Funding technology start-ups

Sunday Business Post - Computers in Business - May 04 2008
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Securing capital for a new business is still possible with the right team and the right idea, writes Dermot Corrigan.

Despite the turmoil global financial markets, Irish entrepreneurs looking for funding support to turn technology ideas into viable businesses have plenty of options.

Late last year, Enterprise Ireland announced that up to €1billion was being made available to Irish entrepreneurs with suitable business ideas in its Enterprise Ireland's (EI) Seed and Venture Capital Scheme 2007-2012. Last year alone, EI supported the establishment of 79 new export-focused high potential startup companies (HPSUs).

The Irish venture capital community is also in the process of launching the next round of their funding cycles. Maurice Roche, partner with venture capitalists Delta Partners, said the credit crunch has not had a major affect on the level of funding available to Irish start-ups.

“The amount of money available from the VC [venture capitalist] community has not dried up,” Roche said. “We have money to invest.”

All of the main banks now have dedicated business start-up packages in place that offer finance to new companies. Damian Young, head of small business segments at Bank of Ireland, said that banks were eager to help entrepreneurs get started with their businesses.

“We ourselves have a developing business loan fund, which we set up just under two years ago,” he said. “Going forward, the market is good for the right businesses.”

Who to approach
Enterprise Ireland is often the first port of call for a technology entrepreneur looking for advice. Tom Hayes, director of the high potential start-ups division, Enterprise Ireland, said that EI welcomed approaches from anyone with an idea.

“We get well over a thousand enquiries a year,” he said. “We will certainly talk to anybody who has the germ of an idea that can develop into something with the potential to sell domestically and internationally. We will provide them with some initial guidance, in terms of how they can secure some early stage funding, and support from ourselves. We will point them in the right direction at a very early stage.”



Incubation and innovation centres are also a useful resource for technology entrepreneurs unsure of where and how to get funding for their idea. The Dublin Business Innovation Centre (DBIC) is a public private partnership, including Dublin Chamber of Commerce, Dublin City Council, Enterprise Ireland and AIB established in 1987, to provide business start-up advice, incubation and access to seed funds.

“We can talk to people over the phone, or face to face,” said John McInerney, project manager with DBIC.

“We have a process that helps to identify the relevance of the entrepreneur, his or her background, the business idea, how far they have got with it so far, and there is a feasibility stage. If the idea qualifies for County Enterprise Board or Enterprise Ireland funding, we would help them put in the application.”

Roche said that venture capital companies were open to approaches from all entrepreneurs.

“It is never too early to talk to a potential funder,” he said. “Even if they say no, you will learn something from them. We operate on the basis that even when we are saying no to businesses, we give them some constructive points to build on.”

Young said banks were also happy to hold early stage negotiations with potential new customers, who were close to bringing their product or service to the market.

“If the company is seeking funding to grow the business, and has secured some contracts, or established a customer base, then bank debt or similar funding would be appropriate,” he said.

“With bank debt, the company does not relinquish a share in the company, and can benefit from support and advice from their relationship manager in their branch. We have relationship managers with particular expertise in technology businesses, so they can get a high level of advice from them.”

Roche said that technology ideas that required a good deal of research and development before a revenue stream was established, tended to take the venture capital route.

“Often with technology businesses first round funding for concepts, prototypes, at a pre-commercial stage, often equity or grant is the route taken,” he said. “Banks will look for a capacity to service the debt.”

Shane Dempsey, director, Irish Software Association, said technology entrepreneurs should talk to as many people as possible before deciding which funding route to take.

“With an increasing number of institutions such as VCs, banks and state agencies, it is important to get impartial objective advice at an early stage,” said Dempsey. “Contacting some other technology entrepreneurs is a good idea. There are many successful serial entrepreneurs in the tech sector who bear the scars of getting funding wrong and will advise you accordingly.”

How to approach
Although it is never too early to make an initial approach, Young said that potential funders wanted entrepreneurs to have clearly thought through their business idea before they considered handing over any cash.

“A business plan is vital,” he said. “It is the road map, but it is also the document that will help you secure investors. Depending on whether it is for a bank or a VC, they might tailor the style of the business plan. The bank will be looking at what this company is going to generate, the VC's perspective is what will it be worth in one year or five years.”

“However, the fundamentals of the business plans would be consistent, including the state of the technology, the management team, the stage the business is at, the market it is focused on, the unique selling proposition, market structure, future projections and so on,” Young said.

