Raising Seed Funds and Venture Capital in Ireland
This article first appeared in the June 2013 edition of “Accountancy Ireland” magazine.
American Computer Scientist, Alan Kay, once said; “The best way to predict the future is to invent it.” Irish technology companies are certainly doing their part to invent the future, but of course, it all has to be funded. Equity finance is the best-fit long term finance for high growth, high risk technology companies that could not, in any event, access capital from public markets or banks. Equity finance consequently forms a vital part of funding growth in the Irish technology sector, and this article looks at sources of equity finance including Venture Capital in Ireland.
Availability of Irish Equity Funds
Results from the “Venture Pulse” survey, conducted by The Irish Venture Capital Association, (IVCA), show that 189 Irish Technology companies raised €269 million in 2012. Amounts raised range from €100,000 to €20 million. Software companies headed the list for funds, with 26% or €68.9 million being invested into the sector. Irish Venture Capitalists, (VCs), leverage additional funds from International VCs through syndicated deals, so Irish companies are not restricted to the funds available in Ireland. International VCs like to have an on-the-ground presence, so they work with Irish VCs to manage their Irish portfolios.
The statistics over the last six years, (see table on right), show that the funds raised peaked in 2010 and declined since, yet the numbers of companies that have raised funds has consistently increased, year on year. Commenting on the numbers, Regina Breheny, Director General of IVCA, says “There are increasingly more small deals, with the growth in company numbers coming at seed level, in the €250k – €700k range.” With many Venture Capital funds currently drawing to a close, there is a funding gap, particularly in relation to Series A funding. However it is expected that this gap should be at least partly be bridged by government initiatives in the pipeline.
It is worth noting that when a VC exits from a company, the funds go back to the investors and not into the VC fund, so there is a constant requirement for Venture Capitalists to replenish their funds.
Role of Government
Budget 2013 provided €175 million in funding for the Seed and Venture Capital Scheme 2013-2018, which will be administered by Enterprise Ireland. This is expected to leverage a further €525 million from the private sector, bringing the total available over a 5 year period to €700 million. At time of writing, (May 2013), the details of this scheme have not been issued, but Deputy Bruton, Minister for Jobs, Enterprise and Innovation, has said that the first call for expressions of interest under the proposed Scheme will be publicly issued before the end of Quarter 2 to VC fund managers.
There are a number of government organisations that can assist with funding and other supports for technology companies. Apart from the value of the supports themselves, private investors and VCs are often reassured to see Enterprise Ireland involvement. The most usual route to becoming a client of Enterprise Ireland is to begin as a client of the local City or County Enterprise Board, then perhaps move to the regional Business Incubation Centre, (BIC), before finally moving to Enterprise Ireland.
Stages and Sources of Funding
There are varying and slightly conflicting definitions for the different stages of funding, but the main differentiator is the stage of development of the business seeking finance, rather than the size of the funds sought.
- Start-Up capital:
Start-Up is the first capital for a business at concept stage. This finance is normally provided by friends, family and founders.
- Seed Capital:
The business has a proven product, has identified their market and may have early revenues. It’s still a high risk investment and the business is still seeking a model for repeatable scalable expansion. It hasn’t yet found full product / market fit. Sources of seed capital are still friends, family and founders but may now be joined by Angel Investors or even Venture Capitalists.
The Halo Business Angels Network (HBAN) is an all-island umbrella group for business angels investing across Ireland, and it brings Angels together into syndicates.
The Halo Business Angels Partnership (HBAP) is a similar organisation to HBAN, but investors tend to be individual Angels rather than syndicates.
Enterprise Ireland provides matched seed funding and many of the VCs also have seed funds.
Bloom Equity is a syndicate of experienced entrepreneurs who will typically invest in early stage companies who believe they have identified a significant market opportunity and wish to commercialise their offering.
- Series A:
Series A funding is development capital for businesses with a proven market, who have found product / market fit are developing and refining their Customer Acquisition Costs, and investment risk is now mainly in the area of business execution. Series A funding is provided by private investors, or Irish Venture Capital funds, often with a co-investment by Enterprise Ireland.
- Series B:
Series B funding is expansion funding, and the business seeking series B funding is well established with no execution risk and known Customer Acquisition Costs. The main sources are private investor syndicates, International VCs and IPO. Ideally a business will partner with a VC from the outset who would be able to fund them through multiple rounds all the way through to exit.
How to Approach Venture Capitalists
There is no great mystery to approaching a VC, and phone, email and LinkedIn are all ways to introduce yourself. It’s a good idea to approach VCs before you actually need investment to strike up a relationship. (There is a list of Irish VC funds on The Irish Venture Capital Association website.) Most Irish VCs, (and it’s a small group), would be happy to meet a CEO informally for early discussions. InterTradeIreland holds a VC conference annually and this provides another opportunity to informally meet VCs.
A VC will typically only invest in 2 out of 100 pitches. It’s critical to get the timing of a funding round right in relation to the stage of development of your business. You should aim to add as much value to the business as possible before you go for funding, so that you are successful and strike a good deal on company valuation.
