Copacetic

Silicon Republic reports recently that,

Enterprise Ireland said that to date it has committed some €148.75m to eight seed and venture funds which have succeeded in raising in excess of €500m for investment in early-stage and growing companies

Feargal O Moráin, executive director of Enterprise Ireland, goes on to say,

The 2007-2012 Seed and Venture Capital (VC) Programme, the third such programme to date, has been extremely successful in raising finance for investment in Irish companies at all stages of development … With over half a billion raised for investment to date, this is of particular benefit to seed and early-stage Irish companies

Eh, no Fergal this is of no benefit to  seed and early stage Irish companies. I have no record of any of the VCs that have raised funds investing in any seed or early stage companies to date. The reality is once EI throws it money into the VC pot is has zero control over how that money is disbursed by the VCs. Nor should it have, that’s not howVCs interact with their limited partners (which is what EI is).

Luckily we have the director general of the IVCA, Regina Breheny who offers a more honest assessment of where this money will go (again in Silicon Republic),

Most of our investments would be in software firms that can grow to scale, not in dot.com companies or because someone has a nice widget … Funding in Irish companies is at its highest now since 2001, but much of these are follow-on investments in existing companies. There is still a lot of work to be done in raising money to seed new start-ups. Venture capitalists are currently raising money but it’s debatable how much of these funds will go into new plays in the next five years

So thanks for the millions EI, but we are unlikely to put it where you want it to go.

I’m all for a thriving VC market in Ireland but my own view is that EI’s co-investment strategy is a more effective vehicle for ensuring that Irish early stage and seed startups get the required funding they need.

It will be very interesting to review the protfolios of the irish VCs (Delta Partners, the AIB Seed Capital Fund, Atlantic Bridge Ventures, Kernel Capital Partners and Fountain Healthcare Partners)  who have taken the EI shilling at the end of their current investment cycle.

Via ReadWriteWeb comes this excellent post by Denny K. Miu about what it is to be an entrepreneur and the entrepreneur’s relationship with the VC community. Lots of counter intuitive advice in here, some you (the entrepreneur) won’t like, and some the VC’s won’t like, but its all good stuff, imho.

A typical snippet,

Remind myself that VC’s know that while they occupy a Board seat, their primary objective is not to fulfill their fiduciary duty. VC does not sit on Board to protect the interest of ALL shareholders. VC is there strictly as a portfolio manager and their job is to protect the interest of their investment.

Patricia O’Sullivan the M50 programme manager wrote an excellent comment on my previous post about EI funding. I’ve given her this post because her information is too valuable to bury in the comments.

 

==> Patricia O’Sullivan Speaks

Thank you for putting this blog up Joe, it is something a few of us have had on a ‘to do’ list for years!

 

I have been the manager of the M50 EPP enterprise programme for
almost 6 years and have assisted a large number of companies prepare
for CORD, EI equity investment and the other grants you mention. This
experience allows me to add some comment having seen the workings a
number of times. I hope they help.

 

EI and Equity Investment

Yes, the EI staff are on your side and they do want to give you the
money in point of fact they are constantly trying new initiatives to
get even more companies to approach them. EI however must work within
their remit and are closely governed in what they can / can not do by
both the Irish Government and by the E.U.. You must therefore ensure
that your company meets all the criteria and that it is at a stage of
development where there is enough evidence to show that the likelihood
is that it will be generating the bulk of revenue from export, meeting
employment figures, etc.. Above all they are not a charity fund – your
company must reflect a good investment – whilst EI are softer than a
venture capital company or even than many professional business angles
they are still reviewed by their superiors and must account for their
investment decisions so the risk / return must look acceptable (even if
a little more risky than others might accept). And, remember that under
their remit EI’s hands are tied and their investment is only allowed to
cover a percentage of your R&D expenditure – not your sales and
marketing activities much as they wish they could.

 

Something Joe did not mention and which I am not sure if it is
still essential but in every case that I have experienced the DA has
visited 3 or 4 customers or potential customers at least two of which
had to be abroad (UK did not qualify) to confirm that the product or
service will sell. Another point worth noting is from the date of
application to the day the cheque is in your hand can be longer than
people expect – typically between 8 and 12 months in my experience due
to the time for all the various steps Joe outlined so clearly and to
the necessary revisions of documents not to mention silly summer /
Christmas seasons and vacations of key people. This point catches many
people out because as Katherine Lucey so wisely said the matching funds
are not what is in your bank the day you apply or what was invested in
the past but rather what is there after some point in the EI process
which tends to occur before final approval. This critical point catches
many people out because they have their BES or other funds spent too
early. You need good financial management to ensure that you do not get
caught out this way and end up having to raise more private funds and
lose yet more equity – BE WARNED.

