Saturday 21 September 2019

We need to do more to reward responsible risk, says VC chief

Taxation rather than Brexit is one of the biggest issue for investors, Neil McGowan, the incoming chairman of the Irish Venture Capital Association, tells Adrian Weckler

Home grown: Neil McGowan wants to see a broader based economy to reduce the reliance on the tax take from multinationals
Home grown: Neil McGowan wants to see a broader based economy to reduce the reliance on the tax take from multinationals
Diverse: Neil McGowan’s MML Capital has backed businesses from bathrooms to biomedical devices

Adrian Weckler technology editor

Is venture capital in Ireland ambitious enough? Is there something in Ireland holding an 'investment culture' back, compared with other countries?

And is now the time to be doubling down on 'risk' as a business virtue?

These are all things Neil McGowan finds himself contemplating as the incoming chairman of the venture capital industry in Ireland, a sector which ploughs around €700m a year into Irish startups and growing companies.

While the VC community here is often associated with tech and life sciences, Mr McGowan's own private equity firm, MML, doesn't chase online food startups or drone delivery ventures.

The company he co-founded with Rory Quirke is as likely to focus on bathroom fitters (Sonas Bathrooms), insurance companies (Sheridan) and conventional couriers (Fastway) as it is medical devices (Schivo) or DNA technology (IdentiGEN).

Backed by €125m from a fund managed with Enterprise Ireland, AIB and other investors, it made around €30m from the sale last year of its stake in fridge leasing company Lowe Refrigeration.

As such, it may be more representative of the 'typical' 2019 Irish investor, if such a thing exists, than some of the more specialist niche players in the wider VC community here.

Mr McGowan certainly knows his way around finance houses and the wider industry.

He started his career with PwC in Dublin, spent more than six years working in investment banking at HSBC and Bank of America in London, then relocated to Dublin with Goodbody Corporate Finance. Before his current existence with MML Ireland, he was an investment director with another Dublin-based private equity firm, FL Partners.

This might give him a level head in turbulent geopolitical times around a likely no-deal Brexit next month.

So he is fairly sanguine about the possible effect of such a political shock on the Irish venture capital industry when I ask whether a no-deal Brexit would threaten the sector here. "Not really," he says. "When it comes to things like deal flow and raising money, it's quite specific to the company you're looking at. When I talk to investors, the further away they are the more they're likely to see as much opportunity as they do risk."

But if you're trying to raise either a fund or money from, say, American sources, do they see Ireland as distinct from the UK?

"They will do their own research. And they're very well aware of the macro-economics and trade relationships," he says.

So is it easier or harder now for an Irish VC or private equity firm to talk to their own sources about raising a fund, for example? This is a question that may have particular relevance to Mr McGowan, his business partner Rory Quirke and MML.

Earlier this year, the firm was reportedly attempting to raise a new fund of around €125m. Mr McGowan, who raised a similar amount in 2013, says he doesn't want to talk about the specifics of where they are in this new fundraising process.

Whether MML is close to completing this or not, does a no-deal Brexit really have little impact on a fundraising effort in Ireland? "It's not necessarily a positive," he says. "But I don't think it's a blocker either. It's certainly a topic that wasn't there when we were raising a fund in 2013."

However, as a general point, he says several investors "take a longer view" of global business conditions than what has making headlines over the course of one or two years.

Indeed, the Irish venture capital community seems more agitated by other things than Brexit. Entrepreneurs and venture partners say the relative lack of tax incentives for business founders is one of the biggest threats to meaningful growth in the ecosystem here.

A few totem issues, such as the disparity between the €9m gap in the capital gains tax treatment between Irish and UK startup founders, continue to grate.

These are at the core of what Mr McGowan says the industry wants to push the Government on in the IVCA's pre-budget submission. The theme, McGowan says, is rewarding risk.

But risk is a double-edged sword in the current climate. With talk in some quarters of food shelves potentially running dry within weeks of a hard Brexit, does the IVCA think the Government is going to respond well to a pitch of 'risk more'?

"We're clearly not talking about incentivising people to take on irresponsible risks or jeopardising a systemic part of the economy," he says.

"But one of the things we've seen over the last number of years is that the country is very dependent on a relatively narrow tax base, When I put all the numbers in front of me, the corporation tax take from a handful of multinationals is very, very significant. So part of the rationale, I suppose, is to try and encourage the supports to enable people to go and set up businesses so we can build a bigger indigenous economy and try to reduce that dependency [on multinational taxes]. It would lead to a more broadly based economy with more founders. It would mean diversifying from multinationals, who make their own decision without where to locate their IP or whatever else in future."

One of the things the IVCA continues to wish for is a so-called 'fund of funds', institutionally backed. Other European countries have such a setup, which broadly involves greater legislative support to incentivise large sources of capital, such as pension or hedge funds.

"I think there's progress being made on this," Mr McGowan says. "But we're trying to make sure that this accelerates."

Mr McGowan takes the helm of the IVCA at a time when some metrics might suggest there is contraction in the Irish VC funding market. The most recently available figures saw venture capital funding in Ireland fall by 41pc to €197m in the first three months of 2019.

This compares with €332m for the same period in 2018, according to the IVCA's regular Venture Pulse measurement, done in association with William Fry.

That decline meant the overall amount of venture funding in Ireland has fallen substantially below the €1bn it achieved between 2017 and 2018.

However, most of that gap can be explained by the lack of "mega deals" that usually prop up the IVCA funding table.

Such deals would have included funding rounds of €100m each for Dublin-based Intercom and Limerick-based AMCS the previous year.

Otherwise, the overall number of companies which got startup or follow-on funding in the first three months from the VC sector grew from 43 to 75 year on year.

There was also an increase in the number of smaller deal sizes worth between €1m and €5m, to 66 from 36 in the same quarter last year, while the first quarter also saw a rebound in seed funding to early stage firms, up 23pc to €17.8m compared with the same quarter a year before.

Even with the absence of the mega deals, the overall level of venture funding into Irish startups is a multiple of what it was six or seven years ago.

So might not a sceptic about the IVCA's pre-budget submission simply say the industry is ticking along just fine without more tax-friendly legislative changes?

"We're not talking about radical change here," Mr McGowan says. "We just want to put in place building blocks to support that ecosystem and infrastructure. One way you might look at the relative lack of private investment is that the state already has to be very involved through the likes of Enterprise Ireland."

Even if the Government introduced much more tax-friendly arrangements for entrepreneurs, startups and investors, would the industry respond meaningfully? One of the criticisms sometimes levelled at Irish financial investors and startup entrepreneurs is that very few have a real ambition to grow something into a genuine global player.

As soon as it looks like trade sale might net someone €10m, €20m or €50m, there's substantial pressure to sell up. With one or two notable exceptions, Ireland isn't a country that supports building and growing a Spotify or a Stripe.

Is this a fair criticism, I ask Mr McGowan. "I don't think so. I think you have to recognise the size of the country. And so to support a multi-billion euro investing environment might need totally re-engineered funding structures, with buy-in from LPs [limited partners, who invest in the venture funds] to do that. You're talking about €2bn or €3bn funds. There's no reason why you couldn't have that based here but right now, the size of the Irish market is a factor."

Lastly, I can't resist asking Mr McGowan: why bathrooms? One of MML's investments is in Sonas Bathrooms, a distributor of bathrooms and bathroom accessories based in Ballycoolin Industrial Estate in Dublin 15.

"We believed in the founder and the family," he says. "It's actually an interesting sector. I suppose it's an indirect play on the property market without taking a direct property risk. We had the opportunity to back Dermot [Usher, CEO of Sonas] and we did."

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