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Venture Capital in Ireland in Comparative Perspective

Frank Barry, Trinity College Dublin
Clare O'Mahony, Dublin Institute of Technology
Beata Sax, Investors TFI Fund Management, Warsaw

IIIS Discussion Paper No. 400

Abstract

Venture capital (VC) refers to equity capital provided to early-stage companies, where the venture capitalist also typically contributes management support to the enterprise. VC is particularly appropriate to the needs of innovative start-up companies where the absence of collateral and reputation preclude access to more conventional forms of finance and where the provision of equity relaxes the time constraints that enterprises would otherwise face. Because of the link with innovative start-ups, the availability of an adequate supply of venture capital is usually seen as a necessary precondition for the emergence of innovative and dynamic regions. This paper assembles the most comprehensive set of data available to offer a comparative perspective on venture capital in Ireland. The paper charts the emergence of the VC sector and the co-evolution of the demand and supply sides of the market. On the demand side, a flow of investment opportunities emerged-particularly from the indigenous software sector-for which venture capital represented an appropriate financing vehicle. Concurrently, on the supply side, public policy initiatives-including direct provision of VC funds by Enterprise Ireland for arm's length distribution by private-sector VC fund managers-dramatically enhanced its availability. Though the Irish state's share of VC fund provision has exceeded the European average since the major public policy initiatives of 1994, and dramatically so over the current recession, its support to the demand-side of the market, through non-arm's-length equity participation, has been a multiple of its support to the supply side. The paper also reveals how internationalised the Irish market is compared to the European average. The abundance of investment opportunities in Ireland appear to far exceed the willingness and ability of Irish VC funds to finance, and Irish companies themselves are not biased against foreign investors. This raises the question of why it is perceived as important for the state to support a local VC market. This issue receives some attention. In spite of substantial state support at the 'infant industry stage', the VC market in Ireland has not yet reached a point where it can be considered to be self-sustaining. Besides the factors pertaining directly to VC, some analysts have suggested that the dynamism of the indigenous high-tech sector-the main 'consumer' of VC funds-has been damaged by a shift towards "market managerialism" on the part of the state agencies. The task of developing a self-sustaining VC sector is clearly not straightforward. Furthermore, the interventionist strategies followed in the Irish case are not necessarily appropriate for other emerging regions. The weaker the standards of public-sector governance, the more the calculus shifts from correcting market failures to avoiding likely 'government failures'.


Last updated 28 August 2014 by IIIS (Email).