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.

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One Response to “The VC Gap”

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