Ireland's €1billion venture capital
(VC) ecosystem finds itself at a crucial point; large funding resources have
slowed down, threatening the flow of seed capital. While the amount of money
invested in the first quarter of 2017 is about €240 million, the financial taps could dry up
going forward. Start-ups at their infancy stand to be the most affected if this
becomes a reality.
For a long time,
Ireland's venture capital scene has relied on three significant investors:
Enterprise Ireland, the European Investment Fund (EIF), and the Ireland
Strategic Investment Fund (ISIF). After these three, the private sector has
been a reliable partner, as have banks and a number of pension funds. With a
small investor base, the looming prospect of reduced venture capital funds is creating
uncertainty among various stakeholders.
Around the world,
ensuring the steady flow of capital is vital to the development of venture
capital. It's an aspect that individual investors such as Henner Diekmann keep an eye on at all times. Mr. Diekmann works for Diekmann Associates, a
law firm that offers guidance on various aspects of company structures and setups.
What to Do?
Ireland's answer to the potential drain on venture capital for its start-ups may lie
in looking at the more established VC markets of Scandinavia, particularly in
Denmark and Sweden. In the former, a fund of funds was established for investors, where they were offered the option of investing their resources in a bond-type
asset. For investors, half the money went into the bond while the other half
went into venture capital. Investors reaped about 12 percent returns on their
investment in the first round, more than enough incentive to participate in the
next round.
Sweden,
on the other hand, is one of the most prolific technology hubs in the world, boosted largely by a thriving
venture capital industry. The country, which has a population of about 10
million, has adopted a global mindset when it comes to tech and innovation. It is associated with some of the biggest brands
in the technology industry, including the likes of Spotify, Minecraft maker
Mojang (acquired by Microsoft), Skype (also acquired by Microsoft) and Candy
Crush parent company King, among others.
This esteemed list of
globally-recognised brands, which also includes others such as IKEA and
H&M, didn’t happen by chance. In the 1990s,
the Swedish government invested heavily in technology infrastructure,
allowing its citizens to enter the digital economy early. Not only did this
equip people with the knowledge and tools to become a nation of disruptors, but it also laid the foundation for
entrepreneurial collaboration.
The Swedish approach
to venture capital funding is to encourage small initial public offers (IPOs)
that are aimed at attracting investors at
a retail level. The results have made a difference, enough to attract Irish
interest. Despite the small population, Sweden has had 51 stock market
flotations in 2017, ten times more than
what Ireland has accomplished. The equity culture in Sweden has successfully
attracted retail markets, allowing more
than €1.1 billion to be
raised in Swedish IPOs. As an incentive to investors, the authorities
have established a tax arrangement that substitutes capital gains tax with an
annual fee of 0.25 percent for amounts reaching up to €15,000.
Additional Factors
Other than a slowdown
in venture capital funding, two other factors could impact the Irish VC
ecosystem in a big way. The first is based
on whether the United States chooses to change its tax laws, which would affect
Irish investors looking to put their money in companies that have US revenues.
The second is Brexit, which could impact the European Investment Fund's
decision to keep investing in the United Kingdom.
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