Investment in Irish tech startups fell in the first quarter of the year, but the number of deals is up
The IVCA said the underlying trend was more positive, with seed funding rebounding by 23%.
VENTURE CAPITAL FUNDING for Irish tech startups dropped by 41% in the first three months of the year, according to new figures.
However, Alex Hobbs, the chairman of the Irish Venture Capital Association, said the underlying trend was more positive as 75 Irish companies received start up or follow on funding, compared to 43 in the same quarter last year.
Irish-based companies received €197 million venture capital funding in the first quarter of this year compared to €322 million in 2018 according to the Irish Venture Capital Association VenturePulse survey, which is published in association with William Fry.
The figure for last year included two €100 million deals for Intercom and Limerick software firm AMCS. ”If you strip these out, then core growth across all deals in the first quarter was almost 50%,” Hobbs said.
There was also an increase in the volume of deals between €1 and €5 million, which increased to 66 from 36.
The five investments that exceeded €10 million were in the life science sector, while software also received a large share accounting for 33% of funds raised.
Sarah-Jane Larkin, the IVCA director general, said that despite an overall fall in funding, “the Irish venture capital community continues to be the main source of investment for innovative SMEs”.
Government blueprint
Seed funding levels to early stage firms have been a worry for startups, but the latest report showed this was up 23% in the quarter to €17.8 million.
Speaking to Fora last week at the 0100 Conference in Dublin, Larkin said the figures for seed funding were positive but added that the government still needs to approach the issue more holistically.
“At the minute some of the initiatives come from the Department of Business, Enterprise and Innovation and some come from the Department of Finance and I just don’t get the sense there is a holistic blueprint at government level,” she said.
According to Larkin, there needs to be more of a focus on indigenous Irish businesses and the lack of funding at seed level means people are quicker to sell their business when they get an offer to sell.
“If its really difficult to get seed funding and its a trudge, youare much less likely to stay on and keep those companies in Ireland and grow them and scale them and have Irish players here that can compete with multinationals.”
She approves of the government’s review of the EU-run European Investment Fund (EIF), Capital Gains Tax system and the share option incentive scheme KEEP.
“Those three schemes would make a huge difference to entrepreneurs at an early stage if they are changed,” she said.
Larkin added the Startup Refund for Entrepreneurs, which allows entrepreneurs to claim an income tax refund of up to 41% on capital invested, should also be reviewed by the government.
“We would argue that you should be able to take that money out and use it as seed capital and take you through the first six months when you’re starting out,” she added.
Lessons from Sweden
Apart from government schemes that give people their first chance to run with their ideas, Larkin thought other incentives should be introduced to encourage people to start businesses.
She pointed to Sweden, where employees who want to explore their business ideas have the right to take six months leave from work – similar to maternity or paternity leave – and return if it doesn’t work out.
Larkin also said the government should encourage people to make riskier investments here.
Again, she looked to Sweden where “the stock exchange is almost a retail market” and people invest smaller amounts of money in companies because the capital gains tax there is small.
“We have a problem in this country that the reward for people who invest in a risky startup just isn’t there when you compare it to investing in property,” she said.
To combat this, Larkin said there should be a larger tax break for people who invest in risk compared to someone who invests in asset-backed investments like a nursing home or a forestry.
Journey time of a company
One of the reasons Daniel O’Mahony, a partner at Seroba Life Sciences, thinks there is less seed investment in the Irish med-tech space is because the journey time of a company is longer, with companies needing to seek approval from bodies such as the US Food and Drug Administration (FDA).
His firm has backed businesses like Galway medical device company Novate Medical and microbiome-based healthcare company Alimentary Health.
“So the journey time is longer, the overall quantum of investment is bigger, and so then if you have a fund of a certain size you know you can only support a company for so long,” he said.
According to O’Mahony, this means an investor is more likely to begin backing a company once it reaches its midpoint of growth, with the intention of bringing a company to a later stage in its growth.
Conor O’Connor, a managing partner at venture capital firm Enterprise Equity, said historically seed funding has been a difficult area in Ireland to attract institutional investors, whereas, in Europe and the US institutional investors will invest at an earlier stage.
Enterprise Equity has a seed fund of €53 million and has backed almost 40 Irish technology companies, including Phorest Salon Software.
For O’Connor, the issue with seed funding is about attracting institutional investors to invest in Irish startups.
O’Connor said that in Ireland at the moment, startups are trying to attract private investors. While he said this is a good thing, he added that many private investors do not have the capacity to put several investments at different stages into a startup that is running several projects.
“That’s why institutional funding is really important because where you have to invest multiple funding rounds in early stage technology companies,” he said.
“It (the investment) has got to be done on a discipline basis and you’ve got to have a portfolio so that you can absorb the roller-coaster ride that there is,” he added.
