The banks were right not to lend to tech firms in the boom
THE CENTRAL Bank’s highly critical report on the Irish banking system was a shocking portrait of just how much money banks were siphoning off to property developers, on a scale grossly out of proportion with investment into other sectors.
As was noted in this paper, from 2003 to 2008, loans to property developers rose from €16 billion to €106 billion, a 558 per cent increase; more than twice the €51 billion made in loans to all other types of businesses.
Lending to the information and communications technologies (ICT) sector was the lowest of all. In 2003, the ICT sector got a relatively modest €760 million; by 2008, that figure had grown to €1.1 billion – still staggeringly low when ICT development routinely fronted government policy reports. The sector has kept cash flowing into government coffers and helped lead Ireland’s export growth – in 2009, the sector accounted for $50 billion worth of exports.
ICT comprises a significant part of the Irish economy, supplying jobs for about 75,000 people, one of the highest per capita ratios for ICT employment in the OECD. Indigenous companies – the kind likely to look for loans – make up the vast majority of Irish-based ICT firms. There are more than 5,400 companies in the ICT sector, according to Government figures, with only about 230 of those foreign-owned. And more than half the medical technology companies in Ireland – 90 of 160 – are home-grown.
On the face of it, it’s appalling that banks were not lending to this important sector and helping promote Irish entrepreneurship. But that’s on the face of it. Yes, the fact that Irish banks were shovelling money into the developer trough on such a profligate scale for so long is flabbergasting. And yes, that banking system should definitely have given loans into a wider range of business sectors.
But into ICT? I think not. Technology firms, by their very definition, are selling innovation. Their asset, when starting out, is almost always intellectual property. For a bank to secure a loan against such an intangible would be, in most cases, irresponsible from (what was supposed to be, at least) the more staid and safety-minded end of the lending market.
What tech firms need and seek is risk capital – not a loan from a bank. Risk capital is supplied in a variety of ways: through various grant schemes, incubators, early-stage venture capital firms and so forth. But it is almost never supplied through banks – not here, not in Silicon Valley, not anywhere.
The problem for many young Irish ICT companies back in 2003 was that, historically, there were hardly any sources of risk seed capital here. The VC industry in Ireland has generally been more cautious than its compatriots in other jurisdictions – perhaps rightly so, given the far smaller scale – and also has tended to focus not on early-stage start-ups but on later-stage funding.
That situation has changed significantly. Joe Drumgoole, vice-president of product management at mobile app company FeedHenry, noted in a recent interview at Inventorium.org( iti.ms/Pt6mj2) that there is plenty of seed funding around.
“In 2002 you had nothing to fund your business unless it was friends and family, or you were wealthy. Now if you have an even half-decent idea and some coding ability, you can pick up about €50,000 for free in about 10 different places.”
The real problem is middle-stage gap funding – between that initial cash influx and the far larger investments that most VCs want to make into an established business. Banks won’t make those loans and it would be inappropriate for them to do so. The issue comes back to the problem of how to broaden the risk capital environment in Ireland.
The recent announcement that Silicon Valley Bank will make €100 million available to technology companies here through the National Pensions Reserve Fund will change the Irish banking picture – it is in the business of risk capital loans, an interesting exception to the general banking rule. But, putting it in perspective, the amount is still modest, even compared to that low 2003 figure for what Irish banks willingly loaned to the sector.
Irish banks definitely deserve severe criticism for the inanity of giving so much to property developers for so long. But it makes little sense to argue they should have given more to ICT businesses.