Ireland and Europe are at a critical moment best described as a burning platform. This has become a common way to describe a situation where the risks and consequences of doing nothing are so great that immediate, radical action is required.
The problem with a burning platform, however, is that it may not be recognised until it is too late.
But in this case, we have been well warned.
The publication of the Draghi report last year on European competitiveness jolted the political and official classes by highlighting the persistent failure to commercialise research and innovation successfully and build great companies in Europe. It is impossible to ignore and we do so at our peril.
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Ireland’s burning platform is made all the more flammable by a long-term reliance on foreign direct investment (FDI) at a time of great geopolitical uncertainty.
After four decades working in the tech sector, as a founder and as an investor, I want to be clear: FDI has served us well and is a hugely successful driver of our economic growth. But it is now time to readjust, and alongside our FDI strategy we need to bolster our indigenous sector significantly.
To be fair, the Irish political system is not completely indifferent to the challenge.
Successive, well intentioned, ministers for finance and enterprise have introduced measures designed to support Irish innovation and entrepreneurship.
These include the Employment Investment Incentive (EII) scheme, the Key Employee Engagement Programme (KEEP), Angel Investor Relief (AIR), entrepreneurs’ relief and others.
Yet, almost without exception, these measures have failed to deliver on their intended purpose.
The KEEP scheme, an incentive for companies to provide share options to staff, is used by a tiny fraction of growing Irish tech companies, and the total projected “tax cost” in 2023 was just €400,000. A clear sign that the scheme is not fit for purpose.
The EII scheme needs radical changes as an incentive for high-risk, early-stage investment in growing Irish companies because some of the conditions attached to this scheme for investors are too onerous relative to the risks, and the scheme does not match how early-stage investing operates in practice.
The relief is not even available for some of the more straightforward legal methods of investing in start-ups. These simple legal methods save start-ups vital time and money at a time when these are at a premium.
This means that those who have invested earliest, taken the most risk, and accepted an instrument that best supports start-ups and founders are often penalised. There are many other similar concerns.
The real question is why does this situation keep arising? There are several reasons.
First, there is a lack of ambition. Ireland has shown great willingness to construct a business environment for foreign direct investment that is highly effective. Yet, when it comes to indigenous start-ups, we consistently administer a sub-therapeutic dose. A change that is so minimal that it is unlikely to have any impact in terms of delivering behavioural change.
And behavioural change is what’s needed.
Individual investors need to be encouraged to invest in Irish start-ups rather than US stocks or low-interest deposit accounts. Talented people need to be encouraged to devote their energies to driving Irish innovation, building Irish success stories.
Second, consultation with the ecosystem is frequently dogged by a culture of suspicion towards experts who might be able to guide policy effectively. The question is always: “What’s in it for them?”
Third, there is also an official obsession with eliminating any possible vector of abuse no matter how obscure, unlikely or arcane it might be. This results in schemes that are so complex that, in many cases, start-ups can’t afford the time or the cost, of engaging with the scheme.
For example, Revenue guidance notes for EII now stretch to more than 100 pages and a professional review to determine eligibility typically costs at least €10,000.
Many companies do not even apply for the research and development (R&D) tax credit, a highly beneficial scheme, because of the complexity involved.
So, what’s to be done?
It is to be hoped that the geopolitical and trade uncertainty that characterises these times will, finally, drive some awareness of the threat to our existing economic model. The platform really is burning now.
Many of the changes that are required do not have any significant exchequer cost.
For example, the R&D tax credit is at present paid out over three years. In recent years, the amount that can be claimed in year one has been gradually increased, which is very welcome. A further increase in the year-one limit does not increase the total tax cost, but significantly helps start-ups from a cash-flow perspective.
Similarly, there is no immediate cost to reform of the KEEP scheme, since tax consequences only arise when a company exits.
Root-and-branch reform of existing schemes is also needed to ensure these are fit for purpose. This should be focused on simplification and eliminating the “gotchas” that unnecessarily penalise start-ups, staff and investors.
Most significantly, we need to look at funding.
Multiple reports, including the State of European Tech 2024 (data sourced from Dealroom and Crunchbase), say the US invests at least four times as much, per capita, in venture capital as Europe does. Some estimates put the figure as high as six times.
Even taking a longer-term view, over the decade 2015-2024, the US invested 0.53 per cent of GDP in venture capital, while in Ireland the figure was just 0.2 per cent. During that decade, Ireland also lagged behind 12 of our European neighbours including Estonia at 1.17 per cent, but also Sweden, the UK, Finland, France and Denmark.
Meanwhile, US pension funds invest about 2 per cent of assets in venture capital, while European pension funds invest just 0.02 per cent.
We must mobilise private capital as France, the UK and Denmark have successfully done by unlocking a portion of pensions fund savings for high-growth indigenous companies.
At the very least, members of pension schemes should have the option to put a small portion of their pensions into funds investing in indigenous companies. That requires impetus and action.
Brian Caulfield is an entrepreneur and venture capitalist who is chair of Scale Ireland, the representative organisation for tech start-up and scale-up companies. He is a venture partner at Molten Ventures and a former director of The Irish Times
