Ms Regina Breheny:

My colleagues and I welcome the opportunity to meet with the committee today. The Irish Venture Capital Association, IVCA, is the representative organisation for venture capital, VC, firms in Ireland. These VC firms have specialist domain knowledge and invest primarily in fast-growing, high-tech companies operating in the information and communications technology, ICT, and life sciences, chiefly medical technology, sectors. The companies are developing deep technologies, addressing global markets and creating thousands of high-calibre jobs.
Venture capital refers to the provision of equity capital to fund the start-up, growth and expansion of innovative small to medium-sized enterprises which are high-risk and high-potential but are unable to access credit markets because their underlying assets are typically based on intellectual property. Venture capital firms bridge that five to ten-year funding gap between the small amounts of money raised from friends and family and the funding from bank debt that comes at a much later stage. While banks do not lend to these companies, they support them by investing in venture capital funds, particularly at the seed and start-up stage.
A particular feature of the VC model is that funds are precluded from taking on debt. Instead, they usually invest equity in return for a minority shareholding. Leverage is not an issue and, therefore, venture capital activity does not pose any systemic risk. Venture capital teams usually have a technology background - scientists, engineers, researchers and so on - or a business background with deep industry experience. A core skill is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. Normally, the interests of the VC fund and entrepreneurs are aligned, with both having a common interest in building a business and exiting it through an initial public offering, IPO, or trade sale over time.
The VC fund is normally structured as a limited partnership with a fixed ten-year life. Capital is provided by long-term private and public investment funds, such as pension funds, life insurance companies, endowment funds, foundations, sovereign wealth funds and state bodies. VC fund managers also invest alongside other investors. The capital is only drawn down as the fund makes its investments; VC funds do not hold cash. The investment period for the fund is generally five years, after which the focus is on managing and making follow-on investments in an existing portfolio. After an initial investment is made in a portfolio company, additional capital is reserved to fund further development but is only drawn down from investors as it is required. Investments are sold through an IPO or trade sale, the cash is returned to the investors and the fund is closed. In effect, the fund is self-liquidating. After the five-year investment period, the VC firm raises capital for a new fund. VC companies in this State are regulated by the Central Bank of Ireland under the alternative investment fund manager, AIFM, directive.
The venture capital industry in Ireland is performing very well. While the level of VC investment activity worldwide has been adversely affected by the credit crunch, with no growth and significant volatility in recent years, there was strong investment in Ireland throughout the recession. In 2013 alone, €285 million was raised by Irish SMEs. The focus of venture capital activity is on investment in high-tech, early-stage companies in the ICT and the med tech sectors. More than 350 of these companies have been supported by Irish VCs in the past ten years and, consequently, Ireland is recognised as a major force in technology development.
