Technology start-ups face funding shortfall

 

NET RESULTS:Ireland's tech industry seems to be vibrant, but entrepreneurs claim there is a funding crisis, writes John Collins 

ON THE face of it, Ireland has a vibrant technology industry. Speaking at a recent event in London, Tánaiste and Minister for Enterprise, Trade and Employment Mary Coughlan said that software now accounts for almost €12 billion in Irish exports which are generated by 800 Irish and international firms. Strip out the multinationals and the indigenous contribution is still €2 billion, a massive improvement on 10 years ago when the figure was less than €100 million.

Homegrown firms have been extremely successful at developing technology for large organisations around the world - from the systems used by US pharmaceuticals to ensure they correctly manage their data while developing drugs to software that assists government agencies to manage their worker compensation schemes.

The "enterprise" software model, which was developed in Silicon Valley, was copied and adapted to Ireland with great success in the 1990s and depended on venture capitalists ( VCs) to fund companies during the two- or three-year development cycle before they started generating real sales. With some skill and luck, these companies attracted the attention of the big players in their sector and a trade sale was concluded that made the VCs and the founders a healthy return.

At first look, any bright young thing with an idea today who wants to get a piece of that action should find plenty of willing backers. After all the Government, through an Enterprise Ireland-administered scheme, has earmarked €175 million in funds to co-invest with private investors, primarily venture capitalists, between 2007-2012. In the optimistic days of 2006, when the scheme was launched, it was suggested that a total pot of €1.5 billion could be available for start-ups. But as of July last, €148.75 million of State money had been committed to eight private funds which have just over €500 million available for investment, including the Government contribution.

The most recent figures from the Irish Venture Capital Association suggest that Irish start-ups received €225.94 million in funding last year, 17 per cent up on 2006 and the most since 2002.

However, the headline figures do not seem to reflect the situation on the ground where technology entrepreneurs and advisers talk of a funding crisis. Neil Pope, of consultants Who42, tracked €1.4 billion of investments, acquisitions, disposals, management buyouts and mergers in the broader "knowledge economy" in the third quarter. He believes the slowing economy will mean VCs will focus on their existing portfolio rather than taking a risk on early-stage companies. "What's worrying is that the funnel is not being fed at the top," said Pope.

Two deals announced recently underline the changing landscape. Movidia, a developer of video chips for mobile phones, secured $14 million from a consortium of investors, but the only Irish VC to take part was AIB Seed Capital, which was one of the smaller contributors. Just as Irish firms are having to look overseas for investment, there are signs that Irish VCs are travelling further afield for investments.

Eyebrows were raised this summer when Delta Partners, which has backed innovative Irish technology companies such as Similarity Systems, Xiam and PolarLake, announced the first investment from the €100 million fund it closed last year, which included €15 million of Government money, was to be in an Austrian medical device outfit.

Sligo-based web survey firm PollDaddy was last week acquired for an undisclosed sum by Automattic, the US company behind the WordPress blogging platform. Although it received support from Enterprise Ireland, it had been incubated by Infacta. PollDaddy was spun off and it did not have any VC backing.

There are now fewer larger VC firms operating in Ireland which do not appear to have the bandwidth to foster the new breed of innovative Irish technology firms. Economic conditions now are totally different than when the Enterprise Ireland scheme was announced. But is anyone asking if the €30 million that hasn't been taken up by the private sector could be put to better use by seeking to attract money from smaller-scale private investors?

The Business Expansion Scheme, which enables start-ups to raise €2 million in a tax-beneficial way for their investors, is becoming the most common way for tech firms to get their initial funding.

Without some additional Government incentive, which was lacking in the Budget, we are at risk of losing a whole generation of start-ups and perhaps also our reputation as a globally recognised technology hub.