It is unclear what the financial returns from Enterprise Ireland's VC investments have been to date, writes CHRIS HORN
‘ENTERPRISE IRELAND is the largest venture capitalist in Europe!” So asserted Frank Ryan, chief executive of Enterprise Ireland during the recent annual Engineers Ireland conference in Galway. An audacious statement, considering Ireland’s small size and the level of entrepreneurship at various locations across Europe. His remark was tweeted live, leading to tweets back from a partner at a VC fund (outside the conference) who also expressed bewilderment. I was unsettled for a number of reasons: disappointment that the Irish State finds itself replacing private risk capital on such a large scale; concern that aspiring immigrant entrepreneurs could perceive that the Irish Government decides what start-ups to support, rather than the market; and apprehension that international VC funds may perceive Ireland as a closed shop, controlled by a State agency.
Great VC funds bring much more than just money: strategic guidance, board depth, industry networks, partner opportunities, management development and key staff. They expect global conquest. And naturally, they bring excellent financial returns to their investors, so enabling further funding and a continuous cycle of innovation and serial entrepreneurship. Arguably, Enterprise Ireland has somewhat similar objectives. In my view, its network of overseas offices are its crown jewel, helping client companies globally expand. It develops management, not least through its Leadership For Growth programme to develop world class CEOs and CFOs. It can assist with board development and industry networks, and sometimes with partner opportunities. However it is unclear and, as far as I know, unreported what the financial returns from Enterprise Ireland’s venture capital investments have been to date: it may be Europe’s biggest VC, but is it the most successful?
Enterprise Ireland would undoubtedly claim different overall objectives than a venture capitalist. The prime focus of the agency is on employment rather than financial returns. A vibrant innovation sector results in employment by companies involved, but also indirect employment in the service industry for professional services, real estate, travel and hospitality. A vibrant innovation sector in turn generates tax revenue for the State: employment, value added and capital gains. Enterprise Ireland ought to routinely report all of these metrics if its success is to be determined.
To consider Enterprise Ireland as Europe’s largest venture capitalist, one must aggregate its direct investments into companies together with its indirect investments as a Limited Partner (LP) in a number of VC funds. Some of the relevant data are published in its 2009 annual report, and a separate 2009 report on its seed and venture capital activities, via its website (it has yet to publish its 2001 reports).
Its 2009 annual report notes that €74 million was directly invested as share capital into some of its client companies (along with a further €82 million in grants and loans).
Its seed and venture capital report for 2009 summaries Enterprise Ireland’s activity as an LP. Forty co-investment deals were made across seven VC funds, for a total value of €41 million. By contrast, these funds have €458 million at their disposal. So, in a single year, less than 10 per cent of the funds available were actually put to work. Over the three years 2007-2009, cumulatively 61 co-investment deals were made (of which 40 were in 2009 alone); for a total value of €51 million (of which €41 million was in 2009 alone). Clearly the pace of deals and investment picked up substantially in 2009 compared to 2007-08, but it remains very striking that of the €458 million available for investment, only 11 per cent had actually been invested for the three-year period.
So, here’s what “Europe’s largest venture capitalist” actually did in 2009: €74 million in direct equity investment, and €41 million co-invested together with private sector resources from other VC funds – a total of €115 million. It had an unknown amount available for further direct investment, and over €400 million jointly sitting in seven funds waiting to be put to work. Europe’s largest VC in practice appears to be making limited investments.
Meanwhile, the Irish Venture Capital Association reports that for 2009 a total of €288 million was invested by its members – of which €100 million was allocated to just four companies (Amarin, Intune, Opsana and Xtra-Vision). The total includes Enterprise Ireland’s participation but also includes some investments in Northern Ireland, outside of Enterprise Ireland’s remit.
To put in context Enterprise Ireland’s role in the VC community, one could consider Israel’s VC activity, which dwarfs “Europe’s largest VC”. In Israel, in 2008, about 1,900MUS$ was put to work by venture capital, representing over 1 per cent of Israel’s GDP: our own figure of about 0.15 per cent of (a smaller) GDP seems insignificant. Israeli VC investment per capita exceeds our own by a factor of about three.
Enterprise Ireland may or may not be “Europe’s largest venture capitalist”. It should rather aspire to ensure that Ireland is the leading innovation economy for all of Europe, by attracting the best European entrepreneurs (including our own) to base themselves in Ireland. I note that rents have now risen to an all-time high in San Francisco city’s SOMA district, driven by the demand for space from start-ups. A thriving innovation sector – Europe’s largest and premier – in Ireland could solve Nama’s challenge.
