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New venture capital fund off to a flying start Back  
Bank of Ireland Specialist Business Bank is the latest player to join the country’s VC market. Fund manager Brendan Vaughan explains the background to Bank of Ireland’s decision to become a direct participant, describes its early successes and outlines plans for the future.
Arriving on the Irish venture capital scene in the wake of September 11th gave us added impetus to focus clearly on what niche we expected the fund to fill. Bank of Ireland already had considerable experience in the marketplace through our relationships with Delta Partners, the Enterprise 2000 Fund and the Millennium Fund. But when we were establishing Bank of Ireland’s Specialist Business Bank, which involved a reconfiguration of some existing services and expansion of others into a holistic market offering, it became quite apparent that we were missing one important component.
We already had a comprehensive range of enterprise banking services, mainstream banking and leveraged finance expertise. But we lacked the facility to take equity. So BOI Specialist Bank was designed to fill this gap. It means that now we have a full one-stop shop facility to meet every type of financing need that an entrepreneur could have - from core credit facilities to mezzanine and leveraged funding to equity.
But although compelling, that was only one reason for Bank of Ireland deciding to become a direct participant in the venture capital (VC) market. We also saw what we believed to be a clear niche opportunity totally unrelated to any existing banking relationships.
A large number of VC companies will not consider investments under E500,000 and for many the cut off is significantly higher. At the other end of the scale, some funds adopt a high risk/high potential return strategy by investing comparatively small sums in early stage and start up companies. Our aim is to become a leading player in the important and sizable niche that exists between the two ends of this spectrum.
Enterprise Ireland has a one third stake in the initial E19 million fund, and our investments range in size from E350,000 up to a maximum of E2 million in any one company. Currently 77 per cent of all venture capital funding in Ireland goes to projects in Leinster and one of our aims is to look further afield, as is evident by our investment in a Galway company. Significantly, the decision making process is totally independent of the bank’s group credit process and involves an independent advisory board.
We are interested in a broad range of companies, including high tech and traditional industries. Like everyone else in the market, we seek high growth potential investments and, also in common with others in the industry, we have a target internal rate of return of 30 per cent on investments we intend to hold over five to six years.
We have been fortunate in starting out with a small but already highly experienced team, and as part of the new Specialist Business Bank, we have a range a range of industry specialists, including the high tech sector team, to support us in reviewing prospective investments.
The recent experience of most venture capitalists has not been particularly positive in the high growth IT sector, and not just dot.coms, but all types of IT related companies have fallen out of favour and with good reason in many cases. Demand from the US economy for what they have to offer is often a key to success or failure for many of these firms. But while we share these general concerns, we still believe that there are many high potential IT projects which merit our attention.
As anyone who has tried to help an IT company raise equity over the last 12 months will appreciate, it is much harder today to convince potential investors that the proposal is worth supporting. At the same time, investors such as ourselves have become more realistic and recognise that, at least in the short to medium term, they are going to have to be more patient about earning their expected return.
In creating a balanced portfolio of initial investments we are looking at both high tech and more traditional sectors with good growth potential. We are also clearly focused on investing in companies, which already have traction in their marketplaces and now need additional funding to exploit their potential.
At the early planning stages we believed it could take up to 12 months to establish our presence and that we would begin to make initial investments over the following 12 months. However, events have progressed far more rapidly.
Within two weeks of opening for business last January we had received over 30 proposals. To date we have announced two investments, and another is likely within a matter of weeks and we expect to complete at least four by year-end.
Our first investment was in Advanced Environmental Solutions, a Kildare-based company that specialises in the collection and disposal of domestic and commercial waste in the Midlands. Formed through the acquisition of three established businesses, operating in a market with huge growth potential and run by a clear and forward thinking management, the firm has considerable potential. The funding we provided has been used in the acquisition of an additional eight businesses. We expect consolidation within the sector to continue and that in about five years time AES will emerge as either a strong predator or valuable prey.
Our second investment, Aimware, is a Galway-based company whose collaborative software enables people to work together in ‘virtual teams’ from different locations. It is a good example of what we are looking for in an investment. The product fulfils a clearly identified need and provides customers with a tangible return on investment. It already has highly credible clients, including Microsoft and the US Army, and a reseller agreement in place with Compaq. The new funding is required, therefore, to increase its penetration of the marketplace rather than funding product development.
Corporate advisers may be interested to learn that, following detailed discussions, this funding round was expanded so that we made a co-investment with Enterprise Equity, another VC fund that has a Galway base. At Bank of Ireland Venture Capital we are happy to look at any VC investment opportunity, irrespective of existing banking relationships and, where appropriate, to entertain co-investments with other funds. This means it is possible for us to participate in funding rounds involving sums greater than our maximum criteria.
We would also wish to acknowledge the considerable help we have received over the past eight months from professional corporate advisers. Professional intermediaries can play a vital role in helping companies, which are looking for equity to put their case coherently, concisely and strongly. We have an ever-growing respect for and appreciation of this professionalism, so clearly evident in Ireland today.
As managers of a young fund, we will naturally seek to walk before we run in the first two years. We intend to establish a track record, both in the marketplace and within Bank of Ireland, for bringing a professional, independent and entrepreneurial approach to our task. All going well, we would hope to encompass an ever-broader range of risk/reward opportunities within an overall balanced portfolio as time passes.

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