To foster a successful startup scene, we need a stronger investor community
Here’s how we can help our founders fulfil their global ambitions at home.
FOR THE FIRST time in nearly 10 years, venture capital funding for Irish startups fell.
According to the Irish Venture Capital Association, 30% fewer companies received funding in the first half of 2018, which brings up questions about whether or not Ireland has the infrastructure in place to support the most ambitious entrepreneurs over the long-term.
In order to empower more companies like Intercom and Stripe, as a country, Ireland needs to address three pressing issues:
- Reliance on international capital
- Sparse limited partnerships (LP) market to support entrepreneurs
- A punitive approach to equity taxation
When Ireland does this, it will become the true tech hub that it deserves to be.
Reliance on international capital
Of the roughly $1 billion deployed to Irish startups in 2017, about 60% was invested by foreign investors.
This is capital coming primarily from the US and UK, giving Irish entrepreneurs more incentive to leave and search for talent and capital outside their home country.
Intercom, according to PitchBook, had zero participation from Irish investors in its Series A round of funding. During those formative years, the company chose to stay in San Francisco and develop its go-to-market arm in the US.
When Ireland relies on foreign investors, it loses more than just the opportunity to invest in its entrepreneurs; it loses the ability to foster the next generation of innovation inside the country.
As a result, jobs, resources and more leave Ireland. That’s why a strong, homegrown investor community with the ability to write meaningful cheques and provide the support Irish entrepreneurs need is crucial to fostering a successful startup ecosystem in the long run.
A sparse LP market
One of the issues faced by Irish venture capital firms – the lack of participation of pension and insurance funds into the Irish venture market – significantly impacts Irish VC firms’ ability to raise significant funds.
Much like I mentioned previously, Irish venture firms cannot compete with the likes of the US and UK due to capital and access to resources.
Therefore, without a strong limited partnerships (LP) market, Irish firms have little chance of participating in funding rounds of ventures.
As a result, very few of our Irish venture investors have the capital to write what is considered an average Series A cheque in the US.
According to PitchBook, the median Series A investment in the US last year was $6.1 million.
In Ireland, the number of Series A investments above the $6-million threshold led by VCs with physical operations in Ireland in Irish companies was just two.
Participation from the insurance, pension funds and other institutional investors is vital in fostering a strong venture capital market, thus funding the best and brightest entrepreneurs.
A punitive approach to equity taxation
Equity taxation has been an ongoing debate for the last 10 years in Ireland. Today, the existing tax structure is punitive, and rather pushing for Irish entrepreneurs looking to start ventures.
Early employees are taxed for their shares similar to those of upper income levels at 52%.
If you’re a founder, it isn’t much better. The stock you have that’s tax-free is small compared to founders in the UK and other markets, which means that it’s much more attractive to leave Ireland and benefit more greatly from equity plans in other countries.
Options should be used as instruments to incentivise employees in staying with a young, ambitious startup for the long-haul.
By applying the lower capital gains tax rate of 33%, assuming the employee remains with the company for a certain period of time, as a country, we’ll be able to foster more innovation by incentivising entrepreneurs to stay.
The Irish entrepreneurs and early employees are becoming more ambitious and wanting to compete on a global stage. Often they are forgoing a more typical and certain path in a more established company to do so.
We, as a nation, should be ensuring the best infrastructure and ecosystem is in place to support this.
Dave Andreasson is director of finance and operations at voice AI startup Voysis.
