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ICC Venture Capital now investing in 15 per cent of ‘serious proposals’ received Back  
ICC Venture capital recently launched a ?100 million software fund and announced the completion of a ?100 million private equity fund, of which ?40 million has been committed to investments. David Fassbender, Managing Director, ICC Venture Capital, here engages in a Q&A with Finance.
It has been said that venture capital provision used to be scarce in Ireland until ICC / Enterprise Ireland developed a strong presence with a public service mandate.

Venture Capital started to become consistently available in Ireland in the 1990’s and in large amounts from 1994 when the Irish Association of Pension Funds members agreed to invest a sum of ?50m over a 5 year period. At that time a number of 10 year venture capital funds were established including the ICC Venture Capital Fund of ?20m which has been invested in 17 companies. Significantly the developments were taking place in Irish owned software companies in the early 1990’s but this sector was experiencing difficulties in obtaining venture capital. Enterprise Ireland made available a sum of ?5m to be matched pound for pound basis from the private sector to establish a ?10m venture capital software fund. This opportunity was put out to tender to venture capital organisations and ICC Venture Capital won the mandate and formed ICC Software Fund in 1996.

Software operates on an international basis. ICC Venture Capital operates on a fully commercial basis and competes with other Irish and international venture capital organisations. If we were not to operate on a fully commercial basis we would not obtain the investment returns which are key to procuring funds from investors and for follow-on support based on achieved returns from investors for new funds.

What financial return do you look for in a new software investment? What exit timeframe do you seek?

We target an annual return of 30 per cent in respect of a new software investment. We expect to have an exit opportunity within 5 years of the investment. The number of rounds of funding for a software company varies considerably. Software companies at an early stage have a strong appetite for cash and often a round of funding of between ?1 million and ?5 million might only last between 9 - 18 months. On average, for software companies we would expect three rounds of finance before an IPO or a trade investor became involved.

What exits have you made since the launch of ICC Software Fund in 1996 and what returns have you gained?

The 1996 ?10 million Software Fund made 10 investments and two of these have been sold: Aldiscon and Apex Software. As a result 70 per cent of investors’ money has been returned. The returns (gross Internal Rate of Return - IRR) obtained by investors in the fund are in excess of 40 per cent per annum. The outlook for such returns continuing and indeed increasing are very good because of the quality and growth performance of a number of companies in the fund e.g. Datalex, Eontec, CardBASE Technologies.

What type of returns do you hold out for institutional investors in your funds?

Institutional investors in Ireland, and particularly abroad, are giving increasing focus to venture capital as an accepted asset class along with equities, bonds, property and cash. The returns to be offered to such investors must obviously exceed the expected returns from plc equities because of the greater risk associated with fast growing companies and the absence of liquidity. As the table sets out the returns for investors in the ICC Software Fund compare very favourably with other indices for the same period. Institutional investors have always been concerned about the realisability/liquidity of a minority shareholding in a private company. We have demonstrated that with the correct approach liquidity can be achieved.

How does your investment and exit strategy differ between the ICC Software 2000 Fund and the Private Equity Fund?

The investment strategy of ICC Venture Capital as between the ICC Software 2000 Fund and the ICC Private Equity Fund does not differ, in that the key factor for us to assess is the management team in the company. Clearly, in respect of software, we need to have the ability and contacts to make a detailed appraisal of the product and its position in the market and we have built up a strong position in those areas in respect of the 23 software investments we have made to date. The exit opportunities are primarily trade sale or IPO. Traditional businesses are more likely to be sold by way of trade sale, but increasingly an IPO is a real option for software companies. Many Stock Exchanges are prepared to support a software company even if profits are not earned and in recent years fewer companies coming to the market have actual profits; by the end of 1999 only about 15 p.c. of venture backed companies that had gone public had been earning profits.

Are there are a lot of bad proposals for VC funding? What percent of proposals that you review do you actually invest in?

There is an increasing understanding and interest in sourcing venture capital for fast growing businesses. In our year to October 1998, ICC Venture Capital invested ?15m which increased to ?28m in 1999 and in the half-year to April 2000 we have invested ?26m. We receive proposals from business people and their advisers and we also generate proposals by suggesting to a management team to give consideration to an MBO or acquisition. In our last accounting year to October ?99 we received some 160 serious proposals and we completed 25 investments for ?28m, consisting of 18 first time and 7 follow-on investments. On such basis, it can be seen that some 15 p.c. of the serious proposals were executed by ICC Venture Capital. This would be a high percentage compared to recent years. I think the higher percentage reflects a greater understanding by business people and their advisers of what is likely to be appropriate for venture capital and significantly the quality of management teams has improved noticeably in recent years.

Do you focus heavily on the financials as real indications of a likely outcome, or do you concentrate more on people and technology?

In respect of dot.com companies the valuations had reached fever pitch and some sense of reality has come into play in recent times. Financial projections for a business at an early stage are notoriously unreliable and our focus in assessing a software company is on the management team and our appraisal of the product and its place in the market. We see financial projections as aspirational but we do focus in some detail on the cash position in respect of the ‘burn rate’ i.e. in respect of the proposed investment, how long will such money last?

What level of influence do you seek at different percentage level investments?

We take a board position in companies that we invest in and our percentage shareholding tends to range between 10 p.c. and 30 p.c. ICC Venture Capital is a supportive and responsive investor, but it is not our policy to interfere in day to day business matters. We become involved in reviewing progress of the company and significantly in growth by acquisition and in the composition of the management and board e.g. we believe that the development of a company can be helped by the separation of the chief executive and chairman roles and increasingly we introduce experienced business people to companies in which we invest to take up the position as chairman.

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