VC chief warns dearth of seed funding is black cloud for startups here
Better tax incentives in UK and lack of pension fund investment are a problem for Irish companies, new IVCA chairman Alex Hobbs tells Adrian Weckler
Thought everything looked golden for Irish tech startups? On paper, it’s never looked better. Finance is booming, with more than €1bn in venture capital raised in Ireland over the last year, according to official figures.
Unicorns have finally emerged too, in the form of Dublin-based customer service software firm Intercom, recently valued at over €1bn.
So everything’s fine, right?
Some senior industry executives say that things aren’t as rosy as they seem.
“There are some pretty heavy clouds facing venture in Ireland,” says Alex Hobbs, the incoming chairman of the Irish Venture Capital Association and director of AIB’S startup fund.
“We have a problem with seed funding and we need to sort it out.”
Hobbs’s day job is looking after a €53m investment fund established 10 years ago by AIB and Enterprise Ireland. That money has been used to invest in 80 Irish startups over the last decade, with over €40m of it deployed.
Successful alumni include Davra Networks, Newswhip, Jobbio and iCabbi, the taxi software startup acquired by Renault earlier this year.
Hobbs is close to finalising a second fund, which will be “similar” in size and which is expected to include AIB with a range of other private investors.
So he knows a thing or two about startup funding.
Now that he has taken over the reins of the Irish Venture Capital Association, Hobbs is warning about the hurdles that early-stage companies are starting to face in Ireland.
One problem is tax.
“If you start a company here and you work your butt off to make it successful and you complete a trade sale, your incentive is €1m free of capital gains tax,” he says. “In the UK it’s €10m. So it’s a no-brainer on that point alone. Then there’s other taxation where we’re behind on how manage EIIS [Employment Investment and Incentive Scheme] funding. In the UK it’s a lot easier.”
Another problem is that pension funds here won’t get into the market.
“Pension funds are very conservative here, unlike in the US where there’s more of a culture of investment among institutional interests like insurance or pension funds,” says Hobbs. “They back property instead and what they think are less-risky propositions.”
To this end, Hobbs and the IVCA are trying to think of ways to change the investment climate. One idea they have is to create a state-backed ‘fund of funds’. This would work by getting entities such as Enterprise Ireland and the Irish Strategic Investment Fund (Isif) to commit to a wide-ranging fund that itself spreads investment over five or 10 venture funds. The state involvement is seen as a way of soothing the nerves of big private sector investment interests, such as pension funds.
“In the UK and Denmark, they put together a fund of funds structure that complemented public funding and money from the European Investment fund,” says Hobbs. “That pulled in financial supply from private investors into that structure. It mitigated the perceived risk for those private investors who were reluctant to engage directly with venture capital.”
Hobbs says that there’s already interest from the EU’s European Investment Fund in taking part.
“The EIF has indicated strong support for this. We’ve had discussions directly with the EIF. They’re positive and would be prepared to support it, looking to put in place the possibility of managing such a structure or supporting the establishment of it. We could see EIF putting some funding into it too. They already do it in other places in Europe.”
Hobbs says that he and the IVCA are proposing such a scheme to the government and that existing Irish institutions are critical.
“The key one is Enterprise Ireland,” he says. “Let’s face it, the startup market would be broken without EI, that’s just the reality. Isif is the other one.”
Whatever the solution, something needs to happen quickly according to Hobbs.
A number of major seed funds that had been active in Ireland are now completed with not enough replacement funds cropping up.
This has led to a seed funding “gap” of at least €50m a year, Hobbs says.
“We need around €100m plus,” he says. “At present I don’t think it’s at €50m.”
We need more infrastructure, too.
“As well as a better supply of seed funding, we need help at companies’ earlier stages through incubators to stimulate them more and make them investible. That means more accelerators and similar soft support.”
But above all, it needs an alteration in perspective as to what venture funding is.
“There’s always been a view of the VC industry as being high risk, which it historically has been,” says Hobbs.
“But Irish venture capital firms are providing really good returns. Now we need to match that with other things.”
Hobbs isn’t alone in warning about the danger of losing startups to other countries, particularly the UK. Senior investors have spoken in recent weeks of similar trends.
“The UK is doing some very aggressive things to make startup investing attractive, pouring money into startups and big tax deductions,” said Sean O’Sullivan, the Irish American founder of SOSV, one of the world’s most active seed funding investors. “There are now some stunningly big incentives.”
Despite all the challenges, Hobbs thinks that Ireland’s venture capital tide will continue to rise beyond the €1bn a year mark.
On his own BIC fund, he says he would regard anything over 12pc a year as a “good return”.
“It’s looking very good, we’re happy with it,” he says, noting that the final return figure hasn’t yet been arrived at.
Hobbs will officially take the reins of the IVCA this week, fronting the organisation for a year.