The VC Gap

August 29, 2010

One of the key ingredients in developing successful IPO/tech enterprises is access to venture capital (VC). Venture capital is effectively the only way to fund the development of early-phase companies so that they grow to a stage to achieve IPO or trade sale. A venture capital fund might invest anything between €10 million and €20 million to get a company to the stage where it can be sold off to a large player or the general public. The Irish Financial Regulator keeps a register of ‘Authorised Investment Limited Partnerships’ under the Investment Limited Partnerships Act 1994 and there are no registered partnerships (see http://registers.financialregulator.ie/DownloadsPage.aspx). But that is not the full story. Enterprise Ireland initiated a Seed and Venture Capital Fund and has supported a number of VC funds in Ireland. Enterprise Ireland’s 2009 Report on the fund was reported as follows, ‘EI said despite the difficult climate for business, Irish venture capital firms supported by Enterprise made 87 investments with a value of €52m in 2009, marking a 53% increase on the value of investments in 2008. The number of new companies invested in during the year, at 25, also represented a significant increase of 47% on the previous year’ (Finfacts Team, 2010 see http://www.finfacts.com/irishfinancenews/article_1020210.shtml). This is an average investment of just under €600,000 per company.

So what is a VC fund? A VC fund is usually a fund invested over a 10 year period. Investors, usually institutional investors as a 10-year investment horizon is too long for many private investors, agree to invest a certain amount of capital into the fund. The investors are the ‘limited partners’. The fund is managed by an investment firm and these are the ‘general partners’. The general partners are the ones that seek out the HPSU and select which to fund and to what level and at what milestones. The limited partners agree to allow the general partners a free hand in the management of the fund and the general partners will only draw down the capital from the limited partners as needs will. General partners do not want loads of money sitting in deposit accounts. The objective is to fund fast-growing high end companies and the ultimate goal is to develop these companies to an IPO within a 10-year framework. Only a few of the companies invested into by the VC will actually get to IPO, some will be sold off in trade sales, some will collapse but the profits from the IPO’s and trade sales should strongly outweigh the losses made on the companies that do not succeed within the fund. The average VC fund would hope to generate a 100-200% profit on the capital invested. This is big money investing and there is no room for amateurs and tyre kickers.

So why do we have so few VC funds in Ireland? Unfortunately, the prevailing view for most of the last fifteen years was that if you had money to invest then you should put it into property rather than putting it into to some risky start-up venture. It looked good at the time but in hindsight the bubble burst and Ireland has no venture capital tradition as a result.

So what are your options if you need €10 – €20 million to fund a HPSU to market and IPO, well the following are cited by the Irish Venture Capital Association (IVCA) (see http://www.enterprise-ireland.com/en/Invest-in-Emerging-Companies/Source-of-Private-Capital/IVCA-Guide-to-Venture-Capital-.pdf).
Atlantic Bridge LP (Dublin and London)
Claret Capital (Dublin)
INTEL Capital (Leixlip)
Ion Equity Limited (Dublin)
TVC Holdings (Dublin)
Alchemy Partners (Belfast)
ETV Capital Limited (Based i9n London with investments in Ireland)

If you needed between €7 and €10 million you might also have access to:

ACT Venture Capital (Dublin)
Bank of Scotland (Ireland) Venture Capital (Based in Dublin butnot sure how sound this is as BOSI havd announced their withdrawal from the Irish market)
Growcorp Group Limited (Dublin, tech sectors)
Novus Modus (Dublin, connected to ESB and energy sector related)

A final note is on the smaller relations of the VC funds, the business angels. A business angel is a high-wealth individual who allocated a proportion of their investment portfolio to helping start-up businesses (the ‘dragons’ in Dragon’s Den being prime examples). Ireland does have a formalised business angel network; the Halo Business Angel Network (www.hban.org) the administration co-funded by Enterprise Ireland and Inter-trade Ireland. However, there seems to be very little formalised angel networks established outside of HBAN. Last year I was in Boise, Idaho on a professional development trip and talked to some of the entrepreneurs there. In Boise, a small outpost city in the West by American terms and no disrespect is intended to my hosts in Boise by that, the successful entrepreneurs were banding together themselves and creating formalised business-angel networks. There appeared to be more formalised angel funding in Boise than in the whole of the Republic of Ireland. For the uninitiated, the difference between business angels and VC is scale. Business angels tend to fund ventures in the €100,000 to €250,000 range whereas VC will only talk to you if the funding requirement is in excess of €1 million.

