Copacetic

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

John Cavill, Chairman, Intermezzo Ventures

Setup a local area networking company (Logical Networks). What was good about our company? Why was it successful. 3i funded. Imported technology from US.  Within three months 3i had invested in three other companies in the same space. One company had gone bankrupt, bought all support people BMW 5 series. Second company, founders fell out with each other.  Third company struggled for first year, then developed some different software that was quite successful.

Finally there was our company. CAG 55%. What was the difference?  Team builds success, lone entrepreneur is a myth. 

Want to understand what makes a good team? Went to Henley to do doctoral research.

What research has been done around the world regarding what makes a successful team?

• The VC industry
• Entrepreneurial Capital
• New aspects of entrepreneurial research

The VC’s Dilemma

“The process of picking winners continue to challenge, baffle and mystify even the most experienced investors. Certain winners somehow fail; apparent losers sometimes win”. (Smilor 1997).

VCs have moved to investing larger sums of money in smaller numbers of businesses. Equity gap between bottom end VC investment (2m) and the emerging companies requiring less than that. Business Angels are starting to fill that gap.

VC Performance

15-20% will be blockbusters

23-35% will be winners

20-30% will break even

15-25% will fail (Laurie 2001).

Why do businesses fail?

Of every 100 businesses that fail, 92 will fail due to bad management, 8 will fail due to acts of God.

Management is the key driver of success? Failures: 69% failure of management, 17% external shocks, 14% flawed business model.

Lens Model: Entrepreneur/Team, Product Service, Market, Financial (business model, capital structure).

VC Human Capital Evaluation

Airline Captains - Systematic data collection/analysis

Art Critics - Snap judgement

Sponges - Soak up data non systematically

Infiltrators - Become quasi management

Prosecutors - Aggressively question management

Suitors - Woo management

Terminators - impossible to achieve - can’t measure

69% of types fall into first three.

IRR .8, .25, .20 for first three.

Usage rates : 13%, 30%, 26%

Attributes of Entrepreneurs

Entrepreneurs like pornography

creativity innovation vs general management skills, business know how, networks

Bottom left : Promoter, Bottom right: Manager administrator, Top right: Inventor, Top Left: Entrepreneur

Many different definitions of Entrepreneur.

Gazelles and Mice. Gazelles, consistent growth of 20% a year for 4 years. Mice, learnt to survive, work hard to feed themselves, remain stable in size and are comfortable with their status.

Only 3% of Entrepreneurial businesses are Gazelles. Drop off of Gazelle status is dramatic over the next three years.

Enterprising person - Create a small or micro business

Entrepreneur - Create a significant business

The growth entrepreneur - Create a sustained high growth business

Move from founder to leader.

New group : The Ultrapreneur, create a hypergrowth business, growth rates of 50% to 500% a year.

Entrepreneurial Attributes:

• Need for achievement
• Internal Locus of control - I control my destiny
• Risk taking
• Tolerance of ambiguity
• Creativity/Innovativeness
• Need for autonomy
• Self Confidence
• High energy levels

Entrepreneurial Team Dynamics:

• Age
• Gender
• Educational background
• Parent(s) entrepreneurs
• Prior work experience
• Prior joint work experience (worked together in mgmt team before)
• Prior startup experience
• Balance of operational skills
• Established networks

Largest number of variables are in the team and the lead entrepreneur.

Todays workforce is being judged by a new yardstick..not just by how smart we are, or by our training and expertise, but also how we handle ourselves with each other.  (EQ)

Success profiles are dominated by High EQ individuals. Failing profiles are driven by low EQ.

Experience + EQ is the key determinant of success.

Left brain vs Right brain. Right brain individuals tend to be entrepreneurs.

Big list, all dyslexic. Jobs, Churchill, Rockefeller, Patton, Branson, Ford, Einstein, Newton.

During a hurricane even turkeys can fly.

www.enterprisehubnetwork.co.uk

DNA link to entrepreneur ship, identical twins study.

High testosterone, more likely to be entrepreneurial. 

Business plan in one hand, urine sample in the other.

Letters from the trenches (founder of Phive).

ISA - 150 members, indigenous technology businesses, entrepreneurial and export oriented.

The current environment. Irish R&D expenditure 2006 400m, 2007 1bn.

Early stage still gives us the best ROI (2004 numbers).

ISA Survey. 6 entrepreneurs. Current model is not a meritocracy its random. Funding focused on multi-nationals. Commericalisation process varies across institutions. Process convoluted and entrepreneur unfriendly.

No clear roadmap for funding across colleges. Focused on flighty P.hDs.

Change. Aims of government R&D retaining Multi-nationals and training people for multi-nationals. Now commercialisation, startups and spinouts. SFI. Globalisation. New people. Lots of non-nationals.

Behavior. People behave as if we know what we are doing. The situation requires new approaches.

US and Israel prove the startup model.

How do we maximise this opportunity.

Best practice. Israel invested 10bn in VC.  World beating research, Entrepreneurs, route to market consumer or multi-nationals.