In the past decade, €1 billion in capital has been imported by Irish VCs through syndication with United States and European-based venture funds. On average, every one euro invested by an Irish VC is matched by one euro from an international VC. Irish VCs add significant value to portfolio companies by syndicating with tier one international VC funds and corporate investors, introducing international business partners, customers and acquirers, recruiting senior management, introducing corporate governance, and endorsing the business and management team to the sector in which it operates. Since 1997, the number of VC funds operating in Ireland has more than doubled and their average size has increased from €20 million to €75 million. In addition, in response to increasing demand from SMEs, the market is now segmented, with both seed and start-up and early and-or expansion-stage funds present. Irish VCs have invested in a wide range of deal types from research and development commercialisation to start-up and early-stage technology companies and companies requiring later-stage growth equity and development capital. Many of the VC firms are entering their fourth investment cycle and have specialist domain knowledge in the sectors in which they invest.
The venture ecosystem in Ireland is well developed, with spin-outs coming from publicly funded research centres. With the emergence of incubation centres and accelerator programmes, these start-up companies are now better prepared in terms of investor readiness than ever before. Almost all of the leading American ICT and pharma, med tech and biotechnology companies have located their European headquarters in Ireland. These enterprises draw talent and are breeding grounds for the entrepreneurs of tomorrow. Most exits in Ireland are through trade sales, mainly to the multinationals, thus further expanding the presence of the multinational industry in Ireland. On a note of caution in this regard, Ireland's tax regime has lost significant competitiveness compared with the United Kingdom. There is a misalignment between the Government's tax policy in regard to entrepreneurship and the key objectives in the Action Plan for Jobs 2014. The IVCA is lobbying the Department of Jobs, Enterprise and Innovation and the Department of Finance to redress this disadvantage.
Returns are poised for a major recovery, because the quantity and quality of the pipeline of investment opportunities has increased greatly. The commercial acumen, international experience and focus of SME management teams is impressive and relevant to what is required for success in world markets. Early-stage valuations are stable after dropping significantly with the onset of the global financial crisis, while exit valuations are growing. Companies are focused on addressing global markets and are scaling faster and building value earlier. Tier one multinational companies have billions of dollars reserved for acquiring technology companies. In addition, mergers and acquisitions activity is strong, leading to attractive exit opportunities for VC investors.
Investment by the State has been key to the success of Irish VC funds in raising capital from the private sector. Since 1997, the Irish venture capital industry has been developed and nurtured by the Government through investment of €348 million via the Enterprise Ireland seed and venture capital programme over three investment rounds. VC firms have leveraged this commitment by raising additional private sector investment both for the fund itself and subsequently through syndicated deals for the individual companies. As a result, nearly €4 billion has been raised by Irish SMEs in this period. The State's commitment has been leveraged upwards by a factor of ten. In fact, payroll taxes of approximately €600 million paid by VC-backed companies over the period 2003 to 2012 have made the programme self-financing from tax revenues alone.
International studies indicate that venture capital stimulates growth, innovation, research and development, new business and entrepreneurialism. In Ireland, VC funding as a percentage of GDP trebled from 0.06% in 2003 to 0.18% in 2012. This is the second highest level in Europe after Finland. Throughout this period, the number of new innovative companies raising seed capital increased fourfold. Irish technology companies have spawned a significant number of new companies and created a new generation of serial entrepreneurs who are now dominant in the early-stage sectors. Three technology companies alone have spawned a further 146 companies.
Irish venture capitalists have driven growth in sectors such as software semiconductors, clean tech and med tech.

