Oireachtas Joint and Select Committees

Thursday, 5 June 2014

Joint Oireachtas Committee on Jobs, Enterprise and Innovation

Access to Finance for SMEs: Discussion with Dublin Business and Innovation Centre.

11:10 am

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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I welcome Mr. Alex Hobbs, fund portfolio manager, and Mr. Richard Watson, investment manager, of Dublin Business Innovation Centre. My apologies for being late. It is hard to judge the times for these meetings but if you need to leave the meeting at a certain time, let me know and we can conclude at that time.
Before hearing your presentation I must inform you about privilege. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if you are directed by the committee to cease giving evidence in regard to a particular matter and continue to do so, you are entitled thereafter only to qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
I invite Mr. Hobbs to make his presentation.

Mr. Alex Hobbs:

On behalf of Dublin Business Innovation Centre, BIC, I thank the committee for the invitation to appear before it today. By way of introduction, I will tell the committee about Dublin BIC. It is part of a national and European organisation of business and innovation centres that identify, select and support entrepreneurial start-ups. We assist in the creation and development of enterprise and innovation in the Dublin region by providing practical support and assistance to entrepreneurs and start-up enterprises with the potential for strong growth. We work in close partnership with Enterprise Ireland, in particular, to support its high potential start-up companies, including the EnterpriseSTART 2 programme.

The Dublin Business Innovation Centre was established in 1988 and was one of the first ever public private partnerships formed in Ireland to assist SME development. It has strongly supported the economic growth and performance in the Dublin region over the past two and a half decades.

We are a member of the association of business and innovation centres in Ireland along with West BIC, South East BIC and Cork BIC. All of which provide key enterprise support and services to entrepreneurs nationally. As the BICs enterprise support is nationwide, it provides a deep regional reach for new sets of entrepreneurs and provides a valuable network for identifying investor-ready seed and early stage start-ups.

We are proud of our strategic role as the initiator of new funding and support models to stimulate and nurture the development of new SMEs in Ireland. These included the groundbreaking initiative that led to the launch of the first seed fund for SMEs in Ireland in 1991, which was done in partnership with private, banking, EU and public funded support.

We also initiated the setting up of the first private investor forum for investing in start-ups in 2006 called the Halo Business Angel Partnership in Ireland. That was done in partnership with InterTradeIreland and Enterprise Ireland. This promotion of private angel investing has resulted in a significant growth in the number of angel investors and funding for SMEs.

The BICs act selectively and effectively become a partner to accompany and hand hold the entrepreneur through all the stages of the development of his or her business. Dublin BIC's companies are knowledge-based, export-oriented and high-potential companies with a requirement for early stage hands-on support and advice over the critical first three to five years of their development.

Dublin BIC works with high potential entrepreneurs at seed, start-up and growth stages. We differ from most forms of enterprise support in that we project manage the entrepreneur through each stage of the SME start-up process, basically from seed to market growth stage. Our activities complement the assistance and services provided by the State agencies and the private sector.

We are run by a professional, multidisciplinary team with extensive experience in start-up and developing SMEs. We have specialist technology sectoral expertise and international marketing and fund management expertise. Dublin BIC is supported by a board of directors comprised of some of the most respected senior executives in Irish business. We are a full member of the Irish and European venture capital associations, IVCA and the EVCA, and we are regulated by the Central Bank of Ireland.

I shall outline the range of integrated financial services that we provide. For example, we provide access to seed and start-up venture capital through the €53 million AIB seed capital fund which is co-managed by Dublin BIC. We also provide access to business angel investment through the Halo Business Angel Partnership. That, too, is managed by Dublin BIC and has national partners throughout the country, including West BIC, South BIC, South East BIC and Cork BIC. Finally, we manage incubation-enterprise space which is located at the Guinness Enterprise Centre based in Dublin. The facilities provide enterprise space for start-ups and early stage companies.

I shall now drill into each of those elements and shall begin with investor-ready business planning support and mentoring. We work alongside the entrepreneurs through project evaluation and the various start-up stages and continue to assist the business through the first three to five years. Through our client assistance programme, we provide intensive investor-ready business planning support in order to hopefully graduate them to the high potential start-up stage. Dublin BIC has assisted in creating over 500 new businesses and employs approximately 4,460 people, including over 2,428 directly.

The annual turnover of supported start-up companies was €172 million in 2012. The economic impact of assisted start-ups in 2012 was €229 million which is based on independent research by DKM Economic Consultants.