Ian Shearer, a chartered accountant by profession and a Director of Atlanta International Ltd, an International Mergers and Acquisitions House, advises that there are two over-riding criteria that will determine your success in a VC presentation:
- Can you demonstrate that there is a market for your product, and
- Can you start reaching that market?
These points relate mainly to Software as a Service (SaaS) companies, which is where my own funding round advisory experience lies, but many of these points would apply equally to other sectors. Not all of these points will apply at seed round stage, but these are the criteria you should be aiming to meet in the medium term at least. Some of these points may seem obvious to an accountant, but we all have to work with teams, and basic points are the ones most often overlooked.
1. A Large Growth Market must Exist
Your product or service must solve a real problem that customers are willing to pay for, and the market must be large enough to allow for revenue growth. If a market exists, value it, or else it looks like you don’t know specifically where your market is or what it is worth. This is the one point which is most often fudged in investor documents.
2. Customers Validate Your Business Model
Your business can have all the Intellectual Property, cool product features and roadmaps that one could ever dream of, but customers are the ultimate validation for any investor. VCs want to invest in businesses that are capable of repeatable, scalable customer acquisition. This doesn’t necessarily mean that your revenues need to be already in excess of, or even approaching $1million at series A stage, but there should be definite sales in a market that has growth potential. Your sales process needs to be scalable and not dependant on one person or a small number of people.
You need to have a great team and be capable of building up that team post-funding. Delivery on the business plan will be the responsibility of the team, so a rounded team with a proven track record of execution is one of the top 3 VC requirements. Your business metrics demonstrate execution. Part of the process for becoming investor ready is to identify what metrics are appropriate to your business, and you need to develop recording and monitoring mechanisms for these.
4. Technology and Service
Technology companies can become very inward focused on the impressive nature of their new developments. Yet it’s almost impossible nowadays to develop software that can do something nobody else can. Execution that delivers service is what is important. Commercial success is not about Intellectual Property, (IP), it’s about the application of that IP and how it is implemented. Where software is delivered under the SaaS (Software As a Service), model, service is all-important. Service is what will bring you customers and is key to customer retention. Customer retention in turn dramatically affects profit.
5. Easy to Use Technology
Innovative development for its own sake does not demonstrate an investable business, so you should be shipping features that are actually used by your customers. Technology companies have to be wary of over-engineering, because a complicated product is overwhelming for a customer. Failure can come from shipping a product bundle that has no adoption.
6. Customer Acquisition Cost
It’s not enough to get customers; the cost of acquiring those customers is one of the biggest factors in maximising a SaaS company’s profits. You have to look at the cost of an employee versus the value of the deals they close. No salesperson, however good, is priceless, and when a VC is on board, decisions on salary are no longer at your discretion. Investors will look to see if there is opportunity to bring your Customer Acquisition Cost, (CAC), down. How sales teams are used to close sales is a critical decision that needs careful and constant evaluation. This decision focuses on a cost/benefit analysis of using a centrally based sales hub that closes sales over the internet and phone versus field staff that travel to meet customers. The latter is considerably more expensive option. It takes time, analysis and experience to optimise CAC.
7. Raise the Right Amount of Capital
You have to identify how the funds raised will be used. You should not inflate this with a contingency figure, because it suggests that you do not have confidence in your execution plan and, to be blunt about it, a VC will not want to reward you for failure by continuing to pay your salary. Conversely, a VC will not want to hear that you have run out of funds and can’t afford to pay salaries at the end of the month. You should expect to raise enough finance for the next 12 – 18 months.
8. Flaunt It But Do Not Bluff
Your VC pitch is not the place to be modest. Talk about your team, market, product, customers and sales. On the other hand, nobody knows all the answers. If you do not know the answer to a VC question, own up, do not bluff. You are seeking to establish credibility. You might have signed re-seller contracts, but unless these led to actual sales, they are worthless. Do not try to infer otherwise.
9. Engage Early
Do not leave it until you are seeking to raise finance to engage with a VC. This point was made earlier in the article, but it is worth repeating. It’s a variation on “know your enemy” but of course, the “right” VC will not be your enemy. This is why engagement, (Email, LinkedIn, phone call or even coffee), is important, so that you can better find the “right” VC for your company. Your pitch is likely to be more targeted and therefore have a better chance of success if you know your VC.
10. Be Careful What You Wish For
Growing a global business for the first time is very different to running a start-up or a more traditional business. If you have a family business mind-set, you are not ready to embark down the funding route. Once you have investors in, your team has to broaden, you will not be able to make all the key decisions in “your” company and you will have responsibilities to others. As your mother might have said, be careful what you wish for.
Funding is available for companies with that can demonstrate access and delivery to a growth market.
To paraphrase Alan Kay, I would say, “The best way to deliver the future is to fund it.”
If your company is ready to start fund-raising in Ireland, please feel free to contact me.