Creating an IPO Culture

August 23, 2010

To my mind, Ireland has not had the level of success that it should have had for the capital; financial, educational and rhetorical, that Ireland Inc. has expended on high-potential start-up enterprises (HPSU), technology transfer and the commercialisation of knowledge-based products and services. The great hope for the future is the ‘knowledge economy’ which would require Irish entrepreneurs setting up successful knowledge-based enterprises. So what should ‘success’ look like?

The first point is to analyse the ‘objective’ being aimed for. Too many times those involved in enterprise support focus on the number of start-up ventures that go through incubation centres, enterprise centres, third-level enterprise platform programmes and clearly this is an important measure. However, it appears to me that we may be setting the bar too low. Surely the ultimate ‘objective’ is not to have HPSU but for a significant proportion of these to become successful, floated ‘IPO’s or early-stage companies sold to the bigger players under trade sales. The number of Irish-initiated IPO is very small and this should indicate that something needs to be tweaked or improved.

In the first instance, I think that this will require a change of mindset, by all involved. We need to create an ‘IPO culture’ not a ‘HPSU culture’. Partly, this is a problem relating to our entrepreneurs (I’m really setting out to make myself very popular!). It appears to me that our entrepreneurs lack the necessary ambition to drive their ventures beyond a certain point (usually 15 employees and a large comfort zone for the owners, management and staff). Of course I will have the response of look at Iona Technologies and other cases but as a percentage of those that establish HPSU they form a minute percentage and a proportion far lower than that of our relevant competitors. Let me give an example. Last year, frustrated by the subject of lack of ambition I asked the Irish Stock Exchange to do an information workshop, in the Board room of the Stock Market, for interested entrepreneurs who might be interested in knowing what steps they should take now to set themselves up if they wished to consider an IPO in several years time. I used an extensive network to advertise the event. Now, if this session was offered for free in any large American, Scandinavian, Japanese or Chinese city, the attendance would be strong. How many showed up in Dublin: 9 and some of those were consultants. Our entrepreneurs did not want to know how to go about an IPO.

This is a mindset issue. We need to raise the bar, be more ambitious and if necessary, bring in people form outside Ireland with great ideas and the ambition to set a new standard. The objective needs to be ‘IPO’ from the start. I accept that there are other factors that are required to be addressed if this IPO culture is to succeed, in particular the lack of venture capital in Ireland and a more ‘aggressive’ approach (in business philosophy rather than physical) towards our entrepreneurs in our third-level entrepreneurship policies but does this really look like success?

I am going to spend the next few posts talking about enterprise policy in Ireland and the gaps and possible opportunities available in my home country. Ireland has a long tradition of publicly-supported foreign direct investment (FDI) which was initially hoped to spur the development of indigenous down-stream enterprises. To some extent this has worked successfully. However, there are a number of gaps in the policy of promoting indigenous enterprise development. It is not that Ireland does not produce start-up businesses, it does but the recent economic downturn has demonstrated that there are new initiatives needed in a number of key ‘transmission’ issues. By a transmission issue I define the ability of indigenous Irish small-to-medium sized businesses (SME) to transmit their growth beyond the SME stage and develop into larger internationally-trading enterprises. Put another way, how can we get our indigenous entrepreneurs to bring their businesses and business ideas to the next level. I am sure that others may point to different problems but let me start by examining 2 key issues:

• The lack of successfully converted high-potential start-up enterprises (HPSU)
• The low number of indigenous Irish enterprises that actually engage in international trade (exporting in particular)

There has been a lot of talk about the ‘knowledge economy’ and Ireland Inc. has spent a lot of time and money establishing an infrastructure to promote high-potential start-up (HPSU) enterprises. Ireland’s national enterprise agency has established a number of programmes to support HPSU development such as:
• Creating a policy framework for HPSU enterprises
• Worked with the third-level universities and Institutes of Technology to establish incubation centres and fund the management and running of same
• Established ‘best practice’ programmes for the management of these incubation units
• Created funds to assist and train nascent HPSU entrepreneurs
• Including a number of high-end enterprise platform programmes run through the third-level colleges, essentially high-end start your own business programmes

However, for all the good work done Ireland is not producing the number of real HPSU that it should expect from the investment made and we are seeing frighteningly too few trade sales and almost no initial public offerings (IPO), where enterprises make their initial appearance on a stock market, or a ‘float’.

Another area of improvement relates to indigenous exporters. Statistically, Ireland has a very strong export sector and in general this is correct. The problem is that the majority of our exports are done by FDI companies’ not indigenous enterprises. Depending on the statistics you wish to select, only around a quarter of the companies in Ireland that export are Irish owned. Thus, to follow the logic, only a very small fraction of indigenous Irish-owned enterprises actually export.

If Ireland is to generate the economic success and jobs necessary to address the current fiscal and employment problems, it seems clear that we will need to export a lot more. Ireland is a classic example of an open economy but we have seemingly failed to take advantage of this. Neither of these issues of themselves will solve the problem but both are key transmission issues in moving the Irish economy forward, creating more exports and more confidence and optimism, things that are currently in apparent short supply.

So how can we help our clients buy? Well, here are a few thoughts.

The first obvious point is that the conversation is focused on the client and their needs. Stop trying to make a sales pitch which is by definition focused on you and your wants and needs. Take a more analytical approach and develop a question-based dialogue with the client that uncovers their wants and needs. Take your ego out of the equation.

Second and following on, stop telling clients and start asking them. Too many salespeople and self-employed people go into sales presentations so full of information, pumped up and so full of belief in themselves and their product/service that they try to ‘convince’ the client of the virtue of what they have to offer. Actually, when I ask participants on start your own business courses their initial views on the characteristics of a professional salesperson, the word ability to ‘convince’ the client is often proffered. This I find worrying. You are not going to talk to a potential client and pound them into the ground with argument. Ask yourself the question in reverse. If someone came in to you and tried to ‘convince’ you without knowing your real needs or wants, what would you do? If it was me it would be a short meeting with the salesperson returning out the door from which he came quickly. Don’t use tactics that you would find unacceptable if you were the client. Ask yourself which salespeople you like to work with. I suggest that the salespeople you are most likely comfortable with are the ones that are interested in you, ask you questions to find out your needs and present the best solutions for your needs. I accept that there are cultural differences around the world. In Europe and America clients tend to be less impressed with ‘in your face’ salespeople whereas in many African cultures, ‘in your face’ negotiating is the norm. However, in most cases, if you ask the right questions of a client they will happily outline their position and needs. The important point is not that they are telling you their needs but in many cases they are using your questions to work through their needs themselves in their own head. In short, stop telling the client anything and start asking them questions and help them work through their buying process.

Is this new, not at all. Sales trainers have been trying to get salespeople to ask questions and listen more and talk less for years. There have been worked out systems developed, for example, SPIN selling is a techniques of asking different types of questions to move the conversation along to its culmination (see Rackham, N (1995), ‘SPIN Selling’ (Gower, Aldershot)).

How you apply this to what you do is, of course, up to you. You may want to make small changes to what you do rather than try and apply a completely new approach but consider making some changes if you feel that you are not making the most of the sales presentations you are making. One idea is to video yourself making sales presentations to colleagues and look at how much of the time you are talking and listening, could or should you be asking more questions, are you assisting the client through their buying process and how can I get over the cringe factor; ‘did I really say that?’ When I have done this myself I scare myself so I can only imagine how the client must feel. Do this in the comfort of your own office and keep the exercise real but you might surprise yourself at how you come across.

Do some reading on the psychology of buying and thinking. Before I do this I should declare that I am not on commission for any of this. I like SPIN selling but it really only works, in my opinion, if you have tried all the other ‘techniques’ and figured out that they don’t work for you. That being said, always a good reference point. Other books I would recommend are ‘Why we buy’ by Paco Underhill which looks mainly at the retail buyer (see Underhill, P (2000), ‘Why we buy: the science of shopping’ (Texere, London)), ‘Buy-ology’ by Martin Lindstrom looks at how the brain actually works in relation to buying (see Lindstrom, M (2008), ‘buy-ology: How everything we believe about why we buy is wrong’ (Random House Business Books, London)) and a final suggestion is Malcolm Gladwell’s ‘blink’ which looks at first impressions which is important in making presentations (see Gladwell, M (2005), ‘Blink: the power of thinking without thinking’ (Back Way Books, New York)).

Enjoy!