Foreign ventures crucial in search for capital funding

Ireland's venture capital industry is about to pursue a more international agenda, writes SUZANNE LYNCH

AT A time when Irish businesses are finding it increasingly difficult to access credit, one source of funding has remained relatively resilient despite the challenging global investment market.

Figures released by the Irish Venture Capital Association last week showed that Irish tech firms have raised €100 million in funding this year. Although this was 8 per cent down on the €111 million raised by Irish companies during the same period last year, the second quarter of 2010 was particularly strong, with €76 million raised.

While not all of this relates to venture capital funding – the figure also includes money from private investors, including angels, Enterprise Ireland and AIB and Bank of Ireland seed capital funds – venture capital investment accounted for three-quarters of the funds raised in the second quarter.

For Peter Sandys, incoming chairman of the Irish Venture Capital Association, the relative health of the industry is no surprise. He estimates there is currently about €800 million available for investment over the next few years by Irish venture capital funds.

The Irish money also leverages international investment. According to Sandys, every €1 invested by Irish venture capitalists attracts up to an additional €1.20 from abroad into Irish small and medium enterprises. “In some sectors the multiple can be even higher. Thus conservatively there is between €2-€3 billion available for investment in appropriate enterprises,” he says.

Local venture capitalists have also benefited from the Government’s investment in the industry, which is channelled through Enterprise Ireland. The State agency has implemented three funding rounds over the last 15 years, designed to leverage external investment of up to 10-12 times the amount pledged by the Government.

The scheme is now in its third investment cycle, the 2007-2012 seed and venture capital.

By the end of last year, the total investment funding available to companies under the programme reached €525 million.

Nonetheless, the funding policy has changed significantly over the last 15 years. The percentage of the fund invested by Enterprise Ireland has been falling, while there has been a shift in the number and scale of venture capital funds awarded monies.

While in each of the first two rounds of funding, 1994-1999 and 2000-2006, 15 funds received Enterprise Ireland investment, in the most recent round, eight funds, each at least €50 million in size, were awarded monies. The strategy of investing in fewer but larger funds is part of a Government initiative to encourage the scaling up of companies.

The other significant shift has been a greater specialisation in the funds themselves. While the earlier funding cycles were generalist in approach, broadly funding hi-tech companies, there is an increasing lean towards specialisation. Although technology remains the major target for venture capital funding, life sciences is emerging as a significant player in its own right, with Irish life science companies now attracting more than 30 per cent of all venture capital funding, compared to 5 per cent five years ago.

In light of the burgeoning presence of life sciences in Ireland’s venture capital landscape, the appointment of Sandys as association chairman is timely. As managing director and co-founder of life science venture capital firm Seroba Kernel Life Sciences, Sandys is at the coalface of that sector.

Sandys set up the fund in 2002 with partner Séamus O’Hara, having worked for British venture capital firm 3i and ABN Amro Corporate Finance (Ireland), where he was managing director. “There was no life sciences fund in Ireland at that point in time,” he recalls. “We saw what was happening in places like Trinity in terms of medical research, but with no way of commercialising it. It was an unexploited opportunity.”

One of Sandys’s main focuses is to consolidate Ireland’s position in the area of life sciences funding, but he believes that it is in the specific area of medical devices that Ireland can really grow. “While we do see bio-tech projects in Ireland, places like the UK and Switzerland have had home-grown pharmaceutical industries for years, and all the infrastructure that goes with that. Ireland can’t compete.”

In terms of medical devices, it’s entirely different, according to Sandys. “We are the second-largest exporter of medical devices in Europe and have a fully integrated industry here, from research through to selling. Also, because we have the leading multinationals in the field, we have the support companies, the infrastructure, to grow further.”

Sandys believes international developments, particularly a tightening of regulation in the US, are opening up significant opportunities for Ireland. “The US is moving towards more rigorous testing, and the number of approvals has slowed down. The effect of all this is that innovation is coming out of America and coming into Europe.

“What you’re hearing at international conferences is that Europe is the place to develop a medical device company today. The problem is that they’re not terribly well aware of Ireland. We need to go out and sell ourselves more.”

Pushing this agenda is part of Sandys’s goal as he takes over the mantle at the association. He is keen to improve the perception of the Irish venture capital industry at home and abroad. “There is a lot of misinformation out there about the level of fees we charge. In fact, we’re very much standard.”

Similarly, he defends the industry against accusations that it exits businesses too early. “We might not create the same number of jobs, but the jobs that are created are high value. Take Stokes Bio which was sold in April. Immediately the job numbers are doubling.”

How does Ireland’s indigenous venture capital industry feel about the Government’s €500 million innovation fund recently launched by the Taoiseach in New York?

“There might have been some initial scepticism, in that it is quite hard to get people to invest outside of America. There was a feeling that maybe this was unrealistic to expect them to come here.”

However, he believes things have changed.

“The cycle has turned in America. It’s very hard for VC funds to raise funds so they’re now looking elsewhere for money. Now it’s a very opportune time . . . it could really work.”