Face to face: Irish eyes are smiling

What do you see as the strengths and weaknesses of the venture capital industry in Ireland?

The strengths, or advantages, include Ireland’s strong economic growth over the last six years – the highest growth rate in Europe by a multiple of three; a young highly educated population, particularly in the technology area; a supportive attitude towards indigenous entrepreneurialism; and low taxation. Another strength is Ireland’s location and its three-way relationships – it is a member of the EU and a full member of the Eurozone; on top of this it has strong historic and geographic relationships with the UK and, of course, with the US.

There are three main hesitations. One is the small size of the economy – a company can be the largest in its sector in Ireland and still be relatively small. Secondly, companies can only grow to a certain size domestically and to achieve further growth must expand overseas. This means Irish companies must face the challenges of going international at much earlier stages in their development than would be the case in other economies. Finally, there can be a shortage of managers experienced at taking companies on to the international arena.

What impact has Ireland’s rapid economic growth had on venture capital investment?

Overseas venture capital investors, hearing about the Irish economy and particularly its technology sector, have been coming into the market to see what investments they can pick up. Although not many investments have been made by such parties, this has had the effect of raising values and expectations in the high-tech sector.

With the high economic growth, the number of venture capital funds has increased from about four to 15 over the last five years. A number of feeder funds and campus funds have been established which are very useful as a supply of early-stage companies to the established players.

Availability of funds, and competition between them, in itself can stimulate entrepreneurs and management teams. As a result there has been a rapid increase in the number of deals being done, particularly in the technology sector, where valuations have risen. However, there is still good value available in the traditional sectors which are of less interest to overseas investors.

What are the current hot’ sectors for venture capital investment in Ireland?

In the technology area, anything to do with web enablement and the Internet; enterprise software at various levels; e-commerce and credit card services; call centre systems; CRM; telecom services and billing systems; and communications encompassing embedded software.

In non-technology, companies are benefiting from the country’s strong economic growth. However, some of these sectors are not always amenable to venture capital investment. Sectors experiencing good growth include construction and construction services; transportation; recruitment; hotels; and financial services.

Do many of the investments you make have an international flavour?

Our technology investments by their nature will have almost all their markets outside the country. This means these companies must internationalise much earlier, and we provide them with follow-on funds to do this. Many of the companies in which we have invested now have operations and subsidiaries in the US, Europe or the UK. Many of these will probably be acquired by US companies in due course. An acquisition of this type can be very attractive to US corporates as, by buying into a technology company based here, they get with it a good supply of bright young employees, membership of the Eurozone and low tax rates.

On the non-technology side, apart from growing further domestically, either organically or by acquisition, we urge and support them to expand outside Ireland, into the UK or elsewhere in Europe, to achieve further growth.

Does Ireland’s close trading relationship with the US bring any particular benefits for venture capital investing?

Significant benefits. US investment in Ireland is very high. According to the US Chamber of Commerce (1997), US companies have been achieving, over a 15-year period, a net return on their investments in Ireland four times what they make in other countries. More than 50 per cent of Ireland’s industrial workforce are employed by multinationals. This helps to develop a growing cadre of internationally focused local management, with corporate and personal networks into the US.

We are doing a number of deals at present where we have invited US venture capital investors to co-invest with us, primarily because we wish the portfolio companies to expand into the US market. Many of our technology companies already have established subsidiaries in the US.

Do you look to grow and/or exit the investments you make in other European countries?

We have made a number of very rewarding exits from traditional businesses (which had become the largest in their sector here) by selling them to European countries wishing to expand into Europe’s fastest growing economy.

Have you noticed an upsurge in entrepreneurialism in Ireland? Are there any particular measures which have encouraged this?

The government’s investment in technology and in education over the last ten years has paid off handsomely, encouraging foreign investment into Ireland. In turn, this has helped to develop the international focus of Irish managers. The government has always been particularly pro-enterprise and pro low taxation. The low corporate tax rate and the halving of capital gains tax have both been positive.

A number of recent IPOs of Irish technology companies on Nasdaq and the Neuer Markt have served as good role models for local entrepreneurs. We have a well established stock exchange here and capital markets work well. Stock options are regularly used to attract good management to small companies, though the Irish Venture Capital Association is currently making proposals to the government to improve the stock option position further by making them subject only to capital gains tax from the time of award.