Don’t take the technology out of the university to early. Israel focuses very heavily on incubation.

SFI and EI are well aligned on the move from R&D to commercialisation.

Startups are not linear. Map networking activity over the pipeline. Business formation issues are done right at the start in the US.

Best practice is defined by financial success.

Involving major multi-nationals is key.

A business startup is a singularity driven by a series of network events.

Challenges.  Access to UNI R&D is confusing. No list of Irish R&D projects in Universities.

Jockeying for position, EI, SFI, multi-nationals, Universities.

Entrepreneurs in a weak position. Academics have full funding.

Incubator access guarantees funding in Israel.

Funding raising takes too long.

ISA actions. use Expertise Ireland as a common portal. Workshop on best practice for startups. Handbook on funding. Stanford program for CEOs. Working to promote entrepreneurship.

Be-Herd project.

Questions:

John Tracey, Gerry Murphy, Aislinn Rice, Ian Murphy, Hal Wilson

Gerry: There is no difference between the domestic and global market. There are no walls anymore. Competition will come to you.

200 companies control 80% of world trade. You have to operate globally to supply these companies.

Ian: Certain segments can scale up. Allan McClay is unique in that he has invested all of his money back into the NI economy.

John: Can we compete? How should we organise ourselves? (People, market opportunity, product) Key element of competitiveness is domain knowledge. Fitness for purpose is key. e.g. Apple Computers are focused on ease-of-use.

Hal: More second/third generation entrepreneurs in Dublin than NI. Can we build businesses of scale, are entrepreneurs ambitious enough? Do we lack confidence? Need to show Irish entrepreneurs they can beat the world, but exposing them to the competition.

Aislinn: Need to develop sales and marketing expertise to expand to a global footprint. 96% of revenues come from overseas. Sales model based on a mix of direct/indirect. We have worked with a Chinese distributor for the past 5 years. He now runs the Andor Chinese office. Andor is a component of larger systems, therefore we need excellent partnerships. Andor growth is 30% year on year.

John: (Q: How do combat copying of ideas?) The type of technology that comes out of Ireland is complex and in the case of software the price tag is around 300k. By building in domain knowledge you make the product defensible. Product architecture and design lives at home. We prefer near shoring (eastern Europe) to Asia/India. In Indian your staff turnover is probably 40% and there are timezone issues.

Hal: If you are bulking up by acquisition then you need the skills to manage that process. NI not there yet.

Ian: I’d be much more optimistic. There are examples here already (Sean Quinn, Allan McClay). The Island economy forces us to move overseas very rapidly. There are successes and failures (SBP: One sold for 10m, another went into receivership).

Gerry: Job losses in Ireland are mainly in the multi-national sector. No such losses in domestic sector. We need to look inside companies to see the problems. Startup rates are very good in Ireland. We less successful at scaling businesses (e.g. the ability to make acquisitions). Business models are often inappropriate (no recurring revenue, not a repeatable business or service). Companies try to go it alone, need to use partners to scale. They need proper organisational structure as they grow (board and management).

Ian: Very expensive for Bio companies to sell in the US (1m per year not unusual). They need VC for this to work.

Aislinn: InvestNI has been very helpful to Andor. Trade missions, logistics, finding partners, opening overseas offices. Also helped find new offices.

Hal: (Q:How do you help with Partner recruitment?) There is no substitute for doing the work yourself, don’t embrace the partnering model before you understand your customer base and your own product. Understand the economics of your supply chain.

Gerry: (Q:Does the Celtic Tiger help Irish companies?) Everywhere you go people have heard about the Celtic Tiger. Its easier to approach Irish companies as a result. Makes Eastern Europe very approachable. Your in the door! We need to do more in emerging markets (India, China, Mexico, Brazil, the Gulf states).

John: (Q:Why take a risk with property so lucrative?) There are large emerging markets with significant capital spend (mobile, networks, broadband). Traditional markets (US, Continental Europe) have made investments. Emerging markets have no legacy systems (e.g. China is a mobile network only).

Aislinn: Our stable market customers are moving to the emerging markets and dragging us along.

Hal: (Q:Is innovation the key?) Innovation is important and differentiation is key. You also need to understand your customer.

ePlanet ventures widely recognised in global VC circles. 7 global offices.

Investment professionals are either deeply technical or have formed their own companies.

We want all the things other VCs want.

Allocation is purely opportunistic, do not pre-allocate funds to specific segments.

We benchmark companies against their global competitors.

Invested in Skype and Baidu (Chinese search engine).

No. 1 performing fund in the world.

Our companies need to be category dominant.

Three key enabling technologies, biotechnology, nanotechnology and ICT.

We can visualise the detail of biological function (e.g. the flagella of a Sperm) , we can simulate the process and then we can conceive of designing an artificial version.

By 2025 (if Moore’s law continues) the available computational power will be equivalent to a human brain (hmmm!).

We can now produce wiring diagrams for brain function.

We can connect a brain to a computer (nasty picture of a mouse with what looks like an Ethernet cable stuck into its head!).

