Against the tide: Ireland’s homegrown tech industry fights on

27 Oct 2015

Despite having revenues of around €2bn, Ireland’s indigenous software industry of more than 1,000 companies rarely makes the headlines. But, in spite of backward tax rules, having to be export-oriented from the get-go and battling multinationals in the war for talent, it endures, unbeaten, writes John Kennedy.

If you read the tech coverage in the business pages of newspapers today you’d be forgiven for sometimes thinking the Irish tech scene consists of only three components: trendy start-ups, the soon-to-depart Web Summit and multinationals like Apple, Google or Dell.

In the background, out of the limelight, the stalwarts of tech in Ireland rumble on with a tenacity that is humbling and inspiring at the same time.

Indigenous tech companies contribute to the Irish economy in the shape of more than 1,0oo companies raking in revenues of more than €2bn

Many of these companies began life in the 1990s, when there was no venture capital industry in any shape or form, or in the 2000s. Indeed, one of their number, Iona Technologies, shot straight into the NASDAQ in 1996, shining a short-lived spotlight on indigenous software companies before the dot-com correction of 2000 focused wiser minds (ahem!) on surer bets like property.

It is often lamented, that unlike their Israeli counterparts who hit NASDAQ every year in their dozens, Irish indigenous technology companies sometimes sellout, allowing themselves to be acquired rather than going the distance. But those in the know will tell you that is like comparing apples with oranges; Irish indigenous companies don’t have the backing of a powerful military-industrial complex like their counterparts in Israel.

Nor do they get the same buy-in from their own government. Despite a more transparent tendering system than existed in the past and which is EU-wide, many indigenous companies I got to know in the last decade or so felt short-changed when it came to selling software locally to government bigwigs, often falling foul of the old adage ‘you’ll never get fired for buying IBM’. No offence to IBM, but that was the mindset that indigenous companies were up against.

So the only route for indigenous companies is export, but that’s not easy when your own country doesn’t buy local. One healthcare software company I got to know told me that when selling abroad to other governments they are often asked why, if their technology is that good, their own country doesn’t buy it? Why indeed? But explaining the vagaries of the Irish health sector would be as harrowing for the teller as it would be for the listener.

So, often, longstanding indigenous companies get acquired; notable examples include Cork cloud company Qumas, which was acquired by Accelrys for around US$50m, Waterford-based FeedHenry, bought by Red Hat for €63.5m, and Cumas, which was bought by IBM for an undisclosed sum. Often these acquisitions spell good news: Red Hat is like the jewel in the crown for Waterford’s growing local software industry and Workday, which acquired Iona co-founder Annrai O’Toole’s Cape Clear in 2008, has just announced 200 new jobs for Dublin’s Smithfield area on top of the 600 staff it already employs in Dublin. And let’s not forget the €115m sale of Realex Payments to Global Payments and the US$40m acquisition of Payzone by Carlyle Cardinal.

Tipping the scales

But the ultimate question for indigenous software companies is around scale. The populist Budget 2016, aimed at securing votes from the hard-pressed middle in the next general election, nevertheless highlighted ongoing travesties in terms of how the State views and supports its indigenous tech firms. This included a limp change to capital gains tax, restricted to the first €1m from the sale of a business, to absolutely no changes to structures that allow firms to reward staff with share options.

It is no wonder Irish homegrown software firms aren’t scaling fast enough; how can they amidst a punitive tax regime and an unrelenting war for talent they have to wage against neighbouring multinationals who have deeper pockets and can offer better benefits?

Despite the reality that firms aren’t scaling fast enough, research by the Irish Software Industry and Tenegro last year found that Irish software companies are gaining in confidence.

The survey found that 81.5pc of respondents were more confident about their business; 94pc stated they expected revenues to increase and 87pc expected an increase in export revenues.

R&D expenditure is expected to rise for 67pc of participants, up from 58pc in August 2013, and company profitability is expected to rise for 70pc, compared to 66pc in August 2013.

Seeds of change

Moving towards 2016, the picture appears to be even brighter. A recent research note from Bank of Ireland’s Technology Sector Group estimated that there are 1,100 companies now spread across software, digital and IT services that make up the homegrown tech sector.

Gartner’s Q2 2015 forecast for annual enterprise software spending in the Irish market is up 6.2pc year-on-year to €712m and the projected growth for IT services spending is set to grow 4pc to €2.1bn.

Irish technology companies outside of medtech raised €90m of venture capital in the first quarter, up from €80m a year earlier. And, according to Harvey Nash, 46pc of Irish CIOs expect to increase the level of outsourcing. Notable fundraisings in the indigenous tech sector included CurrencyFair raising €8.5m, Fenergo raising US$75m and semiconductor player Movidius raising US$40m.

According to Bank of Ireland, Irish companies are investing heavily in analytics and cloud, which is good news for indigenous companies engaged in IT services and products and services like enterprise resource planning (ERP).

There is also an increase in quality at start-up stage among this year’s Enterprise Ireland High Potential Start-up (HPSU) cohort, driven by Enterprise Ireland’s strategy of focusing on industry clusters like healthcare and education.

But the headwinds remain the same as they did a decade ago. Recruitment is challenging and IT staff demand the best salaries in the economy, with average weekly earnings of €1,000, up 4.4pc in the past year, and the failure to make changes on share options in the Budget must rankle tech leaders struggling to hold on to valued employees who are being lured elsewhere.

And Irish software companies – despite their endurance – remain small.

Some 90pc of indigenous software companies have revenues below €3m and barriers to scale include the lack of later-stage funding such as Series A and Series B (€5m-plus) and the lack of capabilities and experience in sales and marketing.

But there is hope.

Evidence is emerging that venture funds are showing a willingness to make larger investments beyond €2m and Enterprise Ireland predicts software growth of 10pc in the economy, while there is also evidence of domestic government and corporate customers who had postponed tech investments and are now willing to invest in areas like cloud, analytics and mobile security.

In spite of the often-challenging economy that surrounds it and the talent battles it faces against stronger multinationals, the indigenous tech industry has weathered the storm.

For this, it deserves recognition.

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Bundoran surfer image via Shutterstock

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