Sunday 22 April 2018

Brian Caulfield: A cold place for entrepreneurs

The web has moved on from the early era of Tim Berners-Lee — but Irish incentives to startups have not
The web has moved on from the early era of Tim Berners-Lee — but Irish incentives to startups have not

Brian Caulfield

I have had a couple of opportunities for reflection this year that have set me thinking about how much has changed and yet how much remains the same. The first is an anniversary of sorts. It's 25 years since, together with three colleagues, I started my first business.

I look back on it now with a mixture of nostalgia, amazement at quite how naïve we were, pride that we somehow managed to survive and ultimately achieve a successful exit and gratitude for our good fortune - especially, to the team members, investors, advisers and mentors who helped us along the way.

Much has changed since then. Tim Berners-Lee had turned on the World Wide Web the previous year but there was, literally, nothing on it. Adjusting for inflation, a decent PC with 4MB of memory (that's barely enough memory to hold a single song in MP3 format) cost at least €10,000. An extra 1MB of memory would set you back about €50.

Today, €50 will buy you almost one million times that amount of memory. The cost of communication - internet connectivity - has also collapsed. From more than €3,000 a month for a 1MB connection in 1992 to roughly €0.50 per MB per month of connection speed today.

This has globalised communication in a way never thought possible.

In 1992, to all intents and purposes, there was also no venture capital financing available or, indeed, any other kind of financing for start-up companies. Now, almost every week sees the launch of a new accelerator, micro VC fund or other support.

The cost of entry to the entrepreneurship game has been dramatically reduced, rather than investing hundreds of thousands in computer equipment and air-conditioned server rooms, a startup just needs a few low-cost laptops and access, on a pay-as-you-go basis, to hosted servers such as AWS.

The internet provides a global low-cost communication, sales and distribution channel and also enables startups to construct products incredibly cheaply using "building blocks" provided by other companies in every part of the globe.

New industries, such as social media, have been created. Others, such as travel agents and, indeed, newspapers, have been almost destroyed. Some products have been like supernovas - iPod sales exploded in 2005, reaching almost 24 million units a quarter only to collapse to the extent that Apple no longer reports them, overtaken by mobile phones and streaming services.

These changes have had a profound impact on the startup ecosystem in Ireland. The number of startup companies has exploded. From a time in the early '90s, when the Irish Software Association struggled to get 30 people to attend a dinner, the ISA's annual dinner now packs the largest function room in Dublin.

Enterprise Ireland supported 229 startups in 2016 - a figure that has more than doubled in just five years. Enterprise Ireland client companies employed over 200,000 people in 2016.

A figure that has grown by about 50pc in just 10 years despite the huge job losses of the recent recession. Venture capital investment in Irish companies reached €888m in 2016 - three times the level of 2012.

Sadly, in many other respects, very little has changed since 1992.

Ireland remains a cold place for entrepreneurs. Despite some very limited progress in the past two years, entrepreneurs still pay more income tax than ordinary PRSI workers. They receive extremely limited social welfare benefits.

The work of Enterprise Ireland and of the Ireland Strategic Investment Fund is a shining light of Irish industrial policy. Everything else, at least as it applies to startups, is a mess. It's a mess characterised, in particular, by a lack of alignment across the various departments and organs of government.

The government introduces R&D tax credits to support companies making significant investments in research and development. Companies build financial plans that rely on the legitimate expectation of receiving those R&D tax credits, only to have the Revenue Commissioners delay payment for months or even years with spurious audits and other delaying tactics. I am aware of at least one company that is close to the edge financially because of these tactics. I am sure there are many others.

Incentives, such as the EIIS scheme, which are poor enough in any event, are introduced to encourage angel investment in early stage companies.

Yet, when the incentive is taken up, it seems that the focus shifts to finding the most ridiculous pretext to deny the relief ("Your business plan of 200x did not foresee the need to raise additional risk finance"). It appears that in future, EIIS relief will only be available to companies that can accurately predict the future.

Some (minimal) relief from CGT is introduced to "encourage entrepreneurship". Yet, when the details are published, it becomes clear that the restrictions are such that almost no one will ever be able to avail of the relief and the restrictions are also likely to impede the ability of companies to raise capital and to scale.

Government (at least, the Department of Jobs, Enterprise and Innovation) appears to recognise that the system of taxation of share options is uncompetitive, grossly unfair and has become a barrier to the recruitment of top-level talent and to the scaling and sale of successful businesses. Yet, when it comes to reform of that system, the can is endlessly kicked down the road.

All of this is symptomatic of successive governments having no innovation or entrepreneurship policy beyond Enterprise Ireland and, it seems, no ability to align various departments of government behind such a policy.

That brings me neatly to my second opportunity for reflection and my pessimism about Ireland's future ... but I guess that will have to wait for a future column.

Brian Caulfield is a partner at Draper Esprit and VC at Trinity Venture Capital. Angel investor and business adviser. Adrian Weckler is away

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