 

Your EI Development Advisor (DA)

These people are critical to your success in obtaining grants and
equity and most of them are very good BUT from what I have been told
each of then can have up to 65 companies allocated to them at any one
time so they can not keep up with them all. That is before we take into
account the need to attend internal meetings, external events and the
usually bureaucracy that goes with a large organisation. So you MUST
help your DA by keeping them in the picture with regular updates. I
suggest a short monthly email with a short list of bullet points under
a couple of headings e.g. ‘Achievements this month’ and ‘Issues we are
facing’. Then a few days later follow up with a quick phone call to see
what they think – to get them thinking how they can help you they need
to know what is going on. It is too late after an event if you are told
“we could have paid for that”.

 

Incubator Programmes

Yes, I
recommend the incubator programmes. There are many of them around the
county and participation on many of them entitles you to ‘apply’ for
CORD funding. Other reasons for attending incubator programmes are (1)
to mix with others in the same boat; (2) to benefit from the advice and
experience of others who know the ropes; (3) to be made aware of
various things i.e. grants and other supports you would not have known
about (see Ian Snipper’s reply about CEB); and (4) this is the reason
quoted by successful entrepreneurs who have sold a previous business,
and it is to have a discipline placed on you to get out of your comfort
zone and do some of the not so pleasant but necessary things for
success.

 

CORD Funding

CORD funding,
if you qualify for it, is effectively 50% of your previous year’s
salary to a maximum grant of €38k (there has been talk of increases in
this figure for some time but no sign yet). The grant may have an
expenses element if 50% of your previous salary is less than €38k to
take you up near to or to that max figure. If you are on an incubator
programme that pays you a stipend then the value of the stipend ‘may’
be deducted from the CORD grant. The CORD money is paid monthly in
arrears like a salary. There is a lot of confusion about whether it is
taxable or not. A number of my former participants have got letters
from Revenue saying it is not, another was told it was but later got a
refund, many take the view it is a grant and say nothing (sort any
potential future consequences at the time). The advice of EI is that
you should seek direction from your accountant. The EI staff are not
tax advisors and are reluctant to give any advice on this matter for
obvious reasons.

 

Feasibility Grants

Whilst it
is rare you can actually qualify for a Feasibility grant and the other
grants Joe mentions whilst in receipt of CORD. I have had a number of
participants do so successfully. However you should note that EI will
not double fund the same activity so it must be for a different
activity. Let me give you an example of a recent case. A participant
was granted CORD in January this year to “investigate the feasibility
of a software services business and prepare a business plan”. During
the research activity he conducted in the early months on the incubator
programme he discovered that the usefulness of his offering would be
seriously limited unless he did some R&D in the field of
electronics to widen the market for his software service. In early
summer he applied for and received a feasibility grant which is 50% of
total expenditure (50% of €60k if I recall), used it with his own cash
to pay a third party to undertake the work and is currently integrating
the hardware and software prior to launch. This was clearly a different
activity and therefore qualified. I have seen others get key person and
other grants whilst on CORD – the activity to be funded and status of
your company are what is important.

 

Sorry about the length of this post but this is a complicated area and I hope that my post has helped a bit.

 

Delta (via Silicon Republic) have closed a 100m euro fund. Good news for the tech sector. Send in your Web 2.0  business plans now.

I attended a seminar on how to raise venture capital yesterday. It was pretty useful because we had four real VCs in the room giving presentations, Brian Caulfield from TVC, John O’Sullivan from ACT, Shay Garvey from Delta and Micheal Donnelly from Growcorp.

My notes are below. Some of the key points that stayed with me were,

• Irish VCs are all locked into the same ten year cycle so they all raise and run out of cash at the same time. They were all cashed out last year so it was a really bad year to try and raise VC in ireland.
• VC’s regularily break their own investment rules, so its always worth meeting them even if your idea is not something that looks like it fits their current portfolio
• There is no point in emailing or colding calling, an introduction via a third party is much more likely to engage them
• Focus on building a great powerpoint presentation rather than a great business plan
• Irish VC’s will sign NDAs especially if you use the standard IVCA one.