Many of the multinationals operating in these sectors have located here and, consequently, Irish VCs have developed specialist sectoral clusters of innovative activities, including medical devices, telecommunications, laser optics, electronic switching devices, business software and gaming.

The IVCA commissioned the Centre for Entrepreneurial Studies in UCD to conduct an in-depth study of the economic impact of venture capital on the Irish economy and data have been gathered on venture-backed companies over the past decade to 2012. The analysis shows that venture-backed companies create more high calibre jobs. Employment is up 11% per annum since 2003. In the past ten years, these companies created 16,400 high calibre jobs. It is estimated that these companies support up to three additional indirect downstream jobs. Hence the true number of direct and indirect jobs generated as a result of venture capital investment in innovative SMEs is approximately 66,000. An additional survey indicated that since 2005, companies originally backed by venture capital and subsequently sold to multinationals went on to increase employment by another 38%.

These venture backed companies are export-led. Exports increased by 12% per annum since 2003 and in the high-tech sector, exports represented 80% of revenues. These companies grow faster and their revenues are up 17% per annum since 2003. They are knowledge based and graduates represent 75% of the workforce. The research and development spend by venture-backed companies represents 30% of all Irish SMEs share of total spend on BERD.

Growing Ireland’s indigenous export orientated SME sector is becoming a national imperative as these companies provide 50% of the jobs in the economy and generate 10% of exports. A strong and well-financed venture capital industry is vital to this growth. The IVCA estimates that over the next five years - 2014 to 2019 - up to 40 start-up companies will be supported every year by the seed funds and start-up funds and 110 existing early stage companies will receive additional expansion capital from the mainstream venture capital funds. Within ten years, these companies could provide up to 21,000 new direct jobs and, based upon a 3:1 multiple, 63,000 additional indirect jobs. They could pay up to €300 million per annum in direct payroll taxes, and over ten years that could exceed €2 billion. They could export in excess of €1 billion per year and spend up to €300 million per annum on research and development.

The investment activity associated with the venture capital funds supported by the last seed and venture capital programme, 2007 to 2012, peaked during 2010 and available funds for new investment has now begun to decline. Investment activity by the seed funds will also see a decline by the end of 2014. Consequently, the number of new investments has started to fall off, bringing about a funding gap for indigenous companies. The IVCA estimates that the capital required over the next five years to fund the growth and expansion of innovative Irish SMEs is €1.65 billion. In response to this, the venture capital industry is in the process of raising new funds to fill this gap.

The economic characteristics of venture-backed companies as outlined above have encouraged and influenced policy-makers to recognise the importance of venture capital activity and, consequently, innovation and venture capital are at the centre of Ireland’s economic policy. The evidence for this is funding initiatives from Enterprise Ireland at the seed stage and in the growth capital space; the establishment of a later stage expansion fund by the National Pensions Reserve Fund; and the commitment by Enterprise Ireland of up to €175 million as a cornerstone investor to venture capital funds under the new seed and venture capital scheme 2013 to 2018. Some €99.5 million of this has been committed to early stage expansion funds. The IVCA believes that the balance of €75.5 million should be committed to regenerate the seed and start-up funds to finance entrepreneurship and to maintain a pipeline of high calibre start-ups.

Irish venture capital funds are currently marketing the Irish opportunity and plan to raise funds from international investors, including the European Investment Fund, international corporate investors and foundations, fund of funds and private investors. In recent weeks, the Ireland Strategic Investment Fund unveiled its plans to invest a €6.8 billion fund in Ireland and indicated that venture capital has a central role to play in growing the Irish economy. However, funds invested by ISIF must be matched by commitments from the private sector but support from the private sector in Ireland is limited. This is because there is a distinct absence in Ireland of certain classes of institutional investors that have historically supported US VCs, such as private equity funds of funds, university endowments, foundations and family offices. Most life insurance companies operating in here are foreign-owned and are managed from abroad, with little influence on decisions to invest in the Irish venture capital asset class. There is a limited pool of Irish pension funds of sufficient scale and with the management resources that have been willing to invest in Irish venture capital. They are largely semi-State or public sector defined benefit schemes. Many of these defined benefit funds are in deficit and have been actively seeking to reduce their risk profile.

The pension industry manages the largest pool of private capital in Ireland. Notwithstanding strong recent returns from Irish venture capital funds, Irish pension funds are not investing. This is because there are regulatory constraints on equity investments in general for pension funds and, in particular, there are regulatory constraints on liquidity issues within defined contribution schemes. Many defined benefit schemes are closing or are converting to defined contribution schemes. There is negative sentiment arising from the pensions levy.

This is inhibiting the development of the Irish venture capital industry and, with it, Ireland’s high-tech SMEs. If pension funds cannot be persuaded to invest in Ireland, it will also greatly impede the ability of the ISIF to invest in Ireland, as it will be unable to access the required matching private sector funding. Initiatives to free up private sector capital should be considered and could include discussions with the pensions industry around the levy and an alternative could be to set up a national pooled mechanism funded by a 1% investment by all private and public pension funds which have received tax relief on contributions. This could create a €700 million to €800 million fund to invest alongside the ISIF; and a Government or an EU initiative to underwrite a liquidity mechanism which allows defined contribution schemes to invest in selected Irish focused investments like venture capital.

I hope these remarks have given some understanding of how the venture capital industry operates, in particular, in regard to its impact on funding innovative SMEs. I thank members for their attention and my colleagues and I look forward to their questions.