It's "business as usual" for the venture capital funds that invest in technology, media and telecoms (TMT) companies despite the drop in such companies' stock-market valuations. Demand for funds is as strong, if not stronger, than ever, according to ACT managing director Mr Niall Carroll. "But a good management team with a good business plan and a realistic valuation on its operation will always get money," he said. The fall in TMT share prices has meant there is better value around for venture-capital investors in some cases, according to Mr James McCarthy from Corporate Finance Ireland, part of Alliance Investment Capital. Some technology companies are deferring flotations because of the weak market and are going instead for another round of private funding, offering opportunities for venture capital companies.
The fall in stock market prices has made no difference to the way venture capitalists do business, Mr Carroll explained. "We invest through stock-market cycles. We invest long before a company comes to the stock market. When we invest we cannot sell our shares because it is a private company so we expect to be a partner for two, three or four years. Therefore we do detailed research and due diligence to see where that company will be in two or three years," he said. "Venture capitalists go into a company early in its life cycle. Hundreds of things can happen on the Nasdaq during the years before that company is ready to go to the market," Mr McCarthy confirmed. The only relevant time to take the Nasdaq into account was when the company was close to coming to the market, he said. A venture capitalist's underlying investment decision would always be made on the quality of the company rather than macro stock-market conditions, he stressed. Venture capitalists looked at a company's "fundamentals" not the state of the stock market when an entrepreneur sought funds, Mr Carroll said. Those fundamentals include the business plan, the management team, possible impediments to future growth and development which would all be assessed in detail. The business plan would be expected to include the promoters' forecasts for turnover, cash-flows and profits and the timescale within which these were expected to be achieved.
Other issues the venture capitalists examine include the market segment the company serves, with infrastructural technology companies generally preferred to dot.coms and e-trading companies, and the company's position and likely future position in that market. Based on this research, the venture capitalist puts a value on the company and assesses the valuation put forward by the company and its advisers. Assessing how high turnover is likely to go, whether the company has "firstmover" advantage in its market, when and if turnover can be converted into profits are all part of the venture capitalist's job. Because venture-capital firms invest on behalf of their own investors or shareholders, their aim is to produce profits on their investments. They invest at an early, high-risk stage of a company's development and plan to get their return when a company is floated on the market or is taken over within a timescale of about two to four years.
"Valuing these companies is not an exact science but their sales have to transfer into profits at some stage for a company to have a value," Mr Carroll explained.
Valuing TMT companies is difficult because there are no standard methods like the price/ earnings ratios, net assets or discounted cash flows applied to value traditional companies, Mr McCarthy agreed. "Sometimes the valuation could even be what a promoter feels he can get away with," he suggested.
"Amazing euphoria" and "lack of judgment" lay behind the dramatic rises in some TMT share prices in the early months of the year, according to Mr Carroll. "We saw companies going public without profits and with low sales levels, and ordinary investors driving up prices without doing any research.
"If we were to invest like that, we would be out of business very quickly. In many cases people would do more research before buying a car or a fridge," he said.
ACT, which has already invested 40 per cent of the €100 million (£79 million) it raised last December, has taken stakes in new Irish technology companies such as Massana, Cape Clear and CR2. In the case of Cape Clear, which was set up by three entrepreneurs who left Iona Technology, ACT invested £2 million in April for a 20 per cent stake, valuing the company at £10 million.
"That was a realistic valuation. If the promoters had valued the company at £30 million or £40 million, we would not have done the deal.
"It is important that we rely on a realistic valuation and not just hope value," Mr Carroll said. "We are as keen as ever to meet new companies. The fall in share prices has brought the market back to fundamentals. It probably means that companies and their advisers have a more rational view of their own value," Mr Carroll said.
