THE DUBLIN WEB Summit was a fantastic opportunity to showcase Ireland’s knowledge economy, with the companies present at the coalface represented, networking and – in the case of start-ups – showcasing. We have a wealth of talent in Ireland and we do a good job of supporting new businesses. To step to the next level we should take steps to become a venture capital hub of the world.
A key to fostering entrepreneurial and wider business success is venture capital (VC), the seed money paid to start-up businesses by speculative investors who believe in a company concept largely before it is making any money. The amount of venture capital and related financial activity in a country is indicative of the amount of innovation and wealth creation that can be had there.
Venture capital is massively selective and exclusive. In the US there are nearly 2 million businesses created each year, yet only 600-800 of them receive venture capital. However, venture backed firms account for 11 per cent of private sector jobs and 21 per cent of GDP.
That’s an outsize performance that points to the success of venture capital funds in picking winners. In a virtuous cycle, the amount of potential winners you’ll find in a market is proportional to the amount of VC funds available there.
In Europe a study in the mid-2000s showed that venture-backed firms grew jobs at 40 times the job growth rate in the wider economy. These companies spent six times more on research and development per employee than other companies, and every third employee in them was focused on R&D. Similar trends emerge in Ireland.
Jobs and wealth
Venture capital in Ireland is a burgeoning sector, with ‘only’ €1.5 billion of indigenous and a further €1.5 billion from abroad total invested between 2000 and 2009, and the industry now in what could be considered its third round of fundraising to carry it forward beyond 2012. Still, the €148 million spent on R&D in 2009 by these companies accounted for 28 per cent of all indigenous spend on R&D, and 49 per cent among small and medium enterprises.
Venture capital clearly remains underdeveloped, however. VC-backed firms accounted for 9,733 jobs and €539 million in exports. This makes them just seven per cent of the size of foreign direct investment (FDI) companies in terms of employment, and 0.5 per cent in terms of exports. They’re also only at 11.84 per cent of the R&D spend by these foreign companies, and eight per cent of the total spend in Ireland. Given that venture capital funds are the catalyst for massive job and wealth creation in high potential companies, and that we possess a much trumpeted workforce that is good enough to build cutting edge businesses for foreigners, it is clear that Ireland should promote the segment aggressively.
The state has made some soft attempts to encourage more venture capital activity. The National Pension Reserve Fund is actually an investor in VC firms abroad to the tune of about €800 million, in its attempts to seek a return on the fund. Very little of that money is invested in Ireland, however. The state also set up a €500 million ‘Innovation Fund Ireland’ in 2010, with half contributed from the state and the other half coming from private funds.
These are positive steps, but the government really should focus its main effort on making Ireland attractive for private investors instead of offering corporate welfare directly.
There are two things venture capitalists really want in life: The ability to reap maximum return on investments and a large pool of high quality investment opportunities. To attract VC funds to Ireland, we ought to try a trick that works so well for us with FDI: Don’t bother taxing them. VC funds that come to Ireland, or Irish people who invest cash into VC firms, and make real investments in a proper commercial fashion should be let away tax (or almost) free on their investments, and any success they reap from them when cashing out of those ventures that succeed.
Investing in businesses is a risky venture, with many of them ultimately failing to return money to a fund. Funds make their money from investing in many companies and achieving big hits in high potential companies. The riskier the road, the greater the reward.
Tax on the cash VC funds eventually reap from companies simply raises the bar with which risk is measured against potential reward. It is a tax on jobs, insofar as it discourages risk-taking. I’d rather see a VC fund come here, take a risk, invest millions and create jobs and help conceive successful Irish companies (all of which we can tax) than not come here at all. In short, I’d rather tax 0 per cent of something tangible with a benefit to the entire economy than tax 50 per cent of nothing.
Funnily enough even the trade unions would (sort of) agree with me that we need to encourage more VC investment, though their proposal on how to do it is rather typically punitive: Jack O’Connor has suggested that we introduce a levy on high earners to produce a €1 billion fund to be invested by the state, perhaps returning a dividend to the surprised investors.
I wouldn’t give such an approach a blessing, believing that incentive is a far better way to attract investment than attempting to smash and grab money, particularly from the people who are most mobile with their cash. Nor am I a believer in the ability – or the appropriateness – of government to attempt such commercial ventures directly.
That disagreement aside, it is always positive to see cross-ideological agreement in the basic requirement for something like increased VC activity in Ireland.
Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna.