Tuesday 24 April 2018

Hunting for early-stage investment opportunities

Kernel wants to back 'quantum leap' start-ups and aims to identify companies with ideas so novel they are immune to the prevailing economic climate, writes Donal O'Donovan

Niall Olden is a man out of step with the times. The economy is reeling and investment sentiment is depressed, but the founder and managing partner of Venture Capital firm Kernel Capital is raring to go.

Optimism is probably a prerequisite for a venture capitalist; it helps when you're making long-term investments in high-potential, but high-risk, ventures.

Olden reckons, however, that there are reasons to be cheerful.

Cork-based Kernel Capital is a technology-focused venture capital house set up in 1999. It targets early stage and seed investments in "high-potential" intellectual property (IP) start-up companies.

Along with partner Seroba Kernel, its investment portfolio runs to 41 companies.

A €10m seed capital fund announced today, it was the sixth fund to be managed by Kernel, taking its total funds to €200m.

Speaking to the Irish Independent ahead of today's announcement, Olden said he is actively seeking new investment opportunities. His funds have closed 20 investment deals since mid-2009 and are targeting as many as 15 more in 2011.

"IP-driven companies are essentially immune to what happens in the domestic economy, the currency markets, or whatever," he said.

The focus is less on being competitive day to day, more on being unique. "If you develop a better way of doing something, someone is going to be interested. Chip Sensors is a good example," he said.

Kernel backed Limerick-based Chip Sensors with an initial €100,000 investment in 2005.

The business was sold at the end of last year to Texas-based Silicon Laboratories for a figure believed to be about €10m after developing an environment sensitive microchip.

"Our business is to look for novel ideas; ideas that will mean a quantum leap from where companies are now. Those ideas will succeed in any economic climate," he said

Selling out

The sale of Chip Sensors is a good result for Kernel, but is it good for the country when Irish start-ups are bought by foreign competitors?

Selling companies too early can mean the buyers reap the benefits of technology developed in Ireland.

The trend is widely seen as evidence Ireland's incubation model lacks the know-how to help companies break through to the big time, the reason there is no Irish Skype or Google.

"There is a bottle neck for start-ups and it comes down to not fostering sales specialists able to close international contracts," Olden said.

"I don't want to come across as being in favour of entrepreneurs selling early, but being bought by bigger companies solves that lack of sales expertise."

It's something Olden wants to address, but it's not simple.

"Sales people by their nature need a product to sell; deep IP start-ups by their nature don't have a product," he said.

For Olden, the issue highlights what should be the premium for the small number of specialist sales professionals able to bridge that gap.

They are people Olden is keen to identify and attract.

In his view, not all trade sales are ultimately produce a negative impact either.

Cork-based Farran Technologies continued to grow after being acquired by British-based Smith Defence in 2005. It now employs 40 people in Cork.

Silicon Laboratories plans to open a base in Limerick, after buying ChipSensors last year.

Such foreign direct investment (FDI) brings in cash and fresh expertise.

Olden is quick to point out that previous FDI projects spawned many of the current crop of entrepreneurs.

"Look at where the start-ups are today and who is behind them and it leads you back to Motorolo in Cork, to Digital in Galway and to the likes of Analogue in Limerick.

"They brought high-level jobs that allowed people to develop new skill sets," he said.

Backing winners:

Kernel's job is to hunt out opportunities. The investment team is an even split of five 'phds' and five accountants.

"What we look for in investments is as much the evangelical founder as it is the idea. We're looking for people that are clear about their ambition and whose intellect and drive come across very quickly," Olden said.

Universities play a major role in fostering start-ups, but company founders are generally older and more industry savvy than people might think.

The typical entrepreneur Kernel backs is a professional in their mid-40s to 50s.

Kernel tends to be the first outside investor in the companies it backs, often syndicating investments by bringing in partners such as Enterprise Ireland or members of the Halo Network of "angel investors".

Investment periods of years and no income before companies mature means investor and investee have to be confident in each other before taking the plunge.

Olden described the pre-investment process in terms of courtship rather than due diligence.

Once the decision is made on who to back, Olden has definite ideas about the role that venture capitalists have to play.

"The job is not to run companies; it's to provide cash, expertise and a recognised brand at the development phase and take a minority stake in return," he said.

As commercially minded investors, getting out of investments is in many ways more important than getting in.

Each of Kernel's funds has a life span of about 10 years, roughly five years investing and five years to exit.

"We try not to be too specific about exit horizons. In my experience once a company gets a mindset that it's for sale, that takes on a momentum of its own and you end up in something like a fire sale," said Olden.

In his view, it's better to focus on making the products commercially viable and waiting for the offers to come in.

At the same time, Kernel does not see itself as a long-term investor in businesses.

"Once the exit is agreed, our role is to take the return and hand it back to our own investors," he said.

The best deal

For Olden every deal Kernel does is a calling card for future business, especially among the relatively small network of technology entrepreneurs.

Asked what his best deal has been, the stock answer is his latest.

He admitted, however, to a soft spot for the sale of Straatum in 2009.

"We went into that deal when others were coming out and it was a lot of work, so we were particularly pleased with the return," he said.

Finally, asked to sum up his approach to new ventures, Olden was characteristically categorical: "It's not about finding the company that's going to be a success and investing in it. It's about investing to help make the company a success."

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