The subheadding of the whole talk was "How to make your story investor intelligent".

Regina Breheny: DG IVCA

Venture Capital funds have a ten year life.

IRR is the key measure. Internal Rate of Return.

Only 16m in funds raised in 2006. How much in 2007?

Aldiscon spawned at least 14 startups (How many has Iona spawned?)

IVCA NDA is available on IVCA web site. Recognised by Law Society.

Irish VCs tend to be locked together in a similar ten year cycle.

EI 175m stalled investment in 2006.

Joe Tynan - Price Waterhouse Coopers

1 in 6,000,000 high-tech business ideas end up in an IPO

Less than 1% of business plans recieved by VC’s get funded

Founder CEO’s of high-tech companies typically own less than 4% of their companies after an IPO

60% of VC funded high-tech companies go bust

Most high tech companies that succeed in having a IPO take 5-7 years to do so

What point are you at in the VC’s ten cycle.

Plan to buy in management expertise.

BC : 1 minute pitch, value proposition and market opportunity

Shay: Proposition, Complication, Solution

John O’Sullivan - ACT Venture capital

VC’s continuously demonstrate exceptions

VC’s is not the only answer

VC’s are curious, positive and entrepreneurial

VC partners invest their own money in the deals

VC money is somebody’s pension fund

Risk: VC is here to reduce risk

Capital efficiency (How much will it take to exit?)

VC’s have to convince their colleagues

What do really want when you ask "What is your added value?"

What are you like to work with?

VC’s are always concerned when companies start taking their advice pre-investment

Financial’s -

• Focus on cash
• Gross margins after startup phase

When did you last meet the competition?

Competition : Anything that is an alternative for your customers.

One alternative is "do nothing"

Is the maximum valuation the optimum deal?

Asset strategy is the focus of many companies. They also need a liability strategy.

Michael Donnelly - Growcorp

Michael Donnelly - Growcorp

Deal Timings - 1m - 12 months, typically 3-6m

Does your investment preferences match the stage of the business

What is the sector track record

Is the fund compatible with your business

Does the investor have conflicts of interest

"Freedom to Operate" - Limits liability in the case of patent contention

JOS: Outside life-sciences patents rarely impact valuations at exit

Make sure you look for enough money to accommodate delays and problems

Offer letter is usually bound by exclusivity (for some period of time)

No skeletons in the cupboard, they will come out and warrants will hold you liable in the worst case

You should have invested if you expect a VC to invest, team investment should be "material"

"Material" is subjective

Due Diligence is need to support or contradict initial business plan impression

Is the venture dependent on IP for its success

Syndication limits control from any one investor

Costs grow by themselves, sales do not

Shay Garvey: Term Sheets

Irish VC’s front load the due diligence so that term sheets are close to complete

Unlikely to get two term sheets that are directly comparable

The term sheet gives clues as to what the investor wants to achieve

• Valuation
• People
• Timing
• Risk Management

How will you manage a sale and continue to run your business?

Brian Caulfield - Trinity Venture capital

Companies being acquired are much more mature

Companies going IPO are much more mature

Not looking for the perfect team, but need market opportunity

Avoid being a feature company (rating companies, OS feature companies e.g. DoubleSpace)

Price your technology sale on future potential sales if haggling over current sales is happening

Companies are bought not sold

Engage early with advisors so they are prepared for an out of the blue M&A request

Are there multiple potential acquirers?

Is there a deal on the table? If so negotiate for a % of the amount over the desired valuation

M&A advisor fees 2 to 5% of the transaction value

(see slide for other stats)

For stock deals, how long will it take to sell the stock, i.e. what is the amount of trading each day? 1m shares but 20,000 sold a day.

Tactics : We are note for sale

Deadlines drive the process

Colm Rafferty: Legal and Administration Process

Put a health warning in your business plan. Nothing contained is warranted.

Use the standard IVCA NDA/Confidentiality agreement

Take your legal advice at Term sheet stage

Test their eagerness for the deal by seeing what you can challenge/change in the term sheet

Ask for a set of warranties when presented with a due diligence questionnaire

Distinguish between what actions are controlled by VC vs what is controlled by the Board

I can pitch you a 60 second idea, in fact I have a limitless universe of 60 second ideas. But nobody is investing in your idea after 60 seconds. And I have worse news, nobody is going to invest in you after your pitch at NextWeb, or Essential Web ‘07 or any of the other favourite rites of passage for startups.

