Ms Regina Breheny:

On behalf of the Irish Venture Capital Association, I thank the Chairman, Deputies and Senators for inviting me to meet the joint committee this afternoon. I will give some brief background of what we are and what we do before I make some recommendations.

The IVCA is the representative organisation for venture capital firms in Ireland. These VC firms have specialist domain knowledge and invest primarily in fast-growing, high-tech companies operating in the ICT and life sciences sectors. These companies are developing deep technologies, addressing global markets and creating thousands of high-calibre jobs. VC provides equity capital to fund the start-up, growth and expansion of innovative SMEs that are high risk and high potential but are unable to access credit markets because their underlying assets are typically based on intellectual property. VC firms bridge the five-to-ten year funding gap between small amounts of money raised from friends and family to funding from bank debt at a much later stage.

A particular feature of the VC model is that a VC fund is precluded from taking on debt, distinguishing it from the buyout part of the private sector industry. It usually invests equity for a minority shareholding. As leverage is not an issue, thus it must be said that venture capital activity does not pose any systemic risk.

VC teams usually have a technology background and are scientists, engineers or researchers or they come from 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 and both have a common interest in building a business around a piece of technology and exiting it through an IPO or a trade sale over time.

International studies indicate that venture capital stimulates growth, innovation, research and development, new businesses and entrepreneurialism. In Ireland, VC as a percentage of GDP trebled from 0.06% in 2003 to 0.22% in 2014, 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 as angel investors in the early stage sectors.

The IVCA's economic impact analysis shows that, over the past decade, venture-backed companies have created high-calibre jobs, with employment growing by 11% per annum since 2003. They are export led, with exports growing by 12% per annum since 2003 and revenues by 17% in the same period. These companies are knowledge based and graduates represent 73% of the workforce. The research and development spend by venture-backed companies represents 30% of all Irish SMEs' share of total spend on BERD, which is the measure of spending on research and development. Growing Ireland’s indigenous export-oriented 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. This imperative is emphasised also in Europe and is reflected in policy guidelines and in the fact that VC as an asset class has been carved out of the more stringent regulatory regime applying to private equity.

We welcome the Green Paper on CMU. It highlights what is well known, that access to risk capital is much lower in Europe for a variety of reasons and this is more pronounced as one moves up the risk curve. The report also highlights the need to improve access to finance, especially for SMEs, to increase and diversify sources of finance and to improve market efficiency across member states. It promotes VC as having an important role to play. However, while there has been progress on regulation and finance, vigilance is required and sanctions may be needed to prevent gold plating and to ensure additional costs are not imposed by individual countries in an uncompetitive way. In addition, a co-ordinated approach needs to be followed to ensure the VC asset class is not excluded or restricted as an investment under the current discussions on prudential rules for the insurance and pensions industries. Joined-up thinking is essential in this regard.

The industry in Ireland is performing very well, but this story is not consistent across Europe. While the level of VC investment activity worldwide has been adversely affected by the credit crunch, with no growth and significant volatility throughout this period, there has been strong investment in Ireland throughout the recession and €401 million was raised by Irish SMEs in 2014 alone. Annual investment activity in Ireland has grown by 65% since 2007 while fund-raising in Europe as a whole was halved over this period.

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 500 of these companies have been supported by Irish VCs in the past ten years. Consequently, Ireland is recognised as a major force in technology development.

In the past ten years, €1 billion in capital has been imported by Irish venture capital firms through syndication with US and European-based venture capital funds. On average, every euro invested by an Irish venture capital firm is matched by a euro from an international venture capital firm. Since 1997 the number of venture capital funds operating in Ireland has more than doubled and the average size has increased from €20 million to €75 million. In Europe the average fund size is €60 million but the median size is €27 million. That is how small the industry is. It is also very fragmented.

Irish venture capital firms have invested in a wide range of deal types and many of the firms are entering their fourth investment cycle. They have specialist domain knowledge in the sectors in which they invest. Unfortunately, deal size is an issue both in Ireland and across Europe. In the US, SMEs receive five times more funding from capital markets than in the EU, and, in venture capital terms, US companies receive up to ten times more funding than in the EU. This is particularly evident in the growth and expansion stage.

The venture ecosystem is well developed, with spin-outs coming from publicly funded research centres and, with the emergence of incubation centres and accelerator programs, these start-up companies are now better prepared in terms of investor readiness than ever before. Almost all of the leading US ICT, pharma, med tech and biotechnology companies have located their European headquarters here. They draw talent and are breeding grounds for the entrepreneurs of tomorrow. Most exits in Ireland are through trade sales mainly to these multinationals, thus further expanding and embedding the presence of the multinational industry in Ireland.

In essence, the US is composed of a number of venture capital hubs. There is Silicon Valley on the west coast, Austin in Texas, Boston in Massachusetts, and New York. It is unlikely that a homogenous industry can be spread evenly across Europe. This seems to be the purpose and intent of the policy in the capital markets union document. Venture capital hubs are already emerging in Europe and policy initiatives should focus more on driving this process and supporting what is being created by the private sector.

It is our ambition to ensure that Dublin is a venture capital hub alongside London and Berlin. We already have many of the building blocks in place. To create a best-in-class venture capital hub, Ireland needs, on the demand side, to attract skilled labour and startups fromother states. To achieve this, key initiatives around personal tax will be essential. We see the UK as our main competitor. Unfortunately Ireland’s tax regime has lost significant competitiveness compared to the UK. There is now a misalignment between the Government’s tax policy in regard to entrepreneurship and the key objectives in the Action Plan for Jobs. The main areas of contention are the capital gains tax regime, where rates here are currently 33% as against 10% in the UK, reduced by entrepreneur’s relief, and there is also a lack of share option schemes to incentivise entrepreneurs. These are barriers to encouraging entrepreneurs to set up in Ireland. All a person has to do is drive one hour to the North to avail of the better regime that operates in the UK.

On the supply side, we need to increase the amount of capital in order to scale opportunities. In this regard, Irish venture capital firms have performed very well because of their ability to import international private capital by syndicating deals. This process has gone some way towards alleviating the lack of depth in Irish and European capital markets. This is a unique advantage for Ireland and, from a competitive viewpoint, local venture capital firms should be supported by the State through Enterprise Ireland, by the Ireland strategic investment fund, ISIF, and by the European investment fund, EIF, in order to capitalise on this advantage.

Fundraising for venture capital funds in Ireland, and in Europe generally, is very challenging. Support from the private sector is limited. In Europe, the international long-term investor has decreased its share of venture capital funding from 35% to 15%. The main reasons for this include a significant fragmentation of investment opportunities. There are not enough large venture capital funds to absorb the investor’s bite size. There is a significant gap between the size of the investor and the size of the venture capital fund. Prudential rules at EU level are restricting the venture capital asset class as an investment. Further, there were high performance expectations, which, unfortunately, after the dotcom crash around 2000, were not met.

There is also a distinct absence of certain classes of institutional investor that have historically supported US venture capital firms. These include private equity funds-of-funds, university endowments, foundations and family offices. Most life assurance companies operating in Ireland are foreign-owned and are managed from abroad, with little influence on decisions to invest in the Irish venture capital asset class. There is also a limited pool of Irish pension funds of sufficient scale and management resources willing to invest in Irish venture capital. They are largely semi-state or public sector defined benefit schemes. Many of these defined benefit schemes are in deficit and have been actively seeking to reduce their risk profile.