Over the past 25 years, Dublin BIC has provided guidance to over 12,000 inquiries; provided business plan assistance to over 4,000 entrepreneurs; nurtured from conceptual-stage to 500 start-up enterprises while completing 780 business plans and encouraging entrepreneurs to achieve progress in building their enterprises; and supported 135 business expansions. Independent evaluations have established that 80% of Dublin BIC-assisted projects survive through their first critical five years.

With regard to access to start-up investment for SMEs, we have seen that innovative and high growth potential companies at the start-up stage are typically funded by equity investment, rather than loan finance. Basically, that is due to the high risk profile. They are often pre-revenue and conducting the product development and planning market launch. That means that they are at the very early stage. To address the funding gap at the seed and start-up stage Dublin BIC took strategic initiatives to provide access to both seed capital funding and angel investors nationally.

Ireland has seen an increase in recent years, since 2007, in seed fund investment activity. A total of €134 million has been made available to back entrepreneurs at the seed and start-up stages. The €53 million AIB seed fund is a limited partnership between AIB Bank and Enterprise Ireland. The fund is the most active seed and start-up fund in the Irish market since its launch in 2007. Dublin BIC and Enterprise Equity, the investment partners, are co-fund managers of this Fund. Dublin BIC's mandate is to invest in the Dublin region while Enterprise Equity invests mainly in the regions nationally. To date, the fund overall has invested €28 million in 75 innovative export-led SME companies, including follow-on investments. This is expected to increase before the primary investing period for new first round investments concludes at the end of 2014.

As a lead cornerstone investor in many co-investment investment rounds, the investee companies have succeeded in leveraging in investment rounds of almost €100 million. Co-investors in these rounds would typically comprise angel investors, other private investors, Irish and international venture capital funds, and Enterprise Ireland. Currently, these companies collectively employ 720 people directly and a corresponding number of support jobs.

Dublin BIC has made 54 investments to date in 38 start-up companies in Dublin. This number is expected to increase before the primary investing period ceases at the end of 2014.

I shall now refer to the Halo Business Angel Partnership. Dublin BIC initiated the setting up of the first business angel partnership in Ireland in 2006 in partnership with InterTradeIreland and Enterprise Ireland. Since then the Irish market has seen a sizeable growth in angel numbers and funding for start-up and early stage enterprises.

The Halo Business Angel Partnership, or HBAP as it is better know, is managed by Dublin BIC. We match angel investors with pre-screened investment opportunities at start-up and early stages. HBAP is a joint initiative between Enterprise Ireland, InterTradeIreland and the Irish Business and Innovation Centres. HBAP has offices in Dublin, Waterford, Cork, Limerick and Galway and provides a nationwide business matching service to select companies. HBAP works in partnership with HBAN which is the national federation of business angel networks in Ireland.

Our role is to act as facilitators for both angel investors and start-up companies seeking investment. HBAP works to increase the number of angel investors investing in start-up and early stage companies and supports the formation of new and existing angel networks, both regionally and nationally.

Companies and investors are pre-screened, initial meetings are arranged between investors and companies and we provide support throughout the fund raising process. The average angel investment per deal to date has been around €175,000. To date, business angel investors have invested a total of €26 million in early-stage companies that leveraged in investment rounds of €65 million.
Dublin BIC provides important added value for the start-ups, apart from cash, including hands-on business planning and pre-investment mentoring. In our role as seed fund manager, our extensive experience in managing the investment process, including access to angel and private co-investors, contributes to an efficient and successful fund raising experience for companies. We believe strongly in providing high quality and significant after care resources to support the companies post-investment. That is a critical piece of the jigsaw because the challenge is to help companies to get early traction in the marketplace. In addition to investment, we provide support through attendance at board meetings and other strategic sessions. Assuming companies progress with their business, they will move on to a "Series A" investment round with later-stage VCs. That is delivering added value for entrepreneurs. We also believe we deliver added value for the co-investors.
The Dublin BIC investment strategy, from the beginning, has been to promote and cultivate a co-investment approach for start-ups, leveraging our established network of contacts and referrals from other parties.This means that we get good co-investment coverage in terms of the round and the kind of expertise and skills that come to the table from various investors, apart from ourselves. We have successfully worked with many within our network, including the AIB seed capital fund, Halo Business Angel Partnership, HBAP and other private investors and seed funds to participate in investment rounds with us. Our approach has produced key benefits for these investors including giving them the opportunity to co-invest in a larger round, spreading the investor risk and expediting their investment decisions by dovetailing with our own seed fund term sheet, for example. Furthermore, our deal structure and due diligence helps to speed up the whole investment process.
The Dublin BIC seed fund team would typically project-manage the investment process from beginning to completion, including drawing up legal share subscription agreements and so forth. This benefits the angel and private investors by reducing the amount of time they have to spend on investment completion. Both seed fund and angel or private investors invest on the same commercial terms and share the same upside and downside risks.
The other key deliverable of Dublin BIC is the Guinness Enterprise Centre.

