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He's got a €0.5bn cheque book -- but still has tough time finding partners

The economy needs more venture capitalists, but a lack of middle-stage funding is hampering our chances of recovery

A UK financier wants to meet to talk about problems he's having investing in Ireland. For once, it's not a would-be property buyer who wants to vent after a fruitless meeting with NAMA.

Andrea Traversone is a venture capital guy. His company, Amadeus, has £470m (€563m) under management and Traversone wants to invest some of it in Irish businesses.

Mr Traversone has found plenty of "fantastic" companies that merit investment, he says, but that's only half the task. Amadeus's model is to co-invest with local venture capital firms who can keep in close contact with the investee company.

And in post-recession Ireland, those indigenous VCs are thin on the ground -- "the local community we used to syndicate with is a lot less active, some of it has stopped altogether".

The result? "The lack of Irish VCs is now causing us not to be able to do deals."

Funding anomalies

Mr Traversone goes on to paint an incredible-sounding picture of cutting-edge Irish companies on the cusp of taking their businesses to the next level, ready to create untold numbers of jobs, but stymied by funding anomalies.

Surely this can't be happening in modern-day Ireland, not when the economy is so desperately in need of growth, not when the Government has vowed to put its full might into the jobs agenda.

This is happening in modern-day Ireland.

Mr Traversone's peers don't share his exact constraints, but several of them testify to an acute lack of funding in key areas, as do companies who've been knocking on doors trying to raise cash.

"The last three years have been the most difficult funding environment I've seen in my whole life," says Ian Jenks, who heads up Dublin technology firm Intune and was once a partner of a major US VC giant Crescendo.

Even Enterprise Ireland senior investment adviser Garrett Murray admits: "I'd be giving the wrong impression if I said we don't have a serious problem here ... There's a major challenge for the sector and for public policy."

The problem, as the VC guys tell it, isn't that a lack of funds is preventing Irish companies from getting started in the first place -- Ireland is actually one of the best places to be in if you're at the very early stages of a business.

In exchange for some of their bailout cash, AIB and Bank of Ireland agreed to make €30m available in seed funding -- both banks have actually done much more off their own bats.

Other seed funds remain active, granting amounts of up to €1m to get companies through the first stages of their development. The problem comes later, the Series A, Series B and Series C funding that companies need to scale up.

"They call it the valley of death now, the B and C rounds, because there's no one there to do it," says Mr Traversone.

"There's a very active angel community, and the market is very active for late-stage deals. The problem is in the middle."

By the time a company gets into its 'middle' rounds, the chances of failure are significantly smaller but the rewards remain high. "We've made some of our best money in series B," says Mr Traversone. "The returns are much much higher than in later stages. You could be talking about 10 or 12 times your money over three or five years."

The main difference between the 'middle' and the seed stages is that amounts of money being raised can be far greater, up to €15m in some cases.

"Beyond seed, fund sizes limit what Irish VCs can do," says Mr Jenks. "If you're a €70m fund, which is a good-sized fund in Irish terms, if you want to put €15m into one company, that's a massive proportion of your fund."

It's far from just an Irish problem. "Globally it's been extremely difficult to raise funds," says Mr Jenks. "The total amount invested by limited partners in VC has halved and halved again."

The fledgling nature of Europe's industry compared with the breadth and depth of the US market creates its own problems, and then there are particular Irish problems to contend with.

"There would have been a lot of property-related capital, that's disappeared," says Sean Melly, of Dublin-based Powerscourt Capital.

There are still active Irish VCs, like Ulster/NCB, but many of them are keeping their heads down. "We haven't invested in anything new lately, our focus is keeping the existing ones capitalised," says Mr Melly.

Ironically, our much-celebrated support of the seed-fund stage has actually exacerbated the bottleneck that's building in the middle-stage funding.

"I'm not sure it's a huge issue now, but as the seed companies grow they're going to need Series A," says Brian Caulfield, who runs a Dublin office for European VC fund DFJ Esprit.

