Innovative Irish firms net vital investment funding

Firms who persevere are managing to attract venture capital – all the more vital with the scarcity of bank funding, writes FIONA REDDAN

WITH THE recession showing little signs of easing, it remains incredibly difficult for companies looking to raise finance. Nevertheless, companies who persevere are still getting there.

According to the Irish Venture Capital Association, 32 firms raised €54 million in the first quarter of this year, up by 24 per cent on the same period in 2008.

One such company is Revahealth.com, an online search engine for healthcare clinics around the world, which went looking for a second round of funding towards the end of 2007.

The company, which was set up by Caelen King, a former vice-president of product at NewBay Software and a marketing executive with Baltimore Technologies, had started out with a seed investment of some €530,000. The money was raised from a group of private investors, including internet entrepreneur Ray Nolan, and Paddy Holohan, founder and chief executive of NewBay Software.

Revahealth.com started looking for additional financing of €1.25 million, to fund expansion into new markets, just as the credit crunch was starting to bite. As a result, the process dragged on much longer than King would have liked.

“It stretched on for ever,” he says, “as investors who had committed started falling by the wayside as they ran into their own financial difficulties. We found that the environment had changed completely.”

While King maintains that finding the money wasn’t difficult, with Rathfarnham-based Hogan Associates helping to sign up investors, the delays caused by investors dropping out were more problematic, particularly in terms of the amount of management time dedicated to fundraising. In the end, the deal closed in the first quarter of this year.

In addition to contributions from private investors, Revahealth.com also got funding from Mianach Venture Capital and from Enterprise Ireland, who invested €500,000.

MXSweep, a specialist in e-mail security-as-a-service, also got help from the Government agency, which provided the “major plank” of financing in its latest round of funding, according to chief executive Edward Grant.

The company, which was spun out of Kingspan’s IT department in 2006, started out life with an investment from Kingspan founder, Eugene Murtagh, who also participated in the latest €800,000 fundraising effort.

The firm, which has raised almost €2.5 million to date, needed the latest round of funding to finance a push into new international markets in the Benelux countries and Scandinavia. According to Grant, the firm’s target starting out was €800,000.

“We were realistic in the current market environment, we didn’t try and be too aggressive,” he says. Already, the latest round of funding has created three new jobs, and Grant says that MXSweep will look for “substantially more funding next year”.

Although Grant was happy to go with funding from both Enterprise Ireland and private investors this time, he also looked at getting a venture capital fund on board for their expertise. However, he found the market “extremely tight”, with little interest from the funds he approached.

“Our company will be cash positive by the end of the year, but venture capital funds are looking for companies who are further down the road, where the chances of failure are much less,” he says, adding that this makes it more difficult for companies who are trying to emerge from the start-up phase.

One venture capital fund which is still investing is the Ulster Bank Diageo Fund, which was set up last October. Managed by NCB Ventures, the venture capital arm of stockbroker NCB, the fund raised €75 million which will be invested over the next five years.

Already, the firm has allocated about 10 per cent of the fund, including a €5.25 million investment in Limerick-based “clean-tech” company, AMCS, which provides technology solutions to the waste and recycling industry. The funding will finance AMCS’s expansion plans.

However, the fund had its own difficulties in trying to raise finance, with the typical constituents of venture capital funds, such as banks and pension funds, facing their own financial difficulties. According to Michael Murphy, chief executive of NCB Ventures, they were met with a “very challenging fundraising environment”.

Nevertheless, they met their target of €70-80 million. “In some ways, just to get the fund away was a great success,” he says.

While Murphy maintains that difficult environments often present opportunities, he concedes that some things are different. Previously, firms could leverage a certain proportion of equity to raise a multiple of debt financing, but this is no longer possible.

“The debt-equity mix has changed and is a more balanced situation. You now have to give away more equity to get the same amount of debt,” he says.

With regards to Grant’s concern that venture capital funds are no longer interested in start-ups, Murphy says that early stage companies need to show that they can progress. “For early stage companies the issue basically is that they are on a cash burn. Whereas in the past they might have raised money to do several things simultaneously, now they should raise enough cash for a year and a half, use the capital as efficiently as they can, and prove a milestone or two, before raising more money.”

While the level of activity amongst venture capital funds may have declined, one source of financing which has almost completely closed is bank funding. According to Grant, MXSweep used to get bank funding for the purchase of its equipment, but this is no longer possible.

“The terms offered by the banks are now extremely onerous, and they are looking for cash collateral as well as charging a massive margin,” he says, adding that MXSweep is now using its own cash to finance purchases.

Bank financing was also not on the cards for Revahealth.com. As King says: “Looking for money from the banks is a pretty poor option for an internet company even in the best of times – and these weren’t the best of times!”

So what can companies who may be looking for funding do to improve their chances of actually getting it? Grant says that it is very important that they articulate clearly why they will be a success. “You need to show what your unique selling point is and why you can survive in this market,” he advises.

For Murphy, companies have to show that they can use capital efficiently. Evidence of an established revenue or sales model is also important, or if a company is engaging in product development, he would ask whether it can get “at least one product over the line, rather than develop three or four products”.

Moreover, Murphy says that one element of fundraising in the current environment which is very important is to make use of existing relationships, as it is much easier to raise capital from them than seek out new investors.

Such an approach has helped MXSweep, as in addition to the financing provided by Eugene Murtagh, his relationship with the firm has given it credibility when it comes to attracting outside investors, notes Grant.