Wednesday 24 January 2018

How Enterprise Ireland can help create ecosystem of thriving firms

The State body's funding model must change now, says investment specialist Ian Shearer

To her credit, Enterprise Ireland’s new CEO, Julie Sinnamon
To her credit, Enterprise Ireland’s new CEO, Julie Sinnamon

Ian Shearer

Enterprise Ireland (EI) is the government organisation responsible for the development and growth of Irish enterprises in world markets.

It is the first port of call for most Irish entrepreneurs and are a major player in small Irish indigenous industry, particularly for technology and other high potential companies. But given the huge amounts of taxpayer money they spend, the question must be asked: "Is Enterprise Ireland operating efficiently and to best international standards?"

In general there is a perception amongst those (like myself) who deal with EI that they are very good in certain areas. Many of their support programmes are excellent and in general their offices outside Ireland give a super service to Irish companies seeking to export.

However, their investing activities are in need of a major overhaul.

Current EI practice is that, when an early stage company goes to EI seeking investment, they are allocated a development adviser. This adviser will request the company to complete a detailed business plan, according to an EI format.

This business plan will usually be about 80 to 100 pages long and will go through numerous iterations between the entrepreneur and the development adviser.

Typically it will take about three months of hard work to complete.

When the business plan is completed to the development adviser's satisfaction, they will bring it to the investment committee in EI for approval. The development adviser will present this plan to the committee. If all goes well the development adviser will come back to the entrepreneur with the positive news that they have been approved for funding "subject to matching funding".

In other words EI will invest in the company if the company can raise a given amount of external funding, usually twice the amount that EI commit to investing.

And this is where the fun starts. The entrepreneur will typically seek to raise this matching money from a venture capital fund (VC) or private investors. When they get to meet a VC they will discover that the VC has little or no interest in their lengthy EI business plan. The VC will ask for a slide deck of maybe 10 slides and they will focus greatly on the market opportunity.

Very quickly the poor entrepreneur will realise that most of the work, which they have put into their business plan at EI's behest, is a complete waste of time. They will quickly form the view that this time and effort would have been better used trying to get their business off the ground.

Indeed, some people (like myself) might even suggest that developing such a detailed business plan is not only a poor use of an entrepreneur's time, but potentially damaging to the start-up because it can make an entrepreneur too rigid in their thinking. In addition, the entrepreneur will realise that the approval from EI is pretty meaningless and that the critical decision is getting external investment.

A better way for EI to approach their investing activities would simply be to approve the funders. In this scenario they would agree with the VCs and other funders that, subject to certain pre-agreed conditions, if the funders invest in a company then EI will, if required, automatically also invest. This is called co-investment and this practice is considered best practice internationally for public venturing.

It is reasonably self-evident that the people best equipped to evaluate a private sector start-up are the private sector funds providers. In reality, EI is leaving the final decision to the private sector anyway at the moment, so moving to a co-investment model would acknowledge this reality and make it more efficient for all concerned.

The benefits of this approach are obvious. Now the entrepreneur can go straight for commercial funding. They will not have to waste months completing a tortuous business plan. From EI's side it will make their processes much simpler because now all those development advisers (perhaps as many as 120) who were spending time reviewing business plans can focus on supporting and assisting the entrepreneur get their business off the ground. They can become productive people.

As well as moving to a co-investment model EI needs to review its whole approach to exits and the creation of entrepreneurs who have successfully built and sold businesses.

Current EI thinking seems to be to try to discourage entrepreneurs from selling their companies. The claimed reason is the need to create large indigenous companies.

However, I believe EI's real motive for discouraging exits is political. EI judge's itself on the amount of jobs and exports that the client companies create.

If a client company is sold to a foreign company then credit for the jobs and exports transfers to the IDA.

It seems that much of EI's thinking on exits is actually driven by the fear that the IDA might get more of the credit for jobs and exports than EI.

Chris Horn (founder of Iona Technologies) has written extensively on the need for EI to change its approach to exits. In a nutshell, we don't have enough entrepreneurs who have successfully sold their companies and are willing to reinvest both their time and money. In San Francisco and Silicon Valley they have developed a huge ecosystem of successful entrepreneurs who can "go again". We need to get EI to understand the necessity for this ecosystem.

Changing EI's thinking in this matter can have significant benefits for the Exchequer. In 2012, EI spent €64m in equity investments and it's likely 2013 numbers will be higher. Their total invested funds in Irish industry must run to many hundreds of millions of euro.

The previous chief executive of EI described it as "the biggest venture capital fund in Europe". This was a shocking statement to make. EI is not a VC, it's a development agency.

To her credit, the new CEO of EI, Julie Sinnamon, seems to understand this issue and it is encouraging that in a very recent interview she talked about the necessity to create role models from entrepreneurs who have successfully sold their businesses. However, she will undoubtedly meet resistance from the old guard in EI who seem to invariably resist change.

Instead of drawing down endless funds from the Exchequer, EI should be obliged to realise cash by selling some of its equity interests (as happens in other comparable countries such as Scotland and Iceland). The State cannot afford to be tossing €64m or more annually into EI if it's not necessary.

At this stage EI's equity investments should be largely self-financing given the vast amounts of equity which it holds in Irish companies. Putting pressure on EI to realise cash from these equity interests is clearly consistent with the aim of creating more successful entrepreneurs who have sold their businesses.

In conclusion, EI should adopt a co-investment model and should move towards a self-financing model on its equity investments in tandem with the aim of creating a greater ecosystem of successful entrepreneurs.

The benefits to the State would be very significant, both in terms of direct savings and in terms of ultimate generation of new businesses and jobs for Ireland.

Ian Shearer works with Bloom Equity, an investor in Irish companies

Irish Independent

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