Will the €500 million Innovation Fund Ireland brings hosts of international dealmakers to this country as hoped - and what exactly is the money being spend on, asks FIONA REDDAN

IT HAS BEEN a long time coming, but the much-touted €500 million Innovation Fund Ireland finally sprang into action late last year. First announced in December 2008, the fund was part of the last government’s strategy to drive the smart economy by turning Ireland into an “innovation hub”. But will the fund’s remit of investing in international venture capital funds pay off for Irish companies – and where will all the money go?

While the headline €500 million figure sounds great, it is important to note that it is not all coming from the State and won’t all be invested in Irish firms. Some €125 million will come from the Exchequer and will be invested by state agency Enterprise Ireland in international venture capital funds, which in turn will invest in Irish companies. The National Pension Reserve Fund (NPRF) will invest another €125 million in international venture capital firms as part of its private equity programme. The balance is expected to be raised privately by participating venture capital managers.

Since the fund was launched at the New York Stock Exchange last July, the NPRF, which already has some €800 million invested in private equity in funds managed by players such as Madison Dearborn and Oak Investment Partners, has committed to two investments.

The first is $50 million (€36 million) into a fund run by Polaris Venture Partners, a US venture capital firm with more than $3 billion in assets under management in more than 90 diversified information technology and life sciences companies, such as Akamai Technologies and Paradigm Genetics.

The second is €30 million into two funds run by Draper Fisher Jurvetson (DFJ), a global network of venture capital operations with more than 600 portfolio companies and over $6 billion of capital under management.

As it has done previously, the NPRF will invest on a purely commercial basis, in an effort to get the best return for the exchequer. From now on, it will also, however, encourage the managers to whom it allocates funds to look to Ireland for their investments and will be investing “with a mind to benefit the Irish economy”.

Enterprise Ireland will also be looking to invest its €125 million in international venture capital funds on a commercial basis, benefiting from any return the fund generates. The main difference between it and the NPRF, however, is that Enterprise Ireland will also require venture capital firms to match the Government’s contribution by investing an equivalent amount in Irish companies, or companies with substantial Irish operations, over the lifetime of their fund.

Last year, Enterprise Ireland initiated its call for expressions of interest in the fund from venture capitalists and received 32 proposals. It is now considering these in conjunction with the NPRF, with a number of announcements expected shortly.

One criticism of the fund has been the amount of money that will be going overseas. After all, of the NPRF’s €30 million investment in DFJ, €10 million will go into the DFJ Fund X, which will fund investments in cleantech, information technology, mobile and the life sciences sector globally.

Another €20 million has gone into the DFJ Esprit Fund III, which has a target of some €150 million and a remit of investing in technology companies across Europe. Neither of the funds will invest directly in Ireland.

Rather than putting taxpayers’ much needed funds into international investment vehicles – which may end up supporting some cloud computing start-up in Poland for example – should the Government not inject funds directly into innovative companies that need funding?

Declan Jordan, a lecturer in economics at University College Cork (UCC), doesn’t think so. “There’s no reason to believe the Government is good at picking what businesses will succeed,” he says, adding that the way the fund is structured, in order to entice international venture capitalists to Ireland, is “laudable” and a “good idea”, because it involves an expert choosing the investment and putting up their own money as well.

“It’s like [the Government is] outsourcing the funding decision,” he says. “It’s like having someone go into a casino for you.”

For Garrett Murray, a senior investment adviser with Enterprise Ireland, attracting international venture capitalists to Ireland is a major part of the initiative. “It is very important that they are here, that they can look at deal flow and syndicate back to head office. It’s very difficult to advise from a distance,” he says.

Already this approach is paying dividends, with both of the NPRF’s investments to date making commitments to Ireland. DFJ’s London operation, DFJ Esprit, is setting up a Dublin office to be headed up by Brian Caulfield, a former partner at Trinity Venture Capital. It will be committed to investing in Irish companies or companies with substantial Irish operations in the future.

Moreover, Polaris Venture Partners is set to establish a Dublin branch of its Dogpatch Labs, a hub for emerging entrepreneurs. According to Terry Maguire, a general partner with Polaris, the launch of the Dublin lab, scheduled for late spring, is not directly related to the NPRF investment: the pension fund had already committed to Polaris before it decided to bring Dogpatch to Dublin. However, the arrival of the entrepreneur hub does tie in with the NPRF’s goal of investing with an eye to the Irish economy.

But will the arrival of venture capitalists make a material difference to funding opportunities for Irish companies? As Jordan points out, the firms that get funding through the Innovation Fund would likely have gotten it anyway – and those who struggle to get funding elsewhere might still struggle.

Moreover, the venture capitalists may invest mostly in technology driven firms. High-tech companies accounted for 92 per cent of all investment by Irish venture capitalists in 2009 and 2008.

Murray says Enterprise Ireland is “purposely quite agnostic” as regards what sectors the Innovation Fund should invest in.

“We didn’t want to preordain [it],” he says, adding that investments are likely to be along the lines of the Government’s smart economy policy, which would include sectors such as technology, life sciences, cleantech and international services.

However, such an approach could be disadvantageous to companies in other sectors, as well as the overall economy, according to Jordan.

He says the scope of the fund should also include non high-tech businesses such as agri-food. “There’s no reason to think that all new jobs will be high-tech,” he says.

Pointing out that venture capitalists are frequently criticised for selling out of companies too soon, via either a trade sale or initial public offering, Jordan expresses concern that technologies developed by innovative Irish companies would be shipped overseas following a sale. “There’s no reason to think that they will remain Irish,” he says.

While Murray acknowledges that such exit strategies are not “an ideal outcome”, he points to the recent sale of Stokes Bio, a University of Limerick spin-out firm bought by California-based Life Technologies. The company is to remain in Limerick.

But the biggest pay-out could come if the venture capitalists selected by Enterprise Ireland start to see significant returns from their Irish investments – or if they find the next Facebook here. If that happens, Jordan says, we could see an influx of international dealmakers pounding the streets of Dublin – much like the record companies that came to find “the next U2” in the late 1980s.