All to play for

For many investors, Irish venture capital is a niche industry within European private equity. However, recent developments anticipate a bright future for the market, writes Jo Nash.

Historically, venture capital investment activity as a percentage of GDP has not been as high as in other European countries, but according to local practitioners, the Republic of Ireland's small VC market is thriving.

Michael Murphy, CEO at NCB Ventures in Dublin, predicts that by 2011, “Ireland's venture capital to GDP ratio will have drawn level with other European countries.” According to the European Private Equity and Venture Capital Association (EVCA), venture activity as a percentage of Ireland's GDP was 0.02 percent in 2005, whereas the UK's was 0.05 percent, and France's 0.03 percent.

Other market participants are also looking to the future with excitement. Deborah Magid at IBM's Venture Capital Group, which has a significant operation in the country, says: “Ireland's venture capital market is mature but not well known, and recent developments make this an extremely interesting time to be investing.”

Why such optimism? Industry participants point to a number of reasons. For a start, the VC market has the support of the Irish government, which engages through a number of well-funded agencies. It also benefits from the presence of global technology companies in the country, and a growing band of international limited partners who are tracking the market.

One of the most important drivers of venture activity in Ireland is a favourable regulatory framework. In its 2006 report on European fiscal and legal environments, the EVCA concluded that Ireland's fiscal and legal system is the most conducive in Europe to the development of venture capital.

To begin with, Ireland's corporate tax rate of 12.5 percent is the lowest in Europe, significantly below the European average of 26.2 percent. The EVCA report identified fiscal incentives, such as Seed Capital Relief, in which Irish workers who become entrepreneurs can claim a refund on taxes paid on previous income, as another important driver of the market.

The government also participates in funds financially, for instance through Enterprise Ireland, a national development agency committed to supporting domestic venture funds. The organisation has existed for about 50 years, but has evolved through different agencies and took on its current moniker in 1997. Denis Marnane at Enterprise Ireland says: “In one sense, you could say we are Ireland's largest venture capital fund.”

Since 1994, Enterprise Ireland has been stepping up its investment pace significantly. Between 1994 and 1999, it invested €44 million ($57 million) in 15 venture capital funds, and from 2000 to 2006, it invested €98 million in a further 15 venture capital funds.

In 2006, its most prolific year to date, the organisation committed another €175 million to eight more venture capital funds, which it predicts will help fund venture deals in Ireland worth up to €1 billion.

Apart from its impact on venture capital fundraising, local VCs also give Enterprise Ireland credit for having helped create a better framework for venture activity – rather than seeing it as a potential competitor. Murphy thinks that “Enterprise Ireland has shaped the indigenous venture capital infrastructure, and acts as a catalyst for private sector involvement”.

Another relevant government agency is Science Foundation Ireland, which promotes technology research at Irish universities. The Foundation is well capitalised. As part of its 2000-2006 National Development Plan, the Irish government invested €1.3 billion in scientific research, €650 million of which was allocated to Science Foundation Ireland.

The next round of funding will be even more significant: the 2007- 2013 Plan envisages further investment to the tune of €3.8 billion, €1.5 billion of which will be managed by the Science Foundation. Through its funding of university research, the Foundation stimulates entrepreneurial activity in the shape of indigenous spin-offs – which then become investment opportunities for venture capitalists.

General partners looking to capitalise on these opportunities are hoping that in addition to the government, local pension schemes will also increase their support. Niall Carroll, managing partner at ACT Venture Capital in Dublin and chairman of the Irish Venture Capital Association (IVCA), says: “Historically, Irish pension funds have allocated less to venture capital than pension funds in other countries. The allocation in Ireland is less than 1 percent, whereas in the UK, it is around 3 percent.”

However, Carroll thinks the venture capital market's recovery from the technology recession and a current over-exposure of Irish pension funds to public equities will prompt pension managers in the country to increase their allocations to venture capital.

“Investment in Irish venture has been quite static, but it is about to boom,” Carroll argues. “Pension funds are changing their attitudes towards venture capital, and more and more political support, through organisations like Enterprise Ireland, is being offered.”

Another important trait of Ireland's burgeoning venture industry is the country's cultural and commercial proximity to the US. Dermot Berkery, a general partner at Delta Partners in Dublin, considers what he describes as the ‘US approach of Irish venture’ to be the most distinguishing feature of the market. “The Irish venture capital market is more like that of the US than any other European venture capital market. Ireland really is the 51st state,” he says. Indeed, Irish venture capital funds, like their US counterparts, are highly concentrated in the technology sector, with 86 percent invested in technology companies, according to the IVCA.

The correlation with US venture is important. For one thing, it attracts support from US investors with deep pockets. While European institutions have been active in Ireland for some time, US limited partners have started to invest much more recently. Delta Partners counts BancBoston among its investors, and ACT Venture Capital is backed by the likes of JP Morgan and Merrill Lynch.

The presence of US technology conglomerates inside the country also fuels Irish venture activity. Carroll identifies the presence of multinationals like IBM and Microsoft as an important driver. He says: “These companies produce excellent quality and internationally exposed managers, and generate a vibrant tech ethos.”

One way in which the technology giants help is that they act as training grounds for potential entrepreneurs. Murphy observes: “One of the most important upshots of foreign direct investment is the growth of entrepreneurial activity in the shape of indigenous spin-offs.”

In addition, US corporations have, whether directly or indirectly, invested substantially in Irish venture. IBM, which arrived in the country in the 1950s and is now one of the largest employers in the country, has been particularly active. In September 2006, the firm launched the Dublin-based European Venture Capital Centre, which seeks to increase co-operation between IBM and entrepreneurs, and to create investment opportunities for venture capitalists. IBM also promotes a strategic collaboration with Enterprise Ireland.

The engagement of the world's leading technology companies, combined with the government's involvement and growing interest from international limited partners, is what makes Irish venture firms so optimistic. Those active in the market say there is a lot to play for now. The coming years will put this thesis to the test.