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Show me the money: the reality of investment in Irish tech

Investment in indigenous tech companies has rallied during the recession – but what’s driving it?

Participants at the Digital Hub's Future Creators programme in Dublin
Participants at the Digital Hub's Future Creators programme in Dublin
Image: Sam Boal

MUCH IS MADE of Ireland’s indigenous tech sector, which has rapidly expanded during the recession and now boasts an impressive ecosystem of start-ups and later-stage inidigenous outfits.

However, just how big is this sector, and what is driving growth in innovation in Ireland? 

Investment

Undoubtedly, tech companies have been very effective in attracting venture capital and other forms of early stage investment throughout the economic downturn.

According to figures supplied by the Irish Venture Capital Association (IVCA), just short of €2 billion has been sunk into just less than 1,000 companies since 2007.

image (6) Source: TheJournal.ie/IVCA

Click here for a larger version

Ironically, the success of many of Ireland’s tech companies owes a lot to the cataclysmic crash of a previously lionised sector of the economy: the banks.

IVCA director general Regina Breheny told TheJournal.ie that Government stipulations that banks divert part of their bailout funds towards seed capital schemes to support young companies injected new life into the sector.

“There was a market failure gap there and it was an area that was highly risky, and the venture capital funds would have shied away, so the state stepped in.”

The result, Breheny says, was a series of funds backed by Bank of Ireland and AIB, with some input and funding from Enterprise Ireland, and crucially, management from professional venture capitalists.

Regina Breheny, director general, IVCA.2 Regina Breheny Source: Colm Mahady/Fennells

The real success, she says, wasn’t just the cash thrown at the market by the State, but the professional outlook the venture capitalists employed, which helped many companies over stumbling blocks that would have killed them off otherwise.

“(Before) only a small proportion of companies would go on to get development capital…so when they created the seed fund, they handed the management to the venture capitals, and that imposed a very significant control on the process.”

Now we have a very significant pipeline of companies…the VCs are doing the quality control. That has changed things dramatically.

This helped companies in the early stages of development, who had progressed past the start-up phase of their lives, to attract more investment.

As the IVCA numbers show, the majority of venture capital investment has been concentrated on these companies, including healthy investment the lean years around the bank bailouts, especially 2009 and 2010.

image (7) Source: TheJournal.ie/IVCA

The number of companies being supported is evidence of a better-functioning market, according to John Phelan, who manages a Dublin-based network of business angel investors.

“The whole space is far more structured now. You have four or five seed funds and then business angels. The route to market has become easier to navigate.”

Companies that have landed investment from Phelan’s network of business angels are seeing similar growth to those that VCs are sinking cash into.

His portfolio boasts an 85% survival rate, with turnovers at year-end last year topping €39.7 million, up from an aggregate turnover of €7.1 million when the investments were first made. On average, employee numbers have grown 2.5 times since investors come on board, to 10.3 per company now.

Irish stand apart

In addition to this, the Irish tech and start-up scene has developed a unique character, separate from more mature markets like America. Breheny says that it’s an atmosphere which is less impatient, and more willing to accommodate a slower pace of growth.

“We’re not like America where the VC cuts the leg off a company early if it’s not performing. They tend to support companies longer – they don’t go to the wall…it’s a different style. The failure rate is a lot smaller here.”

The different way of doing business has also marked Irish start-ups out on the radar angel investors, who are becoming increasingly wary of over-hyped valuations on the other side of the Atlantic, according to Phelan.

“We’ve a number of US investors, and the reason they’re coming to Ireland is because the valuations on the east coast are just off the scale, and they’re seeing much better value here.”

Company valuations, he says, are likely to simmer down in coming years after a persistent bull in the tech market throughout the global economic slowdown – although we won’t see a spectacular burst as in the dotcom bust in March 2001.

What do investors want to see?

In an investment landscape where start-ups are constantly jostling to be part of the next big trend, Phelan picks out three main areas where he expects to see significant growth over the coming years: video, mobile, and cloud based technologies.

However, even more important than the particular platform, Phelan says, is the degree of knowledge and preparation and company will have amassed before seeking investment.

“You do get guys coming through and it’s like they’re pitching a Disney story – ‘you just have to believe’.”

But then you have guys coming through who have deep domain knowledge of where their industry is going in three to five years time.

These people, he says, make for the best entrepreneurs. A knowledge of the market, alongside an ability to execute and humility and an aptitude for adapting to changing circumstances are key.

It was these properties, he says, that helped Mark Little attract investment into his Storyful start-up, which Phelan organised investment for. Little, thanks to his perseverance and vision, was able to sell a controlling interest in the company to Rupert Murdoch’s Newscorp for €18 million.

“A lot of people were looking at Mark saying ‘is this going to happen?’…but because he understood the space and deeply understood why people were buying and what they were buying, that was the difference.”

Read: Seventh heaven: Irish angel investors turn 700% profit>

Read: Lack of finance the biggest barrier to starting new businesses in Ireland, say entrepreneurs>

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About the author:

Jack Horgan-Jones

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