Still smiling

The rise of the Irish venture capital sector from what was practically a standing start in the mid-1990s to a record performance in 2000 has been remarkable for its speed and for the way the sector has so firmly established its credentials.

That rise continues in 2001, though the rate of growth, like elsewhere, has slowed somewhat in the wake of the collapse.

However, venture capitalists in Ireland have escaped the full blast of the implosion, despite the preponderance of technology investments over the past five years. In 2000, for instance, nearly 90 per cent of all venture capital invested in Ireland was targeted at the technology sector. This compares with an average of 32 per cent in Europe as a whole.

One of the reasons for this comparatively softer landing is a natural conservatism among Irish funds which kept them in large part away from the more highly speculative end of the market some of the business-to-consumer, Internet-related plays and led them to favour the software side. Preferred companies were those who exploited practical applications: call centre systems, telecom services and billing systems, embedded software processes and the like.

Undoubtedly some fingers were burned in the frenzy and there have been some less than spectacular performances from some Irish company IPOs over the past year. Among the many that hit or exceeded expectations the most notable being that of tech company Baltimore, but its shares have plummeted from pounds to pennies over the past six months.

But venture capitalists in Ireland remain bullish and are clear on the lessons they have learned over the past 12 months. They take comfort in the speed of development among a whole new generation of Irish technology companies that possess high levels of motivation and entrepreneurial zeal and for which there is a growing network of support from both government and private sources for training and R&D and early development phases. Also, these businesses have the international outlook that is crucial to growth beyond the confines of a small economy and they realise the worth of equity investors and the latter’s need for liquidity.

And though the Celtic Tiger may be roaring less loudly that it was in the late 1990s, the economy remains strong, with growth forecast to continue at an enviable annual rate of around six per cent. It must be said, though, that the slowdown in the US, a key market for Ireland as well as a major employer of Irish skills, is already hitting jobs and prospects. And venture capitalists can take strength from their own role in the development of an aggressive, internationally competitive Irish industrial base that extends beyond technology-related sectors to construction and constructions services, transportation, recruitment, hotels and financial services.

But it is the tech sector that has seized the limelight. According to figures released in June by PricewaterhouseCoopers in its Money for Growth 2000 study, investments in Irish technology companies grew dramatically from e34 million in 1998 to e62 million in 1999 and then to e183 million in 2000. This represents 158 investments.

However, funds raised were down from e316 million in 1999 to e198 million in 2000. For Joe Tynan, PricewaterhouseCoopers director of the Money for Growth report in Ireland, this demonstrates a new confidence in Irish entrepreneurs and highlights the role of the venture capitalist: “We are now seeing in Ireland a development of an entrepreneurial culture which has not previously existed. Irish technology companies are developing world-class products and venture capitalists are funding these companies to enable them to compete in a global market.”

Last year, technology attracted 84 per cent of the total amount invested. Nearly 60 per cent of that money was invested in early-stage companies. Camilla Beglan, an associate director with PricewaterhouseCoopers Business Strategy Unit, notes: “Irish venture capitalists invest more in early stage companies than their European and US counterparts. This may be a function of the relative immaturity of the market and the fact that the more mature Irish technology companies can access funds from large global VCs.” The software sector led the way in attracting investment, receiving e100 million, more than half the funds invested. This reflects Ireland’s competitive edge that makes it the largest exporter of software in the world. Internet technologies received e46 million last year and semiconductors bagged e24 million.The report clearly demonstrates that there are significant amounts of funds available in Ireland. It notes, however, that early stage technology companies will find that attracting investment is tougher, takes longer and that valuations are lower than last year. Joe Tynan concludes: “Going forward, we must be pragmatic and not expect anything like the same availability of investment in the technology sector in 2001. The companies that do have good growth potential and unique technology are still receiving the support they need. The new funding environment is ensuring that more of these companies are coming out of the woodwork, backed by experienced management and with more realistic expectations.” Pat Molloy, chairman of Enterprise Ireland, notes: “The tightening of the venture capital market in recent months is making it more difficult for start-up companies to access seed finance and particularly second and third round finance. This difficulty is exacerbated in regions outside Dublin, which do not have the scale or the vibrancy of the Dublin VC market. Enterprise Ireland is addressing this imbalance.”

Tom Godfrey, a director at IBI Corporate Finance, says: “The amount of money that has been invested is dramatically down on 2000, but the game is far from up as far as technology is concerned. We are still active in that arena but deals are taking considerably longer to get done compared with last year; in some cases, twice as long. VCs are spending much more time in due diligence; valuations are very seriously down. Money is certainly still there but only for top-quality companies. The guy in the garage with the business plan’ just isn’t getting funded anymore.”

Indeed, adds Godfrey, an entrepreneur will have to give up a lot more equity if he is to get funding in future and “we’ll see a lot of ratcheted, staggered funding that will be triggered only on the achievement of certain targets”.

Niall Carroll, managing director of ACT Venture Capital, an Irish independent venture capital management company, acknowledges that such ratcheted arrangements are needed to address the issue of overvaluation that has dogged the market from late 1999, adding that such arrangements are usually mutually agreed.

Conditions are harder as a result of last year’s “silly valuations” to the extent that “the sector is back to basics, back to the period before 1999”, when real revenues based on real demand for a product or service are what count, says Carroll. These can only come on the back of “defensible technologies, realistic valuations, good management and an international business plan.”

There are, he adds, a couple of positive effects of the recent technology market turbulence: management teams are now a year older and have seen for themselves the problems that can come with instant success and are thus more robust; they also have a year of corporate performance and experience under their belts.

ACT is seeing fewer investments in 2001 than last year but, insists Carroll, they are quality investments. Among this year’s deals was the successful completion in May of a $16 million second round financing of web services technology company, Cape Clear. ACT was joined by Accel Partners and Greylock.

Also in May, Qumas a global leader in the delivery of enterprise compliance management systems for regulated industries, and in whom ACT has been an investor since 1999, raised e6 million from Accenture Venture Technologies and the AIB IT Fund. Qumas was advised by IBI Corporate Finance, the investment banking arm of the Bank of Ireland Group.

In a deal in the offing as EVCJ went to press, Alcatel is to acquire Kymata, a leader in next-generation DWDM integrated optical components. The sale is for shares in Alcatel. ACT and 3i were the two original venture capital investors in Kymata in June 1999.

ACT will also be completing the first closing of its ACT 2001 fundraising in the third quarter. At E200 million, it will be double the size of ACT’s last fund.

Interest in Ireland from international venture capitalists has always been strong and continues to grow. For instance, Gensec, the South African investment bank, has announced plans to launch a venture capital fund focusing on Irish and European IT companies. The Gensec Ireland Venture Capital fund hopes to raise e50 million by year-end and will be listed on the Irish stock exchange. And UK venture capital group 3i aims to triple its Irish investment portfolio to E190 million by 2006 and has just opened an office in Dublin. One aim of its presence is “to shake up the leveraged buyout market in the Republic”, according to 3i. It notes that Ireland is an attractive investment environment because of good economic growth, a strong base of quality, well-educated people and it also has a critical mass and depth of expertise in key growth sectors, including software.

It is these very attractions that are helping to keep venture capitalists in Ireland smiling.