Executives leading Irish start-ups who left pensionable jobs and are existing solely on salaries and share options should not have to pay income tax for their gains, urged leading venture capitalist Barry Maloney of Balderton Capital, who has invested in firms like Bebo and Big Fish Games.
Speaking at KPMG’s ‘Switched On for Growth, Financing Innovative Companies’ conference in Dublin this morning, Maloney gave a valuable insight into the workings of venture capital firms.
“Our model is to try and apply business skills and take advantage of the mistakes we’ve made in the past. If anything you need coaching skills to do what we do,” Maloney said, adding that empathy is an important characteristic of an instinctive investor.
He said that Balderton’s typical deal size ranges from €100,000 up to €50m. “We like building companies from the ground up and take them through the various life cycles. We don’t take on personal money because the average life cycle is eight years. What people don’t realise is often the IPO is the start of the journey, not the end of it. So we look to invest in longevity and make sure we can get the company through the various cycles.
High risk, high return
“It is a high-risk, high-return strategy, we are looking for deals that can make 10 times the money we put in,” said Maloney, who previously headed up Esat Digifone in Ireland. “Thirty to 40pc of deals you finance are going to fail.”
He said that venture capitalists are looking for deals that are capable of scaling internationally and unlike their French and German counterparts, the lack of a large national marketplace means Irish companies have the advantage of thinking globally from day one. “We put 20pc of our investment into Irish companies for that reason and my partners recognise that. There is an ambition deficit in Europe compared to the reality deficit in the US, it is important that venture capitalists are in it for the long haul.
“When you are early stage investing, you are really investing in a slide show, an idea and an entrepreneur – it’s a crapshoot. Early stage investing is an art, not a science, and often you are betting on passion and the key.
“Another thing we are looking for is realism, that you are capable of building a management team, communicate that you want to be rich, not famous – you wouldn’t believe how many entrepreneurs destroyed companies because they always wanted to be the boss. The founder may be important to the whole life cycle but sometimes the role needs to change.”
Digital – it’s in our DNA
In terms of strengths and weaknesses, London-based Maloney said that the technical skills in Ireland are as good as anywhere else in the world, that engineering skills are top of the game. Where the country struggles is sales and marketing skills, scaling the business and the discipline of product management in terms of staying ahead of the cycle in terms of product pricing and positioning. “In Ireland, people think of marketing as advertising.”
He went on: “One of the reasons why Ireland is so attractive to investors is the presence of large multinationals. When I worked at Digital Equipment Corporation in Galway, when the company shut down, it was declared a national disaster, but the net result was so many guys went out there and set up their own companies. That is the DNA that is out there because of the multinationals.”
Maloney said that in terms of the Innovation Taskforce report from earlier this year, one of the key initiatives that must be acted upon is the need to stop taxing stock options for entrepreneurs. “This would cost the country nothing and provide a positive impact on the entrepreneur who exists on salary only and has sacrificed their pension.”
Anna Scally of KPMG, who was member of the Innovation Taskforce committee on taxation, agreed with Maloney: “In terms of taxes aimed at entrepreneurs, there is definitely an issue with stock options. We interviewed over 110 people but the idea of dropping taxes on stock options falls on deaf ears. Capital gains tax is the right result.”
She said that it was imperative the country fields more and more start-ups and that resolving the seeding issue is important, otherwise we could face a dearth of start-ups. “To get success at the top we need more and more start-ups at the bottom.”
Maloney said the journey of a start-up to success can often take several years and while Irish cultural attitudes to entrepreneurs have improved, friends and family patience is still an issue.
Keep the wolf from the door
“Most entrepreneurs who are existing on salaries only having invested their pensions survive on the buzz. But then they go home and their husband or wife would say that they’ve been at this eight years, you have a salary but where’s the beef? This creates tension.
“From an investor perspective, we don’t need them to be rich but it would help to get the bank manager off their back so that they’re not worrying about paying the bills but about getting the next customer. Domestic stress – I see it more than ever before. It is real and we need to find ways of alleviating that – taxes are important.”
Scally agreed: “We need to make it easier for entrepreneurs to succeed.
“One of the lesser known recommendations of the Innovation Task Force was to facilitate ways of getting money for individuals who start up companies in a better way, keep them comfortable, keep the wolf from the door, save the wife from giving out and make it easier for the entrepreneur to succeed.”