| Venture capitalists urged to consider funding start-ups |
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| Commenting on current trends in the Irish venture capital sector, Sarah Moores says that a gap is emerging between the types of projects getting investments, with most of the money going to later stage investments and fewer start-ups getting seed capital. |
Venture capital funds invested in Ireland have grown rapidly in the last four years, from $43m in 1997, to $250m in 2000. Although this undoubtedly fell in 2001, and will likely fall again this year, it is now an established part of the economic framework for Ireland, and is fundamental to Ireland Inc’s success in the future.
Venture capital is an essential part of a vibrant economy; funding start-up and early stage companies through the risky early stages. In return investors have been rewarded with above average returns.
And while venture capital is often lumped together as one asset class, there are definite stages within it seed, early stage, expansion/ development capital. Each represents a different level of risk, and expected return, and while from an investor point of view each can be treated as a standalone asset class, from an economic point of view all are crucial to the system as a whole functioning.
We can view it as a funnel process; in the early stages, risk is high and many companies fail; as the companies develop, risk reduces and fewer fail. But the principle is clear - it takes many, many start-ups for one Iona to emerge. Or to take the reverse logic, we must fund many start-ups in order to ‘create’ one Iona.
The issue in Ireland now is that a gap is emerging in this funnel for seed and early stage companies. This is supported by the recent IVCA Annual Report, which reported that only three companies succeeded in securing seed finance from its members in 2001, down from 30 in 2000, 31 in 1999 and 15 in 1998.
In addition only 48 out of a total of 165 investments were initial as opposed to follow on investments. So why is this? The primary reason is that existing funds are trending towards later stage financing, for a variety of reasons, not least of which because they are now too big a E100m fund is unlikely to invest in E1-2m allocations.
So are new investors coming in to fill this gap? The answer is no, despite the fact the economics for early stage investing are better than they have been for a number of years:
• There are many good projects in the market that need funding in the E0.5 - 2m range.
• The groundwork is being laid to continue the project flow. The government has committed significant money to research through the Technology Foresight Fund, a E635m fund to support technology and biotech research at the university level.
• Valuations for early stage companies are now very low.
• Funds incorporated now will benefit from exits as the economy picks up in the next economic cycle. A look at historical returns supports this. Funds incorporated in 1994, and hence liquidated in 1999-2000 enjoyed excellent returns.
• Entrepreneurs starting companies now are experienced, committed individuals; no longer are they looking for a quick win.
So what is the answer?
There is a gap for one or more funds at around the E20m level, investing amounts of the order E1-2m in early stage Irish companies.
And as fund managers, individuals, and corporates begin to address their fund allocations for 2003, we urge them take another look at venture capital as a whole, and early stage venture capital in particular, as part of their strategy. If they select their fund managers well, the potential for attractive returns exists.
Sarah Moores is a director at Alliance Investment Capital a E9.5m early stage venture fund. This fund is now fully invested. Investment sizes ranged from E0.9m to E3.1m across five portfolio companies. The general partner is considering the appetite among investors for raising a second early stage fund later this year. |
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| Article appeared in the October 2002 issue.
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