How has Irish start-up funding been impacted by Covid-19?

13 Aug 2020702 Views

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The latest TechIreland report reveals that investment into early-stage start-ups dropped due to the pandemic, but there was still €545m invested into Irish tech in the first half of 2020.

In the introduction to TechIreland’s Startup Funding Review for the first half of 2020, the organisation’s CEO, John O’Dea, admitted that it has been a challenging year for most businesses, but some sectors have thrived.

He outlined some of the positives for the year so far. For example, 15 women-led companies in Ireland have raised a total of €60m, which is up 40pc on last year and is three times higher than the €19m raised in the first half of 2018.

At first glance, things look positive in TechIreland’s latest review, which summarises investment into Irish tech companies. In particular, start-ups focusing on healthcare and medtech, along with delivery businesses, have seen a boost in funding.

In the first half of 2020, there was €545m invested into 79 Irish technology businesses, which exceeds the volume of cash invested in the first half of 2019, when €437m was invested into 101 companies. It is similar to the figures for the first half of 2018, when there was €538m invested into 80 companies.

‘Worrying trends’

Although Irish tech companies have managed to raise a large amount of funding in the midst of a pandemic, Draper Esprit venture partner Brian Caulfield warned that there are some “worrying trends” behind the 25pc year-on-year increase in funding.

“As is often the case, given the small sample size, the overall figure was distorted by three very large investments into Fenergo, LetsGetChecked and ALX Oncology,” he said. “Between them, these rounds represented half the total funding.”

Enterprise software company Fenergo raised $80m in February, oncology-focused start-up ALX raised $105m in the same month, and LetsGetChecked raised $71m in May for its at-home health testing kits.

‘There is also clear evidence that early-stage companies are finding it particularly difficult to raise funding’
– BRIAN CAULFIELD

Caulfield noted that the number of companies raising funds declined by more than 20pc in H1 of 2020, compared to H1 of 2019. The number of start-ups raising investment for the first time fell by almost 60pc and rounds of less than €5m were down 50pc.

“There is also clear evidence that early-stage companies are finding it particularly difficult to raise funding, with just three companies founded since 2019 raising just €340,000,” Caulfield said.

He added that from a regional perspective, almost every county saw a reduction in the number of investments and the vast majority saw a reduction in volume. “Several counties that would normally feature in the funding list saw no funding rounds at all.”

The investor said that the reaction to the pandemic in Ireland has mirrored a pattern seen abroad, in which venture capitalists and other investors shore up existing portfolio companies, investing additional sums to leverage government supports and ensure the survival of those businesses. A consequence of this is that fewer investors are making new investments.

“It’s a difficult time for new companies, companies without existing deep-pockets investors or companies that have yet to prove their business model,” Caulfield said. “In this environment, strong Government intervention to ensure capital is available in the market is essential.”

More challenges ahead

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Niall McEvoy, manager for high-potential start-ups (HPSUs) in the ICT division at Enterprise Ireland, said that while the funding environment for the tech sector in Ireland during the first half of this year proved “remarkably robust”, the rest of the year is likely to be challenging for companies and investors alike as the early and growth-stage funding market reacts to the economic shock caused by Covid-19.

According to McEvoy, Enterprise Ireland remains the largest seed-stage investor in Europe. The agency has invested in a similar numbers of HPSUs already this year as it did in the same period in 2019, and has been assisting client companies as they respond to “unprecedented challenges”.

This includes Enterprise Ireland’s Sustaining Enterprise Fund, which is “giving companies a new funding option to assist with the liquidity challenges directly resulting from the impact of Covid-19”.

Looking ahead to the second half of the year and into 2021, McEvoy expects to see “increased pressure” on the availability of early and growth-stage investment capital.

The role of Government supports

McEvoy said the Government’s increased business supports, which were announced in the July stimulus package, will make a “strong impact” in helping companies respond to liquidity and growth capital challenges in the near term.

However, Sarah Jane Larkin of the Irish Venture Capital Association (IVCA) raised concerns about the lack of first-time funding rounds and said the outlook for younger, smaller innovative companies is “bleak” as many of them cannot qualify for Government Covid-19 supports.

“What is heartening about this funding review is the number of Irish tech companies that are scaling,” she said. “It illustrates how competitive Irish start-ups can be on the world stage if they have the necessary funding to grow.”

Larkin added that intervention from the Government, particularly in relation to capital gains tax, could make a significant difference for vulnerable tech start-ups. She also suggested that there needs to be more incentive for people to take advantage of the Employment Investment Incentive Scheme (EIIS) to continue the flow of private investment.

Challenging areas

Irish angel investor Mary McKenna said that despite the fact that this TechIreland report recorded the highest female founder funding since 2018, at €60.4m, things are still “challenging”.

“At only 11pc of the total amount raised, the funding for female-led business is still poor,” she said. “This isn’t unexpected: just 2pc of Europe’s VC capital goes to female founders and only 45pc of European VCs have a woman involved in the final investment decisions.”

According to the report, Northern Ireland also continues to lag behind in funding. Of the 10 companies in the region that raised investment in the first half of 2020, only four raised more than €1m and three of these were spin-outs from Queen’s University Belfast.

“Investment is still concentrated in Belfast with little of note in the rest of the province,” McKenna added. “A strong showing, however, in companies with AI and machine learning, and [it was] great to see StormHarvester’s round led by Green Angel Syndicate.”

Kelly Earley is a journalist with Siliconrepublic.com

editorial@siliconrepublic.com