11:30 am

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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I must ask Mr. Hobbs to summarise the remainder of his contribution because several members have business to attend to in the Dáil Chamber soon but would like to ask questions before they leave.

Mr. Alex Hobbs:

I am happy to do that.

The Guinness Enterprise Centre is providing key incubation space in Dublin.

In summary, Dublin BIC is a strong advocate for seed and start-up funding within the Irish market. This has provided a key pipeline of deal flow for later-stage venture capitalists and start-up companies. We would strongly encourage the continuation of seed fund support from Enterprise Ireland. In terms of the latest seed and venture fund initiative, the first €100 million has been approved for a number of VCs at the expansion stage. We would strongly urge that the remaining €75 million be devoted to supporting further seed funds within the market to maintain continuity.

I am happy to take questions now.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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I thank Mr. Hobbs for what was a very interesting presentation.

Photo of John LyonsJohn Lyons (Dublin North West, Labour)
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I must apologise to the witnesses and the committee. I would very much like to be able to stay longer to discuss these issues but I have committed to being in the Chamber at 12 o'clock.

The Irish Venture Capital Association appeared before the committee recently and much of its contribution has been reiterated by Mr. Hobbs today. I am familiar with the work of Dublin BIC and it really is a one-stop-shop for high-potential start-ups in terms of taking them through all of the investment stages. The added-value provided by Dublin BIC is incredible. I ask Mr. Hobbs to give us an example of a company that has gone through all of the investment stages with Dublin BIC and outline to us its current position.

Mr. Alex Hobbs:

I am happy to do that. In fact, I will use the example of our very first investment from the seed fund in 2008 in a very innovative company called Clevamama, based in Coolock in North Dublin and headed up by two sisters. It got support initially from the Dublin City Enterprise Board. As those involved moved through the initial steps of developing their company, they moved up the line and came to Dublin BIC. We gave them additional mentoring to bring them through the investor-ready process for a sizeable seed investment round. We did that seed investment round with some private investor angel investment back in 2008 and the company has made great progress since then. It has weathered the recession and expanded sales. Last year it increased sales by 50% and is now in international markets, including Europe, Brazil and the United States. In 2012 we helped the company to move to second-round investment. We helped to bring in further added-value private investors who have significant PLC experience in the Irish market. This illustrates our strategy of bringing in not just cash but significant added-value to help companies in their business development. That is just one example.

Photo of John LyonsJohn Lyons (Dublin North West, Labour)
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I thank Mr. Hobbs for that. It is an excellent, good-news story.

Photo of Michael ConaghanMichael Conaghan (Dublin South Central, Labour)
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It strikes me that while those of us in Dáil Éireann are very aware of various enterprise-support initiatives, the public is unaware of the significant effort that is going into such initiatives. Much of the effort is not paid for in the sense of people being called upon at all times of the day and night. The public ought to know more about this kind of work because it is both encouraging and inspiring. The commitment of people working with Dublin BIC, who are obviously very able in this sphere, is laudable. They are getting out there and helping companies that need support and encouragement at the start. One rarely reads about such work in newspapers, for example.

Mr. Richard Watson:

We work very closely with Enterprise Ireland which gets upwards of 1,000 referrals every year. Where it identifies companies that have potential but are too early in their development to be able to access high-potential start up funding, it refers them on to us. Our consultants would then work with those companies on the business planning and strategy side of things as well as on fund-raising strategies.

We might work with some of those companies for up to a year, though sometimes for only six months, to get them to a point where they are investor ready. The initial process is our client assistance programme, where we work hands on with the promoters. When we get the companies to a stage where they are investor ready, we re-engage with Enterprise Ireland. In parallel, through our two sources of access to finance, the seed fund and the Halo Business Angel Partnership, we often get these companies to a stage where they are raising funding from Enterprise Ireland, from the seed fund and from one or more private sources. We help to syndicate rounds of funding. We work closely with the likes of Enterprise Ireland and get a lot of referrals from it. Similarly, companies suitable for high-potential start up funding are sent directly to us. There is a kind of dual direction in terms of referrals.

