€1 billion in the pot to assist start-ups

Sunday Business Post - New to the Market supplement - Feb 10 2008

Enterprise Ireland's venture capital scheme aims to inject activity into the market after a quiet period, writes Dermot Corrigan

The Seed and Venture Capital Scheme launched by Enterprise Ireland (EI) has made an estimated €1 billion available to Irish entrepreneurs, according to Willie O’Brien, manager of the organisation's venture capital department.

"Over the last year or so, a lot of the funds have been fundraising,” said O’Brien. “They have had approval from us for about €175 million. Then it was up to them to go and seek additional funding. Ninety per cent of them have completed that fund raising exercise and the overall pot now is around €1 billion."

Maurice Roche, partner with Delta Partners, said the venture capital market, which has been relatively quiet for the last 18 months, was about to see a lot of action again.

"The market will go through a new phase as funds will be getting capital over the next six months and there will be more money to invest in the market," said Roche. "Late 2006 and early 2007 was very quiet as a lot of the funds had come to the end of their investment cycle.”

Two EI-supported venture capital funds were announced in late 2007. In October, Delta Partners announced a new €100 million fund, called Delta Equity Fund III. In November the establishment of the €70m Bank of Ireland Kernel Capital Partners Fund II, with investment funds of €110m, was announced. A total of eight funds incorporated in the EI scheme are expected to be actively seeking investment ideas in 2008.

O’Brien said this third EI-lead venture capital cycle would be more careful than its predecessors.

"There is money available, but the investors are being cautious," he said. "The returns have not been fantastic and a lot of investors are seeking companies to have some sort of traction in the market - sales, profitability, orders or a product developed - and looking to invest on a phased basis. They will be seeking evidence of some sort of progress before they invest."





Under the legislation setting up the EI scheme, funding is targeted at manufacturing and internationally traded services businesses.


"The definitions of manufacturing and internationally traded services are very broad," said O'Brien. "They cover software, technical services, architectural services et cetera. It is for anything using gray matter that can be exported. We can not look at, for example, estate agents or retail shops."


Roche said Delta was already investing its new cycle of funds.


"We are looking at a lot of deals," he said. "We have done one and are close to a couple of others. We are seeing some decent projects. We would like to see a lot more, but it is only now that people are realising that there is capital out there again, and people are trying to put together good projects that can get funded."


Niall Olden, founder and managing director, Kernel Capital Partners, said it was also actively seeking investment opportunities.


"Now, with our new fund, we are targeting investments in the region of €2 million to €10 million," said Olden. "We look at all sectors excluding property and invest in areas where we have strong market knowledge. Our team has strong ICT (information and communications technology) and life science expertise, but these are broad areas and we look on each opportunity on a case-by-case basis. If we believe the opportunity is good and that we can add value then we are interested."


Roche said Delta was primarily looking for projects in the technology and medical devices areas.


"Within technology, it is as broad as possible, we have semi-conductors, clean tech, telecoms and software,” he said. “Business services - people who are trying to offer outsourced services to companies - is an area we would know quite well and we see as a growth area in Ireland."


"Medical devices is another area we see as a growth area," said Roche. "There is a good hub now in the west of Ireland, and there are some decent projects coming out of there. We have scaled up our focus in that area."

Olden said VCs liked to see approaches from entrepreneurs with well thought-out ideas.


"The better prepared and more research done the more likely you are to secure investment," he said. "Not only should the investment proposal be well thought out and validated, it is important also to research your target investors."


Roche said Delta’s process was very informal.


"Our business is about getting out and meeting people and networking,” he said. “We do not sit in an ivory tower waiting on someone to walk in the door with a 50-page business plan. We like to see people as early as possible. We will tell them very quickly if it is of interest to us or not. Even if it is not of interest to us we will still try to be helpful and point them in the right direction."


"We would be very upfront with people," said Roche. "We are interested in companies that are in growth markets, have high margins, accelerated growth potential, and an exit within five to seven year time horizon, either through a public offering or a trade sale. Certain businesses might be good businesses, but are not for us."


Roche said experience in a sector was often a prerequisite for securing funding.


"We like to see a couple of people coming together, either in an existing business, or to form a new idea," he said. "Typically they either have potential customers or they now their market already.”


O’Brien said the types of ideas that venture capitalists were interested in were constantly evolving.


"The sectors come and go,” he said. “For example, years ago we had a lot of companies that were developing payroll packages, but that is now a commodity product. The mobile phone area is seeing great demand now. Ireland would be seen as in a strong position to compete internationally in that sector."

The limited size of the Irish market means VCs are usually only interested in ideas that can be sold internationally, according to Roche.


"We look at it on a global basis,” he said. “For most Irish companies the home market is not enough. They need to sell outside of Ireland very quickly."


Olden said some potential start-ups focused too much on the product and not enough on who would buy it.


"A frequent occurrence is over emphasis on how the product or service will be created, combined with an under emphasis on what exactly the revenue model to generate wealth from this product or service is going to be," he said.


Entrepreneurs drawing up funding applications had a tendency to underestimate the funding required, said O’Brien.


"The general understanding is that it will take twice as long as you anticipate to develop a software product,” he said. “It follows on from that, that it will take twice as much money to develop."


The weakness of the US dollar was a challenge for tech start-ups, according to Roche.


"Most of their pricing would be in dollars, but their costs are in euro,” he said. “Some companies may have to put development centres outside of Ireland."