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Opportunities exist for canny investors in VC Back  
The venture capital industry in Ireland this year is characterised by increased competition, fewer investment opportunities and concerns over returns to investors writes Neil O’Leary - but the outlook is not all bleak.
AA number of new funds have sprung up with a focus on early stage technology. EVP, Mentec, Kernal and Fourth Level, all receiving 50 per cent funding from Enterprise Ireland, with €40 odd million between them, are chasing some of the same opportunities as ACT, Trinity, Delta, ICC (BoS), AIB Equity, Hot Origin, Ion Equity etc. where circa €300 million of available capital remains to be invested.

The new funds are mostly focused on early stage 1st round and even seed funding. Support from Enterprise Ireland was forthcoming because of the perception that because of the vastly diminished interest from ‘Angel’ investors, a traditional source of very early stage funding, start-ups would find it very difficult to get going. In addition to the new money some of these funds are backed by seasoned entrepreneurs and hands-on help and advice is promised as well as capital by these funds. Enterprise Ireland has done a good job here and Ireland is now well served in this area.

For the larger established technology focused funds the emergence of these new funds will make tough market conditions worse when seeking early stage opportunities. The established players already face stiff competition from international players in the mid to late stage investment phases and two thirds of all VC investment in Ireland continues to be from external sources.

The impact for entrepreneurs and promoters of emerging businesses is not that marginal business models will get funding but that good business models are more likely to get a reasonable valuation and there may be a wider choice of personalities to work with.

Another current issue for the industry is the likelihood that returns from VC funds to their own investors or LPs are going to be poor relative to expectations. This is due not just to the post technology boom drop in valuations, but also to the length of the downturn, and the need for ongoing investment in portfolio companies to keep these afloat. This has a threefold impact. Much VC executive time is still taken up by tending the wounded. LPs are less supportive and may even seek the return of funds if there are not a least some portfolio winners and finally the earning expectations of VC industry executives have been severely dented.

Statistics for the third quarter of Irish VC technology investment in Ireland will see a further significant fall in the overall amount invested and in the number of deals. Ion Equity ‘Techpulse’ see www.ionequity.com produces the only quarterly, authoritative analysis available. Of the available activity Ion Equity corporate finance has dominated the fundraising advisory market this year and continues its 100 per cent success record with recent deals including fundraisings for Network 365 and Amphion. The situation in non-technology is not any rosier with negligible amounts of Irish money being placed. Ion Equity quarterly M&A Tracker (also available on the Ion Equity website) records all M&A and buy-out activity and investment.

On the bright side, any canny investor will see opportunity in these tough times.

? Firstly, there is more clarity than in the recent past about the type of business models needed and the sub-sectors in which sustainable value can be created. *

? Secondly, while there is competition, valuations continue to stay at more realistic levels.

? Thirdly, there is a opportunity for the stronger or better funded emerging companies to ‘roll-up’ (buy) competitors or just out-last them.

? Fourthly, the tech VC industry is a year older in Europe and many VCs know and trust each other better making syndication of deals easier. Current wisdom is that even early deals should be syndicated to insure there is more than one deep pocket at the table even if this means a VC can get less money in play initially.

? Fifthly, tough times tend to distinguish the good investor from the bad. It will be interesting to note which funds do well through the downturn. At a recent VC conference in France an industry veteran suggested that by 2010 there will be about 20 active tech VC funds in Europe (currently there are over 200!).

? Sixthly, although activity levels are low new projects tend to be of better quality than many during the boom.

? Finally it seems probable that the US economy will not deteriorate further and may well be experiencing green shoots of recovery. Certainly equity markets are making that bet. US optimism is essential for many Irish tech VC plays to grow. On the non-technology side, (although there is less focus on this sector by local players,) anecdotal evidence is that intermediaries are busy here and a good number of deals are in the pipeline.

Challenging times therefore for the industry but also perhaps a time to sort out the men from the boys and for those who can work the cycle - a time of opportunity.

Neil O’Leary is chief executive of Ion Equity.

(* Global technology analysis, reflected directly in recent VC tech investment spend in Ireland, suggests focus on two areas. Firstly, a continued focus on cost- cutting by big business and especially businesses such as telcoms which have invested heavily in infrastructure. In 2003, enterprise spend on cost saving innovations is up considerably on 2002. Secondly, the large consumer electronics industries are anticipating (finally) a demand for the delivery of ‘rich data’ to a range of devices, including wireless enabled, to the home and office. The Ion Equity advised sale of Massana to Agere for $30 million indicates a hardening of value for genuinely defensible innovations supporting this trend.

In non-tech where Irish VC spending is influenced as much by local factors as external pressures the focus is on MBOS, consolidation and the continuing trend to out-source, the latter an area where Ireland is surprisingly up to 5 years behind the UK and US. Note the strong price achieved by FP2 (facilities management) in its recent sale to Dalkia. (FP2 also advised by Ion Equity))

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