InterTradeIreland’s Drew O’Sullivan offers some home truths about Ireland’s start-up funding landscape and argues that, with the right focus and effort, we can catch up with Berlin and London.
We have Google, Facebook, Airbnb and, once upon a time, even the Web Summit… But, while we can boast of being the “Davos for geeks” and the European HQ of many of the lead US technology companies, we do not have a reputation as a world-class tech start-up ecosystem or an obvious choice to base your start-up.
Internationally, we are not even considered in the same breath as the top European tech hubs, typically overshadowed by Berlin and London.
But we should be.
There is a vibrant tech ecosystem across the island of Ireland and, contrary to some popular narratives, it is not an overnight fad made up on the back of a (craft) beermat a couple of years ago in some hipster bar.
The tech scene in Ireland is alive. It is an ecosystem of serial entrepreneurs, first-time entrepreneurial teams, investors, agencies and institutions, all of whom have been hard at it for years, firstly building the foundations and then the infrastructure of this robust ecosystem.
There are several strong indicators that the ecosystem not only punches above its weight, relatively, but should be comfortably considered in the same breath as London or Berlin by any start-up entrepreneurial team looking at the best options for seeding and growing a new venture.
Truth #1: Companies founded in Ireland raise quite a bit of VC relative to the UK
In 2014, €2 billion was invested into UK technology companies, making it the biggest player in Europe for venture capital (VC) investment. In the same period, €401 million was invested into companies on the island of Ireland, with the majority of VC investment in technology and life science businesses.
Let us put that into perspective: the UK has five times the level of VC investment as Ireland, but the UK has tens times the population of Ireland, which points to the quality of the investment opportunities on this island – something which we should celebrate and be proud of.
Further to this, when it comes to getting that first level of seed rounds, Irish companies are second to none.
Truth #2: It is easier to raise a seed venture round in Ireland than in the UK, but harder to raise an angel round
Enterprise Ireland, which is one of the largest VC organisations in Europe, participates in over 100 VC seed rounds of equity investment less than €1m, each round worth an average of €500k. In 2014, 108 companies raised a VC seed round in which Enterprise Ireland participated.
In the UK, over a similar time period, 156 VC seed deals worth under €1m were completed.
The 156 VC seed rounds completed in the UK were worth a total of €56m, and the 100 deals completed in Ireland were worth somewhere in the region of €50m, maybe in €55m.
Conversely, for funding from angels and crowdfunding platforms, the UK has significant activity relative to Ireland, bolstered by highly competitive tax incentives (SEIS/EIS).
The best current estimate is that, in the UK, hi-tech businesses raised close to €277m (£200m) in 2014. CrowdCube (the leading equity crowdfunding platform in UK) recently passed the £100m mark for gross funding raised by companies using its platform.
In Ireland in 2013, the most recent year for which information is available, €45m was invested in EIIS/Seed Capital Schemes (Irish tax incentive schemes for private individuals). Only about €24m of this went into anything that could be classified as hi-tech.
At seed stage, angel investing in the UK is clearly the significant source of capital (and expertise) for hi-tech startups.
Smart Irish companies are not waiting for tax rules to change domestically, and are beginning to tap this considerable pool of angel seed capital, and the crowdfunding platforms, and may become SEIS/EIS eligible if they have a branch with full-time employees based in the UK (as well as complying with other HMRC rules).
Truth #3: We are fast approaching the level and quality of US seed-funded start-ups
One metric to measure the quality of start-ups we have here is to compare conversion from the seed funding round to Series A-round funding for start-ups. When looking at the most capital-efficient market in the world, the US, how does Ireland compare?
From 2012 to 2014, Enterprise Ireland had 97, 103 and 108 HPSUs (high potential start-ups) per year, respectively. Per IVCA data in the same time period, there were 29, 25 and 35 series-A transactions of between €1.5m and €6m).
Over three 12-month periods, Ireland had an implicit conversion rate of close to 32pc (from seed to Series A), while, in the US, the rate was 39pc (per CB Insights data).
The seed round and Series A-round funding activity illustrates the point of the ‘quality’ of seed- and Series A-funded start-ups being developed within the Irish ecosystem. Furthermore, it highlights how we are fast approaching the level and quality of US seed funded start-ups.
Truth #4: you can go later than than Series B/D/E funding
Can companies founded in Ireland source and execute significant VC funding rounds internationally, beyond the Series A stages? While not yet in the realms of the Unicorns, yes, they can.
Some examples of significant total VC raises for growth companies are Movidius (US$84m), Powervation (US$40m), Cubic Telecom (US$37m), MCOR (US$31m), AMCS (US$26m) and Swrve (US$21m), to name just a few.
There are also examples of Irish companies tapping significant funding and partial exits from private equity – note the recent US$75m deal between Fenergo and a private equity player in the US.
Truth #5: the number and value of exits will go up significantly in the next few years
In terms of IPOs, there have not been many of late, with Kainos and Fleetmatics two of the more recent.
According to research by Pegasus Capital, there were 215 exits by Irish technology companies over the past 15 years, for a total of €7.5bn. The average exit valuation for an Irish technology company over the past four years has been €62m.
In the past five years, there have been more than 11 technology companies exiting for a valuation higher than €100m. With the level of VCs investing at such a rapid pace into Irish companies, it is fair to assume that the level of exits – both in number and value – will go up significantly in the next few years.
Truth #6: if we want to, we can become the best start-up location in Europe
One of the key pillars to the success of the start-up funding ecosystem is government-developed support structures, like InterTradeIreland, Enterprise Ireland and Invest Northern Ireland. They are the cornerstones and secret weapons of our ecosystem.
For years, they have leveraged capabilities with other investors, institutions and organisations to experiment, and optimise resources, for the benefit of knowledge-based start-ups and scaling companies.
Acting as the anchor-limited partner in many of the venture funds that are active on the island, they supported growth companies, developed and nurtured the domestic venture capital scene, encouraged direct investment activity, and invested in incubation and acceleration resources which allowed ideas to develop and start-ups to scale.
A well-worn phrase that we are all used to is that Ireland is ‘one of the best small islands in the world to do business’. What is certain, though, is that it is one of the best small islands in the world for creating, developing and nurturing start-ups.
Improving fiscal incentives for Irish angel investors could give the State a credible alternative to the current state subsidisation of seed investment, or complement it. This would not only improve local seed funding availability, but also expertise by angel investors in making investments and supporting their investee companies.
There is huge potential to transform what is already a good local ecosystem into the best in Europe, by mobilising this local angel capital and expertise.
Ireland is still a pretty small place. Entrepreneurial teams can be readily connected and introduced to the right resources, whether they want to access agencies, incubators, accelerators, angels or venture investors.
So, if you know of someone considering starting up in Berlin or London, tell them to take a look at Ireland, our Start-up Island, first. Get along to the Startup Gathering and get plugged into our ecosystem as soon as possible.
Drew O’Sullivan is the Lead Equity Adviser for the island of Ireland with InterTradeIreland. Drew has worked as a venture investor, adviser and mentor in the start-up ecosystem on the island over the past 15 years.
Stony shore image via Shutterstock