No Need for Continued Irish Government Venture Capital Investments- TCD Policy Institute Study

Posted on: 10 March 2005

No Need for Continued Irish Government Venture Capital Investments – TCD Policy Institute Study No evidence of ‘equity gap’ for early stage risk capital; Enterprise policy must now focus on ‘exit gap.’ Enterprise Ireland has invested over €300 million in Irish small businesses and venture capital funds since its creation, making it one of the largest equity investors in the country. But there is no clear rationale for it to continue making such investments, according to a study launched today at Trinity College’s Policy Institute. Mr. Phil Hogan T.D., Fine Gael Spokesperson on Enterprise, Trade and Employment launched the new publication, Angels and IPOs: Policies for Sustainable Equity Financing of Irish Small Businesses by Diane Mulcahy, a former Visiting Research Fellow at The Policy Institute. The report argues that there is no compelling rationale for continuing Government support given the lack of evidence that an ‘equity gap’ of early stage risk capital exists in Ireland, in addition to the tremendous growth in venture capital (VC) funds, with nearly €150 million of VC funds currently available for new projects. Irish VCs and Enterprise Ireland (EI) should focus on closing the ‘exit gap’ that is evident from the very low rate of IPOs (flotations) among Irish companies, stresses the report. The strong average returns generated by IPO exits are critical to attract investors in young companies and venture funds. VCs and EI can help companies target and prepare for IPOs, and steer them to the most appropriate exchange, such as the Nasdaq, AIM or OFEX, for listing. The paper also recommends that the Irish Stock Exchange considers demutualization and strategic alliances to improve its competitive position as the relatively poor capital raising performance of the ISE for small businesses contributes to the exit gap. “Returns drive the entire equity financing cycle for young companies,” noted author Diane Mulcahy, “Strong returns are critical to attract pension funds, VCs and angel investors to make private equity investments in the early stage companies that are so essential to Ireland’s economic growth. The evidence is clear that IPO exits realize the highest average returns, so a focus on closing the exit gap in Ireland is a key component of any long term enterprise policy.” Irish businesses would benefit from an increase in the supply of angel capital according to the report, to help foster growth during the early critical stages of a start-up company. Most of the Irish Government’s fiscal policies, such as tax reliefs, subsidies and incentives disproportionately encourage individuals to invest in property assets rather than equity. These fiscal policies are at odds with Ireland’s industrial policy goal of fostering the growth of domestic start-ups. The paper recommends that the Department of Enterprise and Department of Finance “join-up” fiscal and industrial policies to more equally treat equity investments and consistently support enterprise development. Mr. Phil Hogan Fine Gael T.D. noted “The recent decision by the European Commission to suspend grant aid in respect of the expansion of Intel at Lexilip in Co. Kildare is an appropriate wake up call for Irish industrial strategy. It clearly shows that the EU Commission will be engaged in more detailed and critical evaluations of grant aid as inward investment to developing economies like Ireland in the context of future industrial strategy. It is therefore appropriate that this study gives us a new focus on the development of indigenous industry and the funding of new ventures from within our own jurisdiction. A new entrepreneurial drive is essential with the appropriate financial supports to implement the Enterprise Strategy Report and to sustain and promote the growth of the Irish small business sector and employment within this sector.” The study is the 16th in the series ‘Studies in Public Policy’ published by Trinity’s Policy Institute. The series aims to bridge the gap between the academic and professional policy communities and to make a real difference to public policy debate in Ireland. Copies of the report can be obtained from The Policy Institute ( ENDS Notes for Editors The Policy Institute is an independent source of public policy research, innovation, advice and evaluation in Ireland. It is based in TCD’s Faculty of Business, Economics and Social Studies. ‘Angel financing’ refers to financial support/investment, which is generally made by an individual investor. Angel financing is a bridge between non-professional (i.e. family/friends) and profession investors. Angels would typically be wealthy individuals, often ex-entrepreneurs, interested in working with and investing in young companies. These individuals offer capital and expertise, bringing considerable experience and assistance to young firms and generally invest small amounts of risk capital (less than €500,000) into early stage companies. Angel capital is important because it acts as an earlier-stage source of capital for young companies (before they move on to trying to raise ‘big’ money from venture capitalists etc who typically are not interested in investments of less than €500,000).