just an investment vehicle for people, it was a way of people helping people they knew.

A deep-tech powerhouse

The seed funding crisis is also exacerbated by the fact that State-backed seed funds created several years ago have served their purpose and are almost fully exhausted.

We need a new generation of seed funds bolstered by collaboration with banks to help kick-start a new generation of Irish start-ups for the next decade.

“Seed funding accounted for 23pc of the total funds raised in the third quarter. The decline in seed funding is being driven by the volume of deals – down 32pc in number. The average seed deal size is broadly similar year on year,” said Sarah-Jane Larkin, director general of the IVCA.

Larkin’s warning ought to be heeded. The IVCA, whose members have invested €3.6bn in 1,450 Irish SMEs since the onset of the credit crunch in 2008, have helped to create 20,000 jobs in indigenous companies in that time.

Last week, I spoke to Enterprise Ireland’s manager of the high-potential start-up ICT unit, Niall McEvoy, about the new generation of deep-tech companies emerging, including firms such as blockchain player Aid:Tech, AI platforms such as Servisbot, IoT firms such as Wia and VR companies such as VR Education Holdings.

McEvoy said that Ireland punches above its weight with this interesting new generation, which marks a step change beyond business solutions and a purposeful stride into the future of computing. Other disruptive fields of deep tech worth watching include fintech, edtech, HR tech, marketplace and retail tech, travel tech, and digital health-tech.

Fostering engagement between start-ups, multinationals and academia makes Ireland “a deep-tech powerhouse”, according to McEvoy.

But, with no clear plan on what is going to happen next when it comes to replacing already leveraged seed funds, we are risking a deeply critical moment in the narrative of Irish tech.

Funding start-ups at the seed level is critical and, often, their ability to attract funding on a broader international scale depends on these start-ups getting funding at home and achieving a certain velocity and scale. If we fail at the seed funding level, then State investments in disruptive technologies long into the future risk being undermined. We need to hear more about what the State is planning when it comes to the next generation of seed funds. And then the disruption can really happen.

Government backing of Irish start-ups between 2013 and 2017 has already been leveraged up to €700m by venture capital firms.

I have already warned about the consequences of placing too much emphasis on job creation solely via multinationals to the detriment of our SME and start-up sectors, which power a significant chunk of the Irish economy.

But, with a seed funding time bomb already on our hands, what comes next?

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Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com