"We need to think pretty seriously about the availability of Series A and Series B."

If otherwise-promising companies were collapsing every day because of a lack of Series B funding, we'd probably have heard about it on 'Liveline' by now. The impact is usually more subtle.

"You end up having to spend a lot of time on the international circuit raising money, and it can take an inordinate amount of management time," says Mr Melly.

"It's not just the companies that don't make it, what's hidden is that companies lack the ability to keep their speed and momentum going."

Jenks can testify to that.

Intune has supportive backers, including Mr Traversone's Amadeus and Dermot Desmond's IIU. Those backers have supported a recent funding round, but Mr Jenks says the company could be "further along" if it weren't "cash constrained".

"There are two impacts," says Mr Jenks. "If you constantly have to fundraise for small amounts that's very distracting for the senior management team and it has an impact on the time to market.

"The other impact is your ability to hire. If you have enough (funding) for 18 months that's an easier sell than saying 'we'll run out in three months but we're optimistic we'll raise another round'."

Mr Caulfield says he often speaks to companies who tell him they "have people lined up to hire as soon as they get funding", while Mr Traversone says he knows of firms that have outsourced some of their research to cheaper countries because they have to "fit" their businesses to the funding that they have.

The funding-driven disruption hasn't gone unnoticed in the official sector. "It's having a significant impact on companies, there's no denying that," says Enterprise Ireland's Garrett Murray.

"There's a cohort of companies that are very strong, but can't get funding."

Mr Murray sees the "lack of risk capital" as the "enormous challenge" facing the Irish industry, pointing to the "significant depletion of personal wealth" that has crippled even the traditional BES (€135m in 2008 to €58.6m in 2010).

That problem has been somewhat masked, because funds that were raised in boomtime Ireland were still at the "investment" stage of their lifespan until quite recently.

"Those funds are coming up to the stage where they're no longer able to invest in new opportunities," says Mr Murray. "That's a challenge for the sector and public policy ... the State will have to decide how it's going to play a part."

Mr Murray insists the authorities are acutely aware of the importance of venture capital and he says they're actively working on strategies to combat the building problems.

EI and the National Pension Reserve Fund have been tempting major international VCs into Ireland by offering to invest money in their funds in exchange for their funds ultimately making investments in Irish-related projects.

Mr Caulfield's DFJ, which got €30m, is one of the first two to set up camp here. It has yet to make an investment, but Mr Caulfield says it has considered more than 200 proposals and has made offers.

The recent Action Programme for Jobs had three separate measures for VCs. Three measures among about 300, admittedly, but some of the VC measures had euro signs attached.

The Government has committed €50m to a Development Capital Scheme that will "address a funding gap for mid-sized, high-growth, indigenous companies with significant prospects for jobs and export growth".

"This scheme will support companies which would not generally fall within the focus of seed or venture capital funds," the Action Plan says, adding that the private sector is expected to contribute €100m.

The turnaround won't be instant but it'll be pretty fast -- proposals are expected to be assessed by the end of the third quarter, with cash going out to 25 or 30 companies by the end of the year.

Innovation Fund

The next measure in the Action Plan is a second call under the Innovation Fund which will also be issued by the end of March, with proposals to be assessed by quarter four.

The third Irish measure is a working group to "ascertain the need for the State to continue its support, on the same terms as the private sector, for the development of the domestic venture capital sector".

In Brussels, the European Commission has vowed to create a "thriving European venture capital sector" and is proposing "uniform rules" for funds that it says will stimulate investment.

The commission also wants member states to find "solutions to tax problems" that are hindering the cross-border investment of VC funds.

As for the sector itself, it too needs to learn how to adapt to these changed times. The most obvious way for Mr Traversone to solve his 'lack of local VCs' problem is to turn Amadeus into a local VC by setting up an office here.

"It's a question we often ask ourselves," he says. "If you start to have an Irish office it gets more complex, you're doing your investment committee by conference call, it's not ideal. But we've been feeling lately that's something we should explore."

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