Funding freeze shows signs of thawing out
MINISTER for Jobs Richard Bruton promises to help fund 5,000 businesses with a view to creating 100,000 jobs over the next five years.
“If we are to turn this country around and create a new economy which can support the levels of employment we need, central to that will be dynamic Irish companies,” he said in October.
“That is why,” he added, “a key part of the Government’s jobs plan is to target policies at sectors where Irish companies have the capacity to break into export markets and grow quickly to create jobs.”
But, as the euro faces derailment and the Irish economy recedes in the last quarter, what is the current climate really like for start-up businesses seeking investment?
Bill Liao is a serial investor now working with SOS Ventures — a $150m (€113m) venture capital fund headed by new Dragons Den TV star Sean O’Sullivan. This year, the fund has invested in Silicon Republic, Storyful (the social media news service set up by ex-RTÉ journalist Mark Little), and most recently Cork-based Zartis, among others.
“I would say there is actually a lot of money out there, globally, looking for a home. I wouldn’t say it’s sloshing around as that would imply it’s easy to get at — and it’s not,” says Mr Liao.
“It’s probably harder to get funding now than at any time in the last five years, but having said that there’s more money there, it just isn’t easy to tap it.”
Earlier this month, Mr Liao joined the board of Cork firm, Zartis, which had already raised investment from AIB Seed Capital, Enterprise Ireland and Equity VC. Zartis has developed software for small businesses to recruit their staff using web-based social media, which it is now marketing worldwide. The company’s founder, John Dennehy, is a start-up veteran, having sold his first internet start-up in 2000. “The current investment climate is terrible in some ways but amazing in others,” he says, “because now you’re seeing the internet having a real impact on people’s lives so you have great change and that disruption creates real opportunities. So, for web-based services, if you’re in Ireland there’s great opportunity here.”
In fact, the investment climate for tech start-ups here is relatively buoyant now. The amount invested in Irish-based technology companies in the first half of this year saw a 58% increase on the same period in 2010. Enterprise Ireland now has €124m for seed capital investment, compared with just €30m in 2009, and the Government has pledged to make more funding and credit available to small firms. The number of start-ups is also increasing: up 5% on last year, when 14,100 new companies were registered.
An OECD study has put Ireland fourth out of 27 countries for venture capital investments as a percentage of GDP. Nonetheless, research published this month also shows that Irish small businesses are the second most likely in Europe to be turned down for credit, so whatever buoyancy exists may be mostly by technology start-ups.
Paraic Hegarty is one of the founders of Akari Software, which has been seeking investment to market its web-based content management software for educational institutions.
“We’ve had mixed results with financial institutions and the current economic environment is not helping,” he says. “Given that we have an established customer base and a proven product I’m actually a little surprised at how long it has been taking.”
Akari, too, has had Enterprise Ireland backing which will match any private investment, given the company’s High Potential Growth Startup status.
“We’ve had good engagement from consortia of angel investors through the HBAN network, the Hello Business Angels Network set up by Enterprise Ireland and InterTrade Ireland. Certainly, the work done in creating a network of angel investors seems to be paying off,” says Mr Hegarty.
“So, now you’re getting access to a group of investors who are probably more professional in their approach to investments and generally these are people who understand the market quite well, so that’s looking quite positive. An individual investor might come in at the €25,000 to €50,000 range, so if you get a consortium of five or six investors that’s a significant investment,” he says.
Much of the current buoyancy in the start-up space has resulted from technological developments that are transforming how people do things. The take-off in social media usage and cloud computing now means firms have instant access to global markets, and when five million messages are being sent on Facebook every 20 minutes, clearly a new era is dawning.
John Dennehy of Zartis claims that the new opportunities and business climate are demanding a new approach to start-ups, which requires much more faith and courage on behalf of investors.
“The old business model for a software company in Ireland was to get two big enterprise customers: they pay you a six figure fee, you then target getting 10 more customers in the UK and that’s your plan for year two when you open an office in New York and Boston. Those days are over and if you look at the growth over the next five years it’s not in that enterprise sector,” he says, instead citing the growth of firms like Twitter with a big user base but relatively low initial earnings as being the model for the future.
“I think investors here still have a lot of maturing to do, in terms of viewing how this customer funnel is working, and a lot of investors don’t get it. Now you’re building a product in your first month and your income from customers is $50 a month. I think that would give more traditional investors a heart attack.”
The result is that investment decisions are now being made with reliance on plans and projections and more on the capability of the people involved and their ability to get things done fast. “The first meeting is absolutely crucial,” says investor Bill Liao, “but then I tend to do everything by phone or skype, but you’ve got to rely on gut feeling for that first impression.”
Instead of being able to project the growth of the business, the importance for Mr Liao is the ability of the team to communicate it. “It’s a story and I summarise it as crisis, struggle and resolution. If a business can’t show me the crisis it solves then why should they be writing a 50-page plan?”
For Mr Liao, the emphasis is instead on the ability of the team to deliver solutions within limited timelines.
“For instance, we’re investing in a Canadian company called Adjuno. We’re giving them fifty grand and we’re seeing what they do with it. So, if they create something great there’ll be more of it and if they don’t, there won’t.”
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