55% of technology SMEs are profitable while revenues remain small
The first was the regular Department of Finance study on credit conditions, the other was a Bank of Ireland report on the financial situation of technology SMEs. This report drew on work conducted by a PhD student under my supervision. Overall the picture is mixed.
First the good news: The SME sector and the technology component are doing pretty well. There is, in particular in the small business technology sector, a huge focus on exporting. People selling business-to-business technology cannot achieve great scale in the Irish market and therefore need to look overseas for their markets.
Around 55% of technology SMEs say they are profitable, which is not a bad situation, and around a quarter of firms say they are breaking even.
Revenues are small however, with only 17% having sales of more than €5m, and 71% of companies generate earnings of less than €250,000. As a whole, Irish SMEs are small, a quarter of Irish SMEs have revenues of less than €500,000, lower than SMEs across Europe.
These technology firms are not necessarily young companies either. Parsing the findings we see that there is a a lot of start-up activity in this sector, but there is also many long-established companies.
That’s a healthy sign because ‘maturer’ firms should have greater corporate knowledge, and a better chance of surviving.
However, half of companies say they are in ‘survival mode’ only, facing limited growth prospects. About 30% of our sample is solely thinking about stabilising their revenues. Thus, in the technology sector, we see a focus on hiring sales and marketing specialists, not on taking on engineers and scientists.
That makes sense, because 75% need to look overseas to generate sales, but it also shows that Ireland’s recovery is dependent on economies elsewhere.
At 29%, the top challenge for Irish technology firms is winning more customers, while 23% sees accessing capital as their main problem.
Those figures compared with ECB surveys which find that 20% of EU and 12% of Irish SMEs say finding customers is their most pressing problem. Technology companies are more concerned about customers and finance than their SME peer group.
So what about capital? There is academic research, including from the Central Bank of Ireland, that suggests that companies fare worse when the banking system is concentrated in a few hands.
In the technology survey, an extraordinary concentration is evident, with 43% of the survey saying they bank with Bank of Ireland, and 40% with AIB. That amounts to a duopoly.
The technology survey respondents were intent on seeking bank credit, mainly for working capital, over the next six months, but 35% of SMEs in Ireland need capital but will not approach a bank.
This is despite the fact that the Department of Finance figures show over 70% of all loans sought are approved. Even though banks may be only accepting high quality applications, on the face of it, access to bank credit is not a problem.
In the technology survey, bank borrowings were deemed a better source of capital than injecting equity sourced from family and friends and crowd-funding.
There is some emerging research on the factors discouraging firms from approaching banks. However, it is clear that banking concentration increases the risk of discouraging firms.
We know that technology companies rely heavily on retained earnings, and with the sector dominated by small, intangible-asset-heavy companies the only way a bank will lend money is when they understand the business.
Herein lies the rub. Technology companies do not feel that banks understand them. Fewer than 25% said that banks understand their business.
We know from other research that good relationship-banking leads to good outcomes. If we do not have a duopoly in banking that is inadvertently holding back the technology sector, bankers need to start to understand this small, export-orientated sector.
