The start-up journey is not a lifestyle choice

13 Jul 2015

There has never been a better time to embark on the start-up journey in Ireland, says John Kennedy. But if we really want to see start-ups succeed all the pieces need to be in place — and they are not.

Last night, from my vantage point as a judge at Dublin Start-up Weekend, where e-sports play Book-e emerged as the ultimate winner, I studied each and every start-up intently. I liked what I saw.

The poise and professionalism of each presentation was a marked improvement on last year. There was greater racial and gender diversity amongst those taking part – five out of the 11 start-ups on stage had female leaders – and each business plan/idea had strong potential.

Those who took part arrived on Friday as strangers. Most of them were there because they were intrigued by start-ups. Most have full-time day jobs, working at places like Google and Paddy Power, but want to realise their potential and do something different with their lives. It could be for a weekend that they will never forget, or it could propel them on a whole new path that could transform the rest of their lives.

In the course of three days, 90 entrepreneurs organised themselves into 11 ventures, sacrificed their personal time with friends and family and, along with perfect strangers, figured out what they were capable of.

But that is just three days, the true start-up journey is when a founder commits themselves and everything they have to the full journey – every penny and every bit of energy. The costs can sometimes be personal and irrecoverable. And there is no guarantee of success.

The start-up journey: the bravest thing you may ever do

Compared with previous decades, there has never been a better time to start a business in Ireland. In May, the Government introduced the SURE initiative, whereby people who start a business will now be able to claim back 41pc of tax they paid in the six previous years.

In recent years and months the Government has created numerous funds that can be leveraged by local and international venture capitalists. This morning the Government announced a new €500,000 fund aimed at international start-ups and encouraging them to locate here.

This is great stuff, but it’s still not near enough. The tax treatment of entrepreneurs in Ireland was labelled ‘absurd’ in April by the newly-elected president of the Certified Public Accountants in Ireland (CPAI). Brian Purcell said that he considers the current situation in Ireland so severe that Irish entrepreneurs would be better off starting their business in the UK or the US due to what he sees as unequal tax treatment.

Many entrepreneurs in Ireland get their initial seed funding not from angel investors or venture capitalists but in most cases in ‘friends and family’ rounds using a mechanism called BES/EIIS. The problem is these mechanisms, which allow investors to write off part of their tax bills, don’t do enough or go far enough.

In Ireland, the total amount invested under BES has fallen by 70pc since 2011. In the UK, a more competitive scheme called EIS/SEIS has grown participation by 55pc and there is evidence that Republic of Ireland start-ups are locating offices in Northern Ireland to avail of the more realistic UK scheme.

The Seed Enterprise Investment Scheme (SEIS), which was created by George Osbourne in 2011, offers tax efficient benefits to investors in return for investment in small and early-stage start-up businesses. Already the evidence is leading to a record level of start-ups in the UK.

Another tawdry reality in Ireland is Capital Gains Tax, which is loaded in favour of the now-defunct construction sector only, but penalises employees of companies of other sectors like ICT or life sciences if they are granted share options in companies.

This is completely absurd – at a time of skill shortages and proof of a vibrant sector on our doorsteps, companies need to be able to incentivise and keep loyal staff.

Purcell in April argued that much of the issues with start-ups in Ireland was that there was no business sense currently for entrepreneurs to continue on with developing their business and they are “effectively forced” to sell their business on because of punitive and discriminatory taxes.

Some of the key issues he raised included the rate of capital gains tax (CGT) placed on entrepreneurs in Ireland compared with the UK, which has a special entrepreneurs’ relief scheme that reduces to 10pc the capital gains tax rate on the first £10m profit made from the disposal of a business.

Risk: It’s the game of life

The Irish Government has set a target of creating more than 90,000 extra jobs from start-ups over the coming years.

“Two-thirds of all new jobs across the economy are created by start-ups in their first five years of existence, and that is why we are putting in place a range of new measures specifically aimed at encouraging more people to start their own businesses,” Jobs Minister Richard Bruton TD said.

Unless specific changes are made to the tax structure for start-ups, the danger is we are pushing people with talent, hopes and ambitions into a potential meat grinder.

Think about it. Seed funding is already difficult to come by and, while individuals can offset some of their taxes of six previous years, they are still in a weak position compared with the UK when it comes to incentivising potential ‘friends and family’ investors and rewarding staff who chose to go the distance with them on the start-up journey.

If the start-up succeeds on the journey, if they sell the company, the CGT rules are ridiculous. Plus it is already very difficult to secure vital second and third round funding in a venture capital market with plenty on its mind.

We need to encourage people to embark on the start-up journey. But it has to be for the right reasons, and if they have it in them.

It is not a lifestyle choice. Go to all the tech conferences you want, lumber from incubator to accelerator and network and schmooze to your heart’s content — it won’t help your company. Sales help your company, good management and vision helps your company.

Businesses succeed because they provide something useful and valuable that others will pay for. Some of these businesses will never make it to SXSW or TechCrunch Disrupt and nor should they need to. As long as they exist, can grow, provide a return for investors and gainful employment and incentives for workers, then they meet the criteria that any government could wish for.

This is about responsibility. It’s not enough to urge people to go on the start-up journey if all the pieces aren’t in place to ensure they can at least have a chance. Creating funds are one thing, but they only have a shelf life. Clear long-term structures and the removal of frictions are also needed.

I have seen start-ups that have failed. Aside from the inevitable story in the newspaper about liquidations to titillate the chattering classes, what is not reported on is the personal cost when a business fails. Yes, be very clear – every business is a start-up.

When they succeed, start-ups can be personally enriching and it can be looked back upon fondly as a rewarding, adventurous journey.

But when they fail the fallout is often brutal and personal: broken friendships and fractured relationships with people who believed in you and invested in your enterprise. Some people suffer in terms of health, breakdowns, etc… No one really reports on that stuff.

This is not about pouring cold water on the start-up spirit that Ireland so greatly needs.

It is about ensuring a fair and level playing field for people who are embarking on the bravest journey of their lives.

High wire image via Shutterstock

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