Ireland could be likened to an oasis in the dessert for venture capitalists that have funds to invest in technology and particularly software. Elsewhere in Europe optimism is low and probably rightly so since the opportunities to invest in good technology companies are few and far between. Ireland is proving an exciting proposition at the moment, so much so that foreign VCs looking for good technology investments can’t get over to the island fast enough.
The trend for foreign investors to be searching for deals on the island has emerged over the last 12 months or so. The reason for their arrival is undoubtedly straightforward. One such new arrival is Advent Venture Partners. Neil Pearce from the firm says: “Ireland is a very good source of outstanding software companies.” Following its investment in Am Beo, a software products company that writes engine software that sits between a network and its billing system and translates between the two, earlier this year Advent Venture Partners has decided to do more marketing in Ireland. The firm has made two other previous Irish investments.
Timing must also be a factor. Few technology investors have not had problems in their portfolio to contend with and consequently much of 2000 and into 2001 was spent assessing and dealing with these issues rather than making new investments. Many technology venture investors also found that from time to time there were good opportunities to be had on the back of another fund’s misfortune; namely subscribing to down rounds in what were fundamentally good businesses to be in over the medium to long term. As investors have moved through these phases they then began to look seriously at how to deploy the remaining monies in their fund and Ireland probably rightly seemed the obvious choice.
Forker names some of the other foreign arrivals: “There is a lot more investor money available from indigenous funds as well as new investors looking for deal flow including strategic and first time institutional investors. IDG Ventures, Siemens Ventures and b-business Partners in the first category and Advent Ventures, Highland Capital and Fidelity Ventures in the second.”
Ireland is and has for a long time been associated with a solid technology economy and much money has been raised to invest in the indigenous industry. ACT Venture Capital, Delta Partners, ICC Venture Capital and Trinity Venture Capital are all long established funds with significantly enhanced funds to invest that were raised before the current funding crunch. Their enhanced funding status comes at a price: “There is a real dearth of deals in the EURO3 million to EURO6 million range in Ireland at the moment, partly because local VCs have a much increased funding capacity,” says Forker.
Denis Marnane at Enterprise Ireland, the technology development agency that also makes technology investments, worries about the sub EURO1 million to EURO1.5 million fundings that are not getting a look in. Much of the work of plugging this gap is down to Enterprise Ireland and a small number of entrepreneurs cum business angels that invest in early stage technology companies. Last year Enterprise Ireland’s partnership funds with the private sector amounted to EURO28.474 million. This figure breaks down into EURO14.3 million for first round investments across 21 companies and EURO14.1 million of follow-on investments across 30 companies.
Ireland’s technology companies are by no means finding things significantly easier than technology and software companies in the rest of Europe. They are faced with the same market fundamentals in that there was a splurge of technology and software spending for Y2K after which there was expected to be a dip in technology spending. This dip has lasted for the best part of two years now thanks to the unfortunate timing of the current economic downturn. “Its more difficult to raise money. Valuations are down and early stage companies are finding it very difficult to generate more sales. On the positive side though we still have a significant amount of money around for investment,” says Marnane.
“From the entrepreneurs there has been a lot of pragmatism over last 18 months. More companies are sensitive to their burn rate and squeezing the most out of existing cash resources. With customer markets slow in many sectors, there is an increased focus on non-revenue targets like making key hires and taking the right decisions (technology, product strategy, channels) so they will be in the best position to be at the top of fund raising pile in 2003,” says Forker.
Marnane notes the change from an investor’s point of view: “If you go into an investment now you have to demonstrate that the company has got some traction before it can go to second or third round funding.”
Although foreign investors are interested in investing in Irish companies they are too well aware of the reputation of the likes of ACT, Delta, ICC and Trinity. Consequently they want to know when they are bought a deal which of the domestic players has seen it and what their rationale for turning it down was. Pearce says: “We ask which VCs they have seen in Ireland. If there is a good reason for coming to the UK [to raise funds] and they have good local support that is fine.” Good reasons include a company that needs to raise more money than can be raised from players in the Irish market alone or companies that are looking to expand outside Ireland to the US or the rest of Europe, for example.
Irish companies looking for assistance in raising larger amounts of money and beyond the home market are well served by the indigenous advisory population. Davies Corporate Finance, part of Davies Stockbrokers and owned by the Bank of Ireland, A&L Goodbody, owned by Allied Irish Bank, Ion Equity, an independent borne out of Dolmen Corporate Finance that was owned by Dolmen Butler Briscoe Stockbrokers, and Merrion Corporate Finance, also an independent that used to be part of Merrion Stockbrokers
Davies Corporate Finance has introduced Pentech Ventures, the Glasgow-based early stage technology investor, to two deals in the Irish market. These were Autumnsoft and AMT aircraft. The first is a provider of a software platform for vertical industries. It has a product working in the pharmaceutical industry that enables drug companies to demonstrate that they can effectively log what was done, when and by whom. Eddie Anderson at Pentech Ventures notes that post September 11 the FDA in the US closed down the only production facility that manufactured the anthrax antidote because the facility was unable to provide it with the sort of production audit that Autumnsoft facilitates. AMT aircraft on the other hand concentrates on providing pilots with a secure wireless web-based tablet on which they can do calculations for setting the throttle at takeoff, the time of heaviest fuel consumption. Anderson notes that because fuel amounts to some 15 per cent of an airline’s costs precise calculations on the web tablet could save an estimated $100,000 per aircraft per annum.
Forker at Ion Equity, which brokered the Am Beo investment that Advent Venture Partners committed to, also notes that interest in the market is coming from both sides of the water. American funds, some with ring-fenced European funds, are showing an increasing interest in the technology investing opportunities – Accel, Benchmark and Carlyle have all taken advantage of the local hospitality.
The close knit and small nature of the Irish venture capital market is one that foreign investors’ remark on saying how helpful it is to get to meet with everyone and share ideas. They also remark on the outward looking nature of the entrepreneurs themselves in that they are active in seeking help and many have experience of working in large organisations as well as small start-ups.
“The VCs are quite upbeat in terms of investing in technology and that the market for these companies will improve and that the companies themselves have a real chance of exiting within a three to four year time frame,” says Forker. For Ireland there is a sense that this optimism is well founded.
Public-to-private buyouts have long been a feature of the Irish market but activity in the Irish market this summer will give a significant boost to the third quarter figures. On June 17 the EURO3 billion plus public-to-private of Jefferson Smurfit, the paper and allied products company, was announced by MDCP Acquisitions, owned by US leveraged buyout firm Madison Dearborn Partners. Just a couple of weeks later, on July 2, Green Property, valued in excess of EURO1 billion, was announced to be the target of Rodinheights, a management buyout vehicle backed by Merrill Lynch and Bank of Scotland. Both transactions will fall into third quarter figures since this is when their completion is expected.
The listed market also provided some good corporate disposal opportunities for private equity investors in July. With most domestic funds concentrated solely on the island’s speciality of technology and software investing it’s not surprising to see that both these corporate disposals were picked up by UK-based pan European funds. The first, announced on July 2, was the EURO130 million LBO from IWP International plc of its household products division that produces soaps, cosmetics and personal care products. The newco was called Inhoco 2655, which is 35 per cent owned by its former parent IWP International, 44 per cent owned by Legal & General Ventures and 21 per cent owned by management. On July 18 BWG (Irish Distillers Group) sold its retail food stores to Electra Partners Europe for EURO220 million.