Tech sector abuzz over BES

02-07-2004

by Martin Lynch

Blood from a stone. It's a good way to describe how many technology firms have felt trying to get much-needed venture capital over the past few years.

The economic downturn not only struck all market sectors hard, it also helped drain the optimism of those that make a living out of investing in the "next big thing." The Irish technology sector has been hard hit, especially the smaller players. That said, the latter half of 2003 proved to be a turning point not just for the technology sector as a whole, but for venture capitalists (VCs) as well. As business improves across most technology sectors, the increased confidence of the VCs can be seen in the depth of their pockets.

Investment by Irish VC companies topped EUR255 million across 187 companies in 2003, according to the Irish Venture Capital Association (IVCA), which represents the VC community here and in Northern Ireland. The figures are a massive jump over the EUR105 million invested in 2002. More encouragingly for technology-related companies, 96 percent of the 2003 investment went to them.

"The venture capital market does not exist in isolation and over the past few years, thanks to dot-com crashes and the general economic slowdown, the venture capital market has been hit too," explained Shay Garvey, new chairman of the IVCA and a partner in VC company Delta Partners. "From the end of 2003 until the latter half of last year, no one was buying technology. Things are looking up on the VC front now because the economy is perking up."

"The evidence for 2004 is anecdotal so far but the overall amount of money invested by VCs will be up on 2003, with regard to start-ups and expansion funding," he added.

Still, according to Kathryn Raleigh, director of the Irish Software Association (ISA), funding is still tight. "Venture capital funding for seed and pre-seed companies is pretty difficult to come by at the moment," she explained, describing a marketplace filled with cautious optimism. "Right now, competition between technology companies looking for funding is fierce, with every company having to demonstrate a good return-on-investment."

If VC funding is up over last year, why are smaller technology firms finding it so hard to get the money they need to grow? The blame cannot be laid at the feet of nervous VCs, worried about getting stung again by a fickle IT market. The figures, and forward predictions, from the IVCA show that spending is rising again. The biggest problem has been the suspension of the Business Expansion Scheme (BES) and Seed Capital Scheme (SCS) by the European Commission. For small firms, not just in the technology sector, these schemes have been crucial by allowing people to invest money in start-ups in return for a tax break.

Much to the delight of small firms, the BES scheme, along with the Seed Capital Scheme, were extended to 2006 by the government in the 2004 Budget. Since then, however, the EC has suspended them while it investigates whether they break EU law. Right now, everyone running a small business with big hopes is holding their breath to see what will happen. They might be waiting a while yet, according to those representing Irish technology and VC interests.

"The suspension of BES has been a hard blow to the sector," said Raleigh. "The BES -- in conjunction with Enterprise Ireland -- is the only game in town when it comes to getting start-up funding for small technology firms. If BES is stopped it will have a huge impact on the Irish technology market."

"No BES means it will make it very difficult for new Irish technology firms to get off the ground," she added. "We'd like to be optimistic that it will be resolved positively."

According to Garvey, "The suspension of the BES and the Seed Capital Scheme is having a major impact right now and I don't think we have felt the full impact yet. Between 40 and 50 percent of technology companies have raised BES funding so far. There are 35 providers of venture capital in Ireland and if there is a gap in funding it's at that EUR100,000 mark -- BES is vital here. We have made representations on this but it's between the government and Brussels now."

Until the BES and SCS issues are resolved, small technology firms will find it tough to find badly needed funding. It is often pointed out that venture capital firms overlook riskier start-ups in favour of more established operations.

Garvey disagrees, however. "It's a myth that we will not help start-ups. Look at last year's statistics and you will see that Irish venture capitalists funded 106 start-ups, up from 62 in 2002. The lack of BES is a negative thing but it will not stop the formation of technology start-ups."

"As venture capitalists, our challenge is to invest at the right time in the economic cycle," Garvey adds. "We are at the bottom of the cycle now and things are improving. We have 10 years' worth of funds right now and this is a very good time to invest."