11:40 am

Photo of Michael ConaghanMichael Conaghan (Dublin South Central, Labour)
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Is BIC based in Thomas Street?

Mr. Richard Watson:

The Dublin BIC office is on Pearse Street, but the Guinness enterprise centre is down off Thomas Street. It is just beside the Guinness Storehouse. The seed fund and the Halo Business Enterprise Partnership are based in the Guinness Enterprise Centre and our office is on Pearse Street. We divide our time between both locations. Quite a number of our portfolio companies on the seed fund side are based in the Guinness Enterprise Centre and it is there we meet initially with companies looking for seed funding.

Mr. Alex Hobbs:

We have referrals also from spin-outs from the universities and the institutes of technologies, as we would have backed companies based in these third level institutions. These are people with extremely good ideas, good intellectual property, IP, and offering good opportunities, though in a raw state. If we were a standalone seed fund and a business plan came into us and was not right and needed work and if we were not within the Dublin BIC family of deliverables, we would be telling the people with the plan to come back when they were ready and telling them they were too early for us. However, now we refer these people within Dublin BIC where they can receive the intensive metric. In the end, it is down to the entrepreneur and the quality of the business idea. If those two elements are not there, we will never make it into a good investment proposition. Where there is advice, support and work the entrepreneur can do to improve the plan and make it an investment proposition, we provide added value.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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Do many clients seek help who cannot be helped? Can Dublin BIC deal with the numbers seeking help or must it turn people away?

Mr. Richard Watson:

We get many inquiries, but we must be selective with regard to the companies we work with. Some come to us too early. We have a programme called EnterpriseSTART2, which involves a focused session over one or two days. This deals with companies that have come too early to us for Enterprise Ireland or seed funding. We provide that kind of support for companies at an early stage. They may then go off and get funding from one of the county enterprise boards or may go on to one of the enterprise top form programmes Enterprise Ireland manages, the new frontiers programmes, and may come back to us a year later. We must focus on the companies we support.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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Is there definitely a demand for the seed capital money and will all of it be used?

Mr. Richard Watson:

Yes, there is plenty of demand.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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Is there an over-demand?

Mr. Richard Watson:

There is high demand. We do not invest in all companies that come to us. They must have the right management team. Some businesses that come our way could be strong lifestyle businesses, but they are not scalable. We are looking to invest in companies that have a high potential for exports and growth.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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How do companies which have received initial funding from Dublin BIC access further funding. Do they get access to finance credit also?

Mr. Alex Hobbs:

Typically, during the seed and start-up phase, there is little mainstream bank lending. That has always been the case in my experience. Funding is mostly through equity investment, risk capital. This reflects the high risk profile. However, as companies begin to build up sales in the market place, for example the company I mentioned earlier, they move to a point where bank lending, overdrafts and term loans come into play. Of the 38 companies in which we have invested from the seed fund, only a few would have traditional bank funding. This reflects the area we invest in. As companies mature, other forms of bank funding will click in, such as debtor financing, term loans and other instruments.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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Is Dublin BIC happy that the companies it has helped get to that stage do not have significant difficulty accessing funding thereafter or is there still a problem? When providing feedback, do they report they have a difficulty or are they successful?

Mr. Alex Hobbs:

Generally, if they are making progress, they go down the follow-on investment route. The objective is to upscale in regard to market presence internationally. Traditional funding does come into play, but there are other entities such as Silicon Valley Bank which provides venture lending. This might apply to companies in the process of expanding their customer base and making a certain level of sales. This funding backs working capital rather than investment in the market or product development.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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Are there other questions or concerns? No. Does Mr. Hobbs or Mr. Watson want to make any recommendations for the committee, which is looking at the different ways of accessing finance, credit, equity and investment? We have had some interesting presentations over the past couple of months and hope to produce a report in July on this issue making clear recommendations on change. I know they suggest we should keep the money coming in the form of seed capital, but do they wish to see any other changes?

Mr. Alex Hobbs:

The seed capital is one of the key initiatives that needs to continue to stimulate activity within Ireland. It is a vital component and has received strong support from the banking sector and Enterprise Ireland, which has also provided significant support. We encourage the continuance of this.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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We had discussion on the pension reserve fund also and that funding may be available.

Mr. Alex Hobbs:

We would be happy to see that.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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We will leave it at that. I thank the witnesses for their presentation and their time. I apologise for changing the date and the time and thank them for facilitating us. We appreciate it.

The joint committee adjourned at 12.10 p.m. until 1.30 p.m on Tuesday, 10 June 2014.