Venture capital fuels high-technology start-ups, and the Irish VC sector is reasonably healthy. From a high point of €994 million invested in Irish start-ups in 2017, the annual investment rate dipped but then recovered to €925 million in 2020. The Irish Venture Capital Association reported a total of €250 million invested in the first quarter of 2021, as compared with €229 million for the same period last year. Extrapolating from the first quarter, maybe 2021 will become the first ever “unicorn” period for Irish venture capital with more than €1 billion invested in a single year.
By way of international comparison, I consulted the data for the Israeli venture capital sector. The most recent figures I could find were for 2019, in which €3.4 billion was invested across 447 deals, representing 1 per cent of GDP. The average was €7.6 million per deal and, relative to population, a deal density of 20,800. In 2019, we had €820 million invested across 187 deals, which was 0.3 per cent of GDP, averaging €4.4 million per deal and a deal per capita of 26,200. Clearly Israel currently has a stronger high-technology start-up base.
If venture capital investment fuels high technology, what fuels venture capital investment? Unless there are high returns on deployed capital, venture capital fails as an investment sector. Great returns encourage yet further investment funds, creating a virtuous circle of investment and subsequent high returns.
In 2019, the Israeli venture capital sector received back €3.4 billion in exits (coincidently, the same amount invested into new deals in the same year), representing a 26 per cent annual compound return on the sector’s investment five years previously. I have been unable to find the corresponding figures for the Irish sector, and am unsure whether they are published at a national level.
A national objective to scale Irish high-tech startups to become high-profile global champions is understandable. Why shouldn’t we create more Ryanairs or CRHs or Smurfit Kappas but from the indigenous high-tech sector? However, the high-tech sector worldwide is characterised by continuous and rapid technology innovation which, together with the fuel of venture capital investment, drives high levels of merger and acquisition activity as compared with other economic sectors.
It is challenging to sustain a global high-tech leadership position: think of mobile phones and Finland’s Nokia or Canada’s Blackberry, or data science and the UK’s autonomy. I believe that rather than an emphasis on grooming Irish high-tech global champions, instead our primary emphasis should be on vibrant innovation together with high-value exits, serial entrepreneurship and an experienced founder culture.
Achieving a successful exit, and then being able to repeat this across multiple start-ups, requires both considerable leadership skill and experience. The primary challenge is to balance exit negotiations and associated due diligence, concurrently with the normal, routine, day-to-day operations of the company. This can be particularly demanding if the exit is an acquisition rather than a public market listing. If customers and business partners learn that a company is “in play”, they may very well stand back and wait for clarity as the shape of the new entity emerges.
If competitors discover that the company is in acquisition discussions, then they may well draw the market’s attention to the uncertainty and potential flux. If staff discover that their employer may be about to be acquired, some will inevitably wonder what this will mean for their jobs and careers, and of course their remuneration. The stasis that can easily emerge from rumours of strategic change to a company can rapidly damage its value.
It unfortunately is also common that some unscrupulous high-tech acquirers exploit the vulnerability. Having caught the attention of the target’s board and leadership team with an interesting proposition and valuation, then a predator may unnecessarily draw the process out. A lower valuation might then be argued in the light of any stumble in operational performance, and key assets and staff identified for acquisition from the remainder of the operation.
Rather than considering an exit as some future potential event, a wise entrepreneur will accept that a company could be approached for acquisition at any time. Thus, exit preparation requires ongoing care in financial planning and reporting, customer contracts and records, partner and supplier agreements, and corporate competitive positioning. A continuous “exit-ready” mindset brings clarity and focus to day-to-day operations, and improves performance.
For our indigenous high-tech sector to continue to grow and become world class, we need now not only to invest in start-up bootcamps and leadership development, but also in exit graduation and acquisition coaching. We need a cycle of successful but continuous entrepreneurship, serial high-value exits and returns on capital, and thus vibrant innovation with recycled and expanding investment. Major Irish high-tech multinationals may in due course emerge from this powerhouse, but any would be a pleasant byproduct rather than necessarily the primary intent.