Business Technology

Sunday 24 June 2018

Tech funding clouds on horizon

Peter Sandys favours greater funding. Photo: Karl Hussey/Fennell Photography
Peter Sandys favours greater funding. Photo: Karl Hussey/Fennell Photography
Adrian Weckler

Adrian Weckler

Last week's deadline day in the English Premier League saw eye-watering sums of money being thrown up for relatively unknown players. Big clubs such as Chelsea, Liverpool and Arsenal pleaded with smaller outfits such as Southampton and Monaco to take up to €100m for individuals such as Virgil Van Dijk or Thomas Lemar. Mostly, they were rebuffed: €100m doesn't buy what it used to, it seems.

In the tech world, funding sums are also being ratcheted up to historically unheard of levels. Ten days ago, the co-working space startup WeWork completed a funding round of $4.4bn (€3.7bn) from Softbank, the Japanese firm that says it has over €80bn to invest in tech ventures.

It's true 99.9pc of firms will never make anything close to that in their existence. But money, it seems, is not in short supply in the world of tech financing.

In Ireland, Series A, B and C rounds are ballooning. Two weeks ago, Dublin-based tech firm Cubic Telecom announced a fresh funding round of €40m. Five years ago, that would have been considered an unworldly sum for an Irish company to raise. It would have made principals such as Barry Napier a household name in business circles. Today, it's less and less unusual.

So when Limerick biotech firm Teckro announced a fresh round of over €8m last week, it was politely noted and reported without much further comment. (Even after the announcement, I doubt many business readers of this column will know what Teckro does or who runs it.) "Funding rounds are definitely getting bigger," said Claire Lee, managing director for early stage banking at Silicon Valley Bank. "There are fewer deals but the amounts are larger."

Why is this? Is it just a glut of money looking for an investment in an era of perpetually low interest rates?

Those directly involved in funding tech or life science companies in Ireland say that putting more money into a tech startup can be a prudent, conservative move rather than a risky one. "What you're actually doing is de-risking the investment," said Peter Sandys, managing partner of Dublin-based Life Sciences, which is currently placing €100m into early stage Irish biotech companies. "If you have a bigger syndicate with more money, the company can do more."

For example, Sandys says that the company's next investment is likely to be part of a €47m round. "In the past, that company's funding might have been €20m. But the €47m will take them a heck a lot further than the €20m would have. Hopefully, at the end of the round, the company doesn't need to do another funding round. You might have enough to actually exit."

But mightn't that also mean simply a bigger loss if the company doesn't work out? "Of course," he said. "But you've less chance of a loss because you've got more arrows in your quiver from the beginning."

Whether or not this holds in the medium to long term, there's no doubting the figures on a macro level. In Ireland, €245m was raised by tech firms in the first three months of this year from venture capital firms. That's an historic high and puts the small country on an annual VC run rate approaching €1bn.

VC veterans say that these higher investment pots reflect an industry that is maturing. Despite the dot com crash in 2000 and the financial crash in 2008, returns from tech investment funds have generally been solid.

Whether this tech investment bull run can continue is being debated. Enthusiasts say that good companies creating profitable businesses will keep the sector in clover for the forseeable future. This sector, they say, is not like derivatives on sub-prime home loans. The internet is at an early stage of transforming the global economy and is irreversible. As such, there are hundreds of billions yet to be realised in new companies and services. But rain clouds are on the horizon. These take the form both of cyclical trends and uncertainty over tax and IPOs.

After such a long bull run (almost 10 years if the 'flash crash' of 2015 is discounted), the world is, historically speaking, due a significant correction. Confidence always hits investment and tech ventures could be directly in the firing line.

Uncertainty over tax reform in the US is also touted as a potential issue. President Trump aims to bring corporate tax rates in the US down, but his ability to do so is being strongly questioned. The longer that uncertainty over this situation lingers, the less likely it is we'll see major acquisitions involving US tech firms. And that could have the knock-on effect of narrowing the supply of money to investment funds backing such tech firms.

Then there is the lack of IPOs. Since 2014, the number of tech IPOs has shrivelled. IPOs are traditionally a solid alternative to companies relying on private funding to scale or expand. But the tech world has become used to gorging on VC cash, which remains plentiful. Whenever Uber feels like raising another billion, it does so immediately, with private investors still queuing up to place that money.

Meanwhile, benchmark companies that have floated, such as Snap, have struggled.

Talk to tech founders for a while and many will admit that they do not relish the prospect of an IPO. Despite providing capital and beefed up incentives for staff, being a public company lets millions of people poke their noses into the company's business. It can be a huge distraction.

"There are pros and cons to being a public company," says James Park, co-founder and chief executive of publicly-traded company Fitbit. "On one hand, it's great to be public because it does give liquidity to employees and investors.

"There are definitely some downsides to being public. When you're trying to do new and risky things, it's a lot more difficult to do in the public eye. But on balance, we viewed the IPO as a financing event. We raised over $800m. That cash and capital has allowed us to fund a lot of initiatives."

Tech funding looks set to continue rising this year. But it may soon see challenges it hasn't known in a while.

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