Ritalin routinely used by university students to enhance performance in exams.

The Brain Age is Ninetendo’s biggest selling product (target market the over 50’s).

Sustained health. Artificial pancreas.

Extended life span. Suppress the seven chemical path ways. Reduce your calorie intake to extend your lifespan. Doubled the life span of a mouse by reducing its calorie processing capability.

The first person to live to the age of a 1000 may have already been born (Aubrey De Gray).

Mastering complexity . Global warming. Climate change.  What ever we do is a waste of time, its what happens in China and India that will make the difference. Climate engineering is the future. Alternatively we can go nuclear. Their is now world shortage of Uranium Oxide. (25% price increate in the last year).

The hydrogen economy, burn hydrogen, you get water not C02.

Nano, Bio and Info is the future.

Intrapace - emplanted in stomach and makes you feel full. Can make you sick if you overdo it. Stomach pacing.

Creativity. Moore’s law, plastronics, Any-Fab.  D:Wave - quantum computing chips (just demo’d a 16 bit computing chip).

Sustainability - Batteries, HPL- High powered Lithium.

JungJo (sp?) University in China- 200,000 students, 70% doing science, 125 startups produced last year, founded only 5 years ago. Welcome to the competition.

Entrepreneurs - Core Team, innovative product x 10, pragmatic market entry strategy and large addressable market.

Drivers - Wellbeing, creativity and sustainability.

Without Nuclear power we are hugely exposed strategically. (Big push for nuclear).

Questions:

Heard in conversation today,

“I don’t want anymore advice from investors, I just want their money”

I sympathise, when you are running a startup eventually you’ve heard all the advice ten times over.

Darren drew my attention to an essay by Paul Graham entitled “The 18 Mistakes that Kill Startups“. Its a pretty good list but of course it could just as easily be entitled “The 18 mistakes that kill companies”. The only difference is that when big companies (DEC, Data General, Compaq, Symbolics, Thinking Machines, ICL) make these mistakes, death is long and lingering rather than short and sharp.

As you may know, Enterprise Ireland intends to disburse €175m to Irish VCs in the period 2007 to 2012. This is a follow on to a previous scheme which ran from 2001 to 2006. EI has produced two documents related to this scheme the first entitled, “Enterprise Ireland, Seed Venture Capital Scheme, 2007-2012, Guidelines for Calls for Expressions of Interest” and the second a shorter document which is the text for an advertisment.

These documents reveal some of EI’s thinking in this area. The impetus for the whole exercise is defined in the opening paragraphs,

Many firms have found it difficult to access growth and development capital because of the lack of private equity being invested in small to medium sized enterprises (SMEs). Irish entrepreneurs have continued to testify to the difficulties in accessing funding. The Small Business Forum stated that, “despite the broad range of finance sources and the fact that interest rates are at historically low levels, small businesses continue to report difficulties in obtaining sufficient finance for start-up and growth�.

On this basis EI want to seed investment in small firms by increasing the amount of VC capital available. This is all well and good and it makes sense. Every dollar invested in an Irish VC leverages many more dollars overseas.

However EI wants to have its cake and eat it. While expecting the Irish VCs to play ball and divert these funds into “…those sectors that are difficult to finance” (e.g. SMEs and early stage startups especially those outside Dublin) it also wants proportional treatment,

Private sector investors and Enterprise Ireland will be treated proportionally in terms of both dividends and capital distributions (sharing of risk and reward in line with relative amounts invested)

So EI wants the VC to make riskier investments when using EI money, but EI gets to play on level playing field with the other limited partners? Well why would an LP invest in a fund like that? The VC model is simple, give us your money and we’ll beat the market by 2-5 times by leveraging risk against return. Its not about developing an export market for Irish companies or developing a vibrant tech sector or a fledgling biotechnology industry. Those are accidental byproducts of VC investment. Why would I take on more risk than I need to?

So if EI wants to develop these areas surely the right thing to do is to subordinate its investment so that it gets paid last, and then it can swing the big stick over the VCs and get them to fall into line and focus their investments on the SME sector. As it is, they will have all the rights of existing limited partners, which is to say, give us your money and we’ll tell you how we’re doing every year, with very littly actual clout to leverage those investments in a direction it would prefer.

Final bit of advice to EI, you might do a better job of selling this kind of thing to your constituents (the SMEs of Ireland) as opposed to lobbing it over the wall to be picked up in dribs and drabs by the press.

I read in the Sunday newspapers that Marrakech was flogged recently. They raised over €75millon during the boom years and beyond. I always used to like my friend Conor’s quote (he was head of strategic alliances there),

At Marrackech I learned how to add a lot of cost into a business and then I learned how to take it back out again.

I somehow feel they didn’t quite make the 10x multiple that VCs hope for when they invest…

Techcrunch reports that BlogBeat has been acquired by Feedburner. I have used BlogBeat for the past few months and love its simple and intuitive stats. Its also real-time unlike Google Analytics.

Well done Jeff!

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