Wednesday 25 April 2018

Cash out or stay in the game? The million-dollar question for startups in Ireland's technology sector

Funding for our tech startups is set to hit €1bn this year. But is the lure of a payday - against the uncertainty of taking an idea to the world stage - still more attractive? Adrian Weckler meets some of the key players in the funding area

“Irish tax policy around capital gains tax, income tax, share options and seed investment impact our ability to bring talented leaders together,” says Niamh Bushnell, Commissioner for startups
“Irish tax policy around capital gains tax, income tax, share options and seed investment impact our ability to bring talented leaders together,” says Niamh Bushnell, Commissioner for startups

Are Irish tech startups thinking too modestly? Should they be dreaming of becoming homegrown 'unicorns' or does it make more sense to opt for an 'exit' when a reasonable cash offer comes along?

Irish tech companies are experiencing a surge in growth. Local startups are getting bigger, faster. Venture capital war chests are also increasing, with funding pouring in at an unprecedented rate. (Industry estimates put this somewhere between €500m and €1bn for 2016.) The result is a swathe of Irish tech firms beginning to break through to bigger things.

In the last few weeks alone, two homegrown tech firms - Movidius and Brite:Bill - were bought in separate deals for a valuation of over €400m.

Is this a sign that an Irish-based Stripe is on the cards in the near future? Or is growing a company in Ireland still constrained by the combined gravitational forces of grounded aspiration and investors seeking brisk exits? Will Irish companies invariably hand over the keys once €10m, €20m or €50m is on the table?

"Some of them might," says Dublin's Commissioner for startups, Niamh Bushnell. "But this reflects a trend globally. A much truer reflection of the maturing of the Irish ecosystem and the ambition level of the companies is the actual level of funding Irish companies are raising. This is much higher in the last two years than previously and it's not just [US-Irish software firm] Intercom."

On the funding issue, Bushnell has a point. There have been some sizeable deals over the last year. Limerick-based AMCS continues to go big with a €45m funding round late last year.

Investor Brian Caulfield argues that ‘the volume of startups in Ireland is small relative to the US’
Investor Brian Caulfield argues that ‘the volume of startups in Ireland is small relative to the US’

And what might have seemed like a big deal a couple of years ago now seems routine, with the likes of Clavis Insight (€18m), Swrve (€19m) and Currencyfair (€10m) all getting on with business.

"Considering all of these companies are R&D focused and product based companies building businesses out of Ireland, I think it's pretty clear there's no shortage of ambition to be huge and go global from Ireland.

"And they're successful at raising funds locally and internationally which is a huge measure in itself," she says.

This is a view that is accepted with some qualification by others who deal with Irish startups. "I do believe that it's absolutely possible for Irish-based entrepreneurs to start and scale up a business to unicorn levels and remain Irish-based," says Eoghan Stack, who runs Dublin City University's Ryan Academy for startups.

"Our association with the Ryan family is evidence alone about how that can be achieved. And we're not just talking Ryanair either. Several other startup airlines have been scaled by teams working in Ireland across time differences and other cultures with operational teams based in the target markets. So it can be done at scale, from here."

But Stack says that the Irish tech scene is relatively young and still in a burgeoning state. In this context, he says, it might be a little much to expect a unicorn to appear just because it is theoretically possible.

"On the hunt for unicorns, I think it just makes sense that the startup-to-scaleup market develops and we generally see more Irish entrepreneurs doing well from trade sales," he says. "That is, until it gets to a point that there are more and more of these entrepreneurs in these positions of success. For some, they may just choose to risk it and scale more by themselves until the unicorn becomes a possibility."

This latter point is one taken up by Brian Caulfield, a partner in Draper Esprit and one of the investors that cashed out in the recent €300m-plus Movidius sale to Intel.

"It's partly a statistical thing," he says. "The volume of startups in Ireland is small relative to the US. Statistically speaking, we're only going to get an Irish Google maybe once every 500 years. Also, bear in mind that it's not that long ago when there were only 39 unicorns in the world and all of them in the US."

Caulfield believes that "undercapitalisation" is an ever-present factor in the structural constraints that Ireland and Europe have in producing a company of the size and profile of unicorn startups such as Stripe.

"There's a generic European problem in that our startups are underfunded relative to US competitors," he says. "This is particularly at the crucial Series B stage. All the statistics show this. We seedfund roughly half the number of companies that the US does. But in terms of raising ronuds in the range of $5m to $20m, it's only a fraction, something in the region of a sixth of the number of companies the US does. So I think that has an impact because it takes our companies a little longer to get to scale."

This smaller seedfunding propensity is a challenge of a larger issue between the US and Europe, he says.

"The fundraising environment for VC firms is much more difficult here than in the US. It's much harder for European VC firms to raise a new fund unless they're able to demonstrate exits. And a lot of the major players in venture capital funds in the US either don't exist or don't participate in the market in Europe.

"If you look at the US, the university endowments are huge players in venture capital. Just look at something like Calpers [California Public Employees' Retirement System], which is one of the biggest VC investors in the world. To all intents and purposes they don't exist in Europe. That means euro funds take longer to raise, they're smaller and the system produces smaller investments. I don't see that changing quickly." Funding infrastructure isn't the only financial barrier facing the emergence of big tech companies, according to some. A vocal lobby has emerged on tax reform for entrepreneurs, startup founders and investors over the last two or three years. Proponents claim that Irish revenue laws are not keeping pace with international rivals such as the UK and the US, resulting in lower yields and lower incentives for tech startups here.

"Irish tax policy around capital gains tax, income tax, share options and seed investment impact our ability to bring talented leaders together," says Niamh Bushnell. "If we can create a tax environment that's competitive to the UK, leaders and investors will want to build big companies from Ireland.

This is echoed by DCU's Eoghan Stack. "Without new incentives to get more investment into the system in Ireland, our entrepreneurs are going to look to the USA lot of the time for scaling finance," he says. "While US venture capital firms are increasingly looking abroad for dealflow it's still common that investors and founders will want to be in the same area code to work together on their businesses."

But while Ireland waits on its own Stripe to bloom from Dublin, Galway, Cork or Limerick, optimism abounds.

"I don't see a lack of ambition, I see a lot of great companies, more and more of whom are going global," says Bushnell.

"Every week, we see new large raises and news of Irish companies being acquired. We've a short list of role models now and that list will just get longer and longer."

Bushnell argues that the tech ecosystem in Ireland is still quite young and there's a lengthening list of companies now growing organically here.

"Companies like Teamwork and Phorest are building large and long term companies out of Ireland. Both have revenues per year into the tens of millions and global client lists that keep their competitors, large and small, awake at night."

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