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What's VC anyway?
Venture capital is investment to get new companies up and running. Most of the money comes from high net-worth individuals, or venture capital funds that make their money by investing in a basket of early-stage companies.
The first piece of VC funding usually comes from 'angel' investors, seed-capital funds or Enterprise Ireland. The investors get a shareholding in the company and usually provide some management support. The money usually keeps the company going for six to 12 months.
The next stage is 'Series A' and 'Series B', where companies look for multi-million investments. The money is often put in by syndicates of investors, who will end up taking part in subsequent funding rounds and becoming long-term partners.
The rewards of VC investing are extremely volatile. Most investments fail, but those that succeed can deliver returns of more than 500pc over a couple of years. A fund can succeed if it has a few big windfalls to cancel out lots of smaller losses.
Are there good companies out there?
"The biggest test when we launched our seed capital fund was, 'is the demand out there from businesses of sufficient quality and robust nature?'," says Bank of Ireland's Donal Duffy. "Turns out there is -- it's been a bigger success than we expected."
BoI has already committed €9m in about 20 seed and early-stage investments. It has another €40m of funds, which it expects to dole out to between 40 and 50 more companies "depending on the quantum" of each investment.
"BoI has been a very long- term player in this, we're at it for 15 years, and we're very committed to the seed fund," adds Mr Duffy.
DFJ Esprit's Brian Caulfield says he's considered more than 200 proposals, and even though he hasn't invested in any of them, he says the quality has been "very, very high" and there are a number of deals he'd have liked to have done.
Powerscourt's Sean Melly, who isn't looking for new companies now, agrees there's quality in the market. "I don't think there's any lack of companies," he says.
"There's less noise about the companies and people are more private about what they're doing, but there are definitely opportunities."
Don't the good companies always get money?
Most industry sources say there are genuine issues out there in the funding markets, but not everyone agrees. One technology boss, whose own firm has recently raised Series A money, believes that the problem is partly of companies' own making.
"Sometimes the people who can't get Series B require a little bit of self-examination," he says. "If you're looking for €7m and you only want to dilute investors by 30pc, do you really have a €31m company? There aren't very many of those."
But Powerscourt's Mr Melly says that while "you'd like to think" that good companies always get what they deserve, it doesn't happen like that these days.
The European VC market
This market is still in its infancy. Between 2003 and 2010, €131bn was pumped into US VC funds, but over the same period just €28bn was raised by their European peers. The average size of a European VC fund is €60m -- against €130bn in the US.
A recent paper by the European Commission put the smaller VC scene here partly down to investors preferring to put their money into private equity, which buys out mature companies and turns them round. "As long as this bias in favour of private equity persists, available funds are not channelled to equity finance to seed and start-up ventures that are at the make-or-break stage in their corporate development," the commission noted.
The lack of VC is also leading to a bigger dependence on bank finance -- about 80pc of European SMEs' financing is supplied by banks with just 2pc from VC funds. In the US, 14pc of SMEs' financing is supplied by venture capital.
The Irish market
The Irish Venture Capital Association says 547 SMEs have raised venture capital of €1.1bn since the credit crunch hit in 2008. Their latest survey shows 159 technology companies raised €247m from VC investors last year -- down on the €310.2m that they raised in 2010. Last year was very much a year of two halves, with funding up 58pc in the first six months and down 46pc in the second half.