What investors are going to invest in is simple,

• Market opportunity: A big and growing market, without strong incumbents, where you’re company has an unfair advantage.
• Great Team: Stupidly off the scale technical brilliance will get you somewhere here, but is that you? Are you as smart as Sergey and Larry. No I didn’t think so, So great team means great engineering guy, great marketing, great sales guy and/or great “did it before” guy. Or some combination of the above.
• Style, Fashion, Vogue: Investors are herd animals, advertising, social networks and media sites are big at the moment. If you’re pitching something else, prepare to queue.

One minute pitches are the entrepreneur equivalent of shitting in a bottle. Very dificult to achieve and one you’ve done it nobody is interested in the results.

Here is me on  the Redcouch at NextWeb. Memo to self,  push glasses up on nose before doing video interviews.

From Ireland.com,

Dublin-based Trinity Venture Capital is considering listing on
secondary stock markets in Dublin and London.

It is understood that the company has engaged Davy to advise it on the
move, and is considering floating on the IEX in Dublin and the
Alternative Investment Market in London.

The move is designed at raising funds to expand its investment
activities. Sources say the company could raise up to €50 million from
the move.

An investor roadshow is believed to be under way, and the listings are
expected to happen by the end of the summer.

When contacted, a spokeswoman for the group said: “Trinity Venture
Capital is currently in discussions with institutional investors
reviewing the many options available to them to raise new capital to
grow their existing portfolio of companies over the next number of
years.”

The listed company manages Trinity’s portfolio of investments. These
include: Norkom, a listed financial software company worth €166
million; Havok, a maker of games software and special effects for
films; Aepona, which supplies network solutions to the telecoms
industry; and CR2, a banking software provider.

A decision by Trinity to float would follow a similar move by Boundary
Capital, a Dublin-based investment group headed by financier Niall
McFadden. Boundary listed on the IEX and AIM on May 15th. Its shares,
which listed at €1 each, rose sharply in the first few days of trading
but have since fallen back to €1.09.

Trinity is one of Ireland’s biggest venture capital groups. Founded in
September 1997, it is led by chairman Shane Reihill and chief
executive John Tracey.

It has raised €163 million to date for two funds that have invested
primarily in early-stage technology companies in Ireland and the UK.

Trinity had two high-profile exits from investee companies in 2006 -
Similarity Systems, in which it owned about 27 per cent, was sold for
€45.4 million, while software group Steeltrace was bought for $20
million by US firm Compuware.

It is understood that Trinity has decided to refocus its strategy and
move into the private equity space.

This would see it participate in larger transactions, including
buy-outs, buy-ins, restructurings and public-to-private deals.

Mr Reihill is a former joint chief executive of fuel importers and
distributors Tedcastle Holdings, which he left in 2001. He has also
worked for Dillon Read Investment Bank in New York. He is currently
chairman of Norkom, which this week announced a 38 per cent increase
in its revenues to €25 million.

Mr Tracey is an engineer and initially worked in the semiconductor
industry before joining Deloitte & Touche as a management consultant.

In 1989 he moved into venture capital, and spent eight years with ICC
Venture Capital, which is now owned by Bank of Scotland. He has led
Trinity since its inception.

I am at this shindig today at the Crowne Plaza Hotel (WIFI 15 euro for the day). Is IBM going to lob a bit of cash at the Irish Software Sector? Oops, they just said they are not an investment house, they want to partner and “add value”. I’ll get my coat

Hang on, they are interested in acquisitions they might buy me. Ok, that’s cool, we can go with that.

In Dublin IBM’s technology Centre  is focused on RFID. 

This is going to be a state of the art facility (not built yet, planned to open in the Summer).  There is a terrible graphic of the centre, the entrance looks like an old Cray computer.

IBM is focused on working collaboratively with VC backed partners at seed, early stage and late stage VC backed companies. The seed guys are pretty far out there on the slide. i.e. I can’t see LouderVoice, Sxoop, MySay and PutPlace getting a lot of attention.

Objectives of the centre:

• Build relationships with business partners
• Assist VC backed companies leverage IBM products, services, research, mentoring
• Open eyes and ears
• Assist VC backed companies in driving revenue

Question: What are the qualification criteria for access to the centre’s services? Deborah in next section will answer.