A business plan should concentrate on the business potential of the idea, rather than the technological jargon, McInerney said.

“Sometimes a technology business plan can have 60 pages, but 40 of those pages might be explaining the product, and there might be no emphasis on the business concepts,” he said.

“You have to be able to explain the technology in simple terms and you need to have a strong marketing focus, and not recognising that early enough can cause difficulties.”

Hayes said that VCs were more concerned with the size of the market for the product or service than the practical workings of the actual technology.

“You are looking for an opportunity, is there an addressable market of some size or scale,” he said. “Most important of all is the value proposition, what is in it for the customer, whether that customer is an individual consumer or a corporate. What will attract them and make them decide to buy the product or service.”

Technology companies looking for large-scale funding need to be eyeing up international markets, according to Roche.

“The most important thing for us, when we are looking at an opportunity, is the size of the market or how big the market can become,” he said. “You would want to be looking at markets that are at least a couple of hundred mil lion dollars in size and growing aggressively - at 50 to 100 per cent per annum.

“An international focus is vital. You might get your first or second reference country in Ireland, but you need to be selling into international markets shortly after start-up.”

Roche said that while it was a good idea for tech people to get advice from people with more business experience when putting their plan together, the entrepreneur should still write the plan himself.

“You have to put your ideas down on paper and you have to be sure of who owns the plan,” he said.

“Some people will try to put other language around their idea to make it more sellable but, in my view, entrepreneurs need to put down their own points on paper, and they need to own it and believe in what they can do.”

Support
Hayes said many different types of people approach EI for advice on starting a new tech business.

“The kind of people we get can vary enormously, from a very sophisticated team of two or three people with lots of experience of business development, to somebody coming out of a college or a research centre with very little business experience,” he said.

Inventing a groundbreaking new technology product or service and commercialising are two quite different skills. Therefore, potential funders look very carefully at the management team in place in a start-up that approaches them, according to Roche.

“Our ideal management team at the start would be someone who has very specific domain knowledge, in terms of the product, and someone who has very good domain knowledge from a sales and marketing point of view,” he said.

“The technical person can concentrate on building a team to develop the product, while the sales and marketing person will know the market and know how to sell to customers and make business partnerships along the way.”

Many of the different business sources of funding, including EI, the VCs and the banks, will offer business advice or structures to help a technology entrepreneur succeed. One example is the Business Angel Partnership, a joint initiative between Enterprise Ireland, InterTrade Ireland and the Irish Business and Innovation Centres. McInerney, who is programme manager for the Business Angels Partnership, said the scheme gives a technology person access to management expertise and funding, while al lowing them to keep control of their idea.

“The business angel partnership is a combination of business skills and money,” he said. “What you do is build skillsets around the entrepreneur and the idea, adding different skills depending on the stage of development.”

When to begin
McInerney said that, while there was some doom and gloom around the Irish economy at present, this was not necessarily a bad time to start a tech business.

“People would obviously prefer to start a business in a more buoyant economy, and in expanding global market conditions, but Irish start-up businesses tend to be in niche areas which can be less affected by big global events,” he said.

“There is never necessarily a bad time to start a business. Over a five- or seven-year cycle, there will always be ups and downs.” Hayes said technologies that helped large organisations to cut their costs were especially attractive at present.

“Technologies that can provide companies with better efficiencies, or management, or information are attractive to al l enterprises,” he said. “In the current environment all companies, whether they are medium or large, will be looking for these solutions as cost pressures come to bear.”

Roche said new technology ideas with high business potential were always sought after by funders.

“We look at companies right across the technology spectrum - software, hardware, business services, Web 2.0, software-as-a-service companies, telecoms, financial services, enterprise software and media deals,” he said.

Following the latest tech fashion was not a good idea for wannabe technology entrepreneurs, according to Roche.

“Web 2.0 and social networking sites like Facebook and Bebo have been al l the rage, but you have to be there at the point in time,” he said. “The opportunities to create another MySpace are now very limited.”

Roche said that Irish government focus on ‘information economy', in particular into universities and research institutes, should lead to more new technology start-ups going forward.

“We have seen some proposals coming from incubation facilities, and we would expect over the next couple of years to see some more businesses coming through,” he said. “Science Foundation Ireland have spent a lot of money funding research and we would expect over the next couple of years to see business ideas coming forward.”

Hayes said that good technology ideas would always find the money to back them. “There is always scope for entrepreneurship, and there are always resources there for the right idea,” he said.