Tuesday, 11 October 2011
Investment in Science, Technology and Innovation: Statements
John Gilroy (Labour)
I welcome the Minister of State to the Chamber. It is a very significant move on the part of the Government to appoint a Minister of State with responsibility for this area and I can think of no better qualified person.
We hear a great deal of talk about the smart economy and innovation and this sector has a significant role to play in our economic recovery. This matter has come up repeatedly and seems to have gained a level of dominance in both political and public discourse. The key to the realisation of this potential is how we can support innovative Irish companies, help them get off the ground and get from the idea to the working prototype and thence to the market. How do we support an innovator as she moves from one stage to the next? This is the challenge we must overcome if we are to deliver results for the substantial level of public investment.
I am delighted the Minister of State mentioned his interest in intellectual property rights. We must ask one question, whose answer will determine whether we are serious when we speak about innovation, namely, whether there an appetite in this country for risk. The basis for the knowledge economy rests in this area. Traditionally in Ireland, especially in recent years, most investment has been in property, pensions and shares in large companies and this has stifled much of the activity in the real economy. We have voiced our ambition to become a knowledge economy but the biggest problem we face is changing our mindset about the way we have traditionally invested in this country. In the knowledge economy there are few tangible assets. We cannot touch or see them in the same way that we can see bricks and mortar or shares and therefore the traditional investment community is slow to invest in this area. The nature of the knowledge economy is such that it requires us to change our investment culture. This is about ideas. We cannot put ideas on a balance sheet and this is an uncomfortable thought for those who manage traditional investment funds in Ireland.
The