Question: Will IBM provide VC? No.

Deborah Magid - The IBM model for supporting entrepreneurs and Startups

• Innovation that matters is innovation applied
• Innovation is technology + business
• We have offices in every country in the globe it is legal to operate in
• Business Strategy - Business Value, Infrastructure Value, Component Value
• Business Management Focus - Core Business, Growth Business, Emerging Opportunities
• Emerging Opportunities : test business models, prove viability, test growth e.g. RFID, Open Source, Retail, Web 2.0, Virtual worlds, Web Services/SOA, CleanTech/Energy, SaaS
• Will evangelise partners technology when appropriate

IBM Corporate Venture Group

• Its not about money, its about the innovation ecosystem
• No investment via cash, more about technical and marketing resources
• We build relationships between VC and Entrepreneurs
• Group has sector and geographic focus
• 1300 venture backed partners today
• Go to ibm.com and click on the link for partners program to join

What do we do?

• Exchange ideas with VCs (business models, technologies)
• Connect high potential companies with VCs
• Scout for companies that may fill gaps in the IBM portfolio
• Introduce promising business partners at partner world
• Act as a channel for strategy, information and exploration of business opportunities

Partner program has Member, Advanced, ISV Advantage and Strategic Alliance levels. More IBM go juice is available at each level.

IBM goes to market by vertical  industry (IBM’s industry definitions).  Its pretty much focused on business play’s so companies like mine are SOL.

There is a partner portal (yawn). It has social networking (double yawn).

The innovation centre will give you access to IBM software and hardware for testing (both locally hosted and remote access to mainframe).

IDC says IBM has the best partner program (go IBM!)

They listed five European companies as successes. Has anybody else heard of Volubill, Unicorn (IBM acquired), dbMotion, Definiens or LightSands Communications? Are there no Irish successes that IBM has been involved in?

In 2006 4.1bn dollars of of VC was placed. Biggest investment in 4 years.

 

Michel Duponchel - Digital Convergence

• Movement from Massive/Passive TV viewing public to “Coolkids/Gadgeteers” who want much more control over what they watch and how they watch.
• There is a generational chasm between these groups
• Interactivity is the key
• The beginning of the end of TV is emerging
• Content is accessible from a number of sources and devices (not just TV)
• The threats to existing players, Telcos, Google, Yahoo, Microsoft, Apple
• Digital home value chain - Content, Access, Platforms
• The layers in this chain are currently linked together by a single vendor e.g. Sky
• Consumers want choice and the ability to pick and choose the best of breed in each of these layers
• TCP/IP as a distribution medium disintermediates TV companies (and governments!)
• Telcos deliver quality of service

Michel finished his talk with a bunch of slides indicating some architectures that IBM was using to resolve the issues existing telcos, network operators and content producers are facing. Lots of big hardware with Tivoli, WebSphere, MQ and BPEL4WS (for the love of Christ!). Think about getting no change out of 10m dollars and you’ll get the picture.

I asked him how IBM was planning to address the issue regarding businesses (such has content producers) who are starting to operate on margins and can’t afford the huge sunk cost of an IBM techstack? He said they would service the service providers who supply such services.

Didn’t seem to know about EC2 and S3.  Ouch!

So Enterprise Ireland doled out 175 million euro to Irish VCs last year on the basis that they would find matching funds and thus inject new vigor into the Irish VC market. Since then, well not much has happened. No Irish VC to date has raised a new fund, and none looks like doing so in the immediate future (please comment if you know different).

So here’s a suggestion, carve out 50m of that fund (or 75m or 20m) and just give it away in chunks of 100k to any Irish startup who meets the following criteria,

• Are in or have completed an Enterprise program, such as the one at the PDC or the M50 program at Tallaght. There are others but these are two I know about
• Meet standard HPSU criteria (will generate employment and export markets)

That’s it. You get a 100k (It can be tranched but that’s more management overhead, better to just chuck it out there) and go and start your business.

Even 50m would mean you could fund 500 startups. How many HPSUs are there?

That would still leave 125m to prepare the ground for those startups once they need to raise serious money from the Irish VC market.

Conor O’Neill leaves a valuable clarification in the comments,

A key requirement is that matching funds are NOT required from the startups