Business Irish

Wednesday 22 November 2017

If we treated farmers the way we do entrepreneurs, they'd be burning sheep

Brian Caulfield is an outspoken serial entrepreneur and venture capitalist who thinks Ireland lags behind in supporting new businesses. He spoke to Donal Lynch

Brian Caulfield: 'Most countries have active incentives to entrepreneurs. We actually have exactly the opposite: we have disincentives to entrepreneurs. If you are in a steady job and you move to become an entrepreneur you will move to pay more tax, not less'
Brian Caulfield: 'Most countries have active incentives to entrepreneurs. We actually have exactly the opposite: we have disincentives to entrepreneurs. If you are in a steady job and you move to become an entrepreneur you will move to pay more tax, not less'
Donal Lynch

Donal Lynch

Brian Caulfield is surveying the quite spectacular view from his office window, which looks out north over O'Connell Bridge. On a clear day, you can see forever. Or almost as far as Croke Park, anyway.

And from his perch, this outspoken venture capitalist has a widescreen view of the various protests which teem across the bridge. A stickler for detail, Caulfield frequently disagrees with garda assessments of numbers and sometimes, as he looks down on the banner-waving hordes crossing the Liffey, he's given to wonder if the wrong groups are protesting.

"Entrepreneurs would probably march if they weren't already working so hard and if they thought it would make a difference," he begins in his distinctive drawl, which is Lloyd Grossman by way of south Dublin.

"Most countries have active incentives to entrepreneurs. We actually have exactly the opposite: we have disincentives to entrepreneurs. If you are in a steady job and you move to become an entrepreneur you will move to pay more tax, not less.

"If you make more than €100,000, you'll end up paying 3pc more in USC than anyone else does. Fundamentally, we come from a culture which still believes that an entrepreneur is a chancer who goes home every Friday with his pockets full of fivers he's not paying tax on.

"Crucially, we make no distinction between the capital gains that occur from the blood, sweat and tears of building a business, as opposed to the passive holding of an asset.

"There's no safety net for entrepreneurs either: they lose access to unemployment and health benefits. If that were done to another group in society, there would be uproar. Imagine if we decided to penalise farmers with a higher USC. I'd be counting from this window for a long time. They'd be burning sheep on Kildare Street!"

Caulfield, of course, has a fairly singular perspective on this, having been both a serial entrepreneur and now a venture capitalist, manning the lonely Irish outpost of London-based early-stage investment firm Draper Esprit. He previously founded software companies Exceptis Technologies, which was acquired by Trintech Group, and Similarity Systems, which was acquired by Informatica.

Prior to joining Draper Esprit, Brian was a partner at Trinity Venture Capital where he sat on the boards of, or led investments in, AePONA (Intel), ChangingWorlds (Amdocs), CR2, SteelTrace (Compuware) and APT (CSR). In his current role, he acts as both a mentor and investor to tech entrepreneurs and says he is generally looking for companies that have the ability to eventually achieve exits north of €100m.

"We don't always get there, of course, but that's the target", he adds. "Because the environment in the UK is so enormously more favourable to entrepreneurs, our investments are weighted there.

"We are seeing a massive influx of European entrepreneurs into London, which, of course, could be coming here if we were at the races at all in terms of being competitive."

So what, specifically, should we be doing here that they're doing better in the UK?

"Well, you have the EIS scheme in the UK, which has generated a very vibrant angel capital market. That makes available to entrepreneurs in the UK early-stage capital to get companies started. That's important for us because venture capital doesn't work when you're making large numbers of small investments.

"We need to improve our education system here to catch up with theirs and validate entrepreneurship as a career choice."

But even if we changed our tax code, pumped money into third level and changed how we think about business, won't UK-based entrepreneurs still always have the inherent advantage of a much larger market? "Yes, they will, and even more so in the US they have that advantage.

"But the other side of that coin is that Irish entrepreneurs think very early about export and making something a global concern. That too can be an advantage."

Irish authorities have invested €20m of taxpayers' money into the Draper Esprit Fund and a further €10m in the Californian sister fund. Does that give him pause before criticising how little the Irish Government has done to encourage entrepreneurship?

"You have to stand up for things sometimes", he responds. "Many semi-state organisations - Enterprise Ireland, for example - are very supportive of improving the environment."

What about improving the quality of venture capitalist coming here - would that also be part of the puzzle? There's a perception that Ireland got the VC companies to come here - by dint of government support - but not the heavyweight personnel. Caulfield refutes this.

"I was in Berlin yesterday and attended the demo day and I met a lot of VCs and I wouldn't be convinced that they're better than ours."

Do Irish companies tend to sell too soon?

"That's accurate. There has been a failure of ambition here. There have been Irish founders who are happy to make a small number of millions and then sit back for a relatively easier life.

"I wouldn't criticise people for that, everyone must do what's right for them personally. But at the same time, I might look and say, 'That's a real pity, it was sold too early, that company could have been bigger.'

"Another factor is that it's historically been extremely difficult for an entrepreneur to take a little money off the table but to keep going. For an entrepreneur who has taken a large personal risk and put in those hard years, the temptation to get out is huge. The years of early struggle take their toll."

Is there a tech bubble?

"No. If you look at the dotcom bubble in late 1999 and early 2000, there were companies which were being valued for enormous sums with no product, no business model and no revenues; that is simply not happening now. If you look at the stats around what investors are paying for revenue today, it's not close to that situation.

"But I do think that in narrow areas of the market there are some bubble valuations being paid, mainly in areas like business-to-consumer businesses which are large on a global basis and you're disrupting an existing model; I'm think of the Ubers of this world.

"Music distribution is another where the valuations are not remotely supported by the underlying economics of the business. For most businesses, however, the prices being paid are pretty rational."

He has spoken of entrepreneurs being born and not made and his own future was probably foreshadowed somewhat by his family background and the work ethic passed on to him by his parents, who came from working-class Dublin. When he was 12 both of them went back to college part-time and the determination they showed was formative for him. From an early age he had part-time jobs.

After secondary school in Loughlinstown, he went on to study engineering at Trinity. While doing postgrad work there he joined a subsidiary of a Swiss multinational, Landis & Gyr.

"They were working on artificial intelligence and I was very interested in that area. So I left without finishing my masters."

After two years, the subsidiary got into trouble and that provided the impetus to start his own business, Peregrine Systems, or what he thought of as "the cheapest MBO in history".

After a trademark dispute, Peregrine became Exceptis and after a number of years Caulfield was approached by an American company called Paylinks about merging. The plan was to go public - the late lamented Lehman Brothers having written the S1 for the IPO. Caulfield was told they'd start at a $400m market cap and trade up to $1bn.

"I was in our office in Dublin when I heard those figures. I do remember quickly doing the maths and saying, 'Myself and Helen (his wife) will still have 16pc of the business after the IPO and at $1bn that was still $160m.' It was incredible."

In fact, the market began to swiftly dip and perspective merger partners got nervous and sold themselves. Caulfield was faced with a choice between raising more capital and selling the company and since the venture capital tap had run dry the company was sold to Trintech, one of the last Irish hi-tech hopes of the era. "I knew it was never-work-again type wealth if I wanted, but I wasn't counting my chickens at any point", he recalls.

While all this was blowing over, he set up Similarity Systems with Garry Moroney and worked with him for a while until moving on to Trinity Venture Capital.

"I'd been interested in (venture capital) industry because of the experience of working with Shay Garvey from Delta Partners, who gave us discipline and thought processes that I didn't have. He'd also supported us through a few ropey moments and been supportive of me personally."

In 2007, Trinity changed strategy and went public. One of the company's first moves was to buy a hotel chain, which became Dalata, but Caulfield's tech focus meant he felt the urge to get out.

He moved on to AePona, where he had been an investor and planned to raise a fund and tried that in 2008. "But by that point Jesus Christ himself couldn't have raised capital. It was just terrible timing." He instead threw himself into angel investing and served as an adviser with Enterprise Ireland, where he built a programme for early stage internet entrepreneurs.

He thinks the poor climate for entrepreneurs here is partly a function of the political culture.

"When I've had Americans visiting, we might be sitting in a pub in Drumcondra and they are always astounded when I can say that's this or that government minister. Our politicians are very accessible. That's the good.

"The bad is that their concerns are often very local and I think a lot of policy is decided by the civil service. I think it's an issue that we have very few business people who engage in politics. This is a function of the localism. We have a lot of teachers, publicans and auctioneers but, as far as I am aware, not a single tech entrepreneur."

So would he get into politics himself? "No, I'm definitely not running for anything any time soon. But if saying these things nudges anything in the right direction, well maybe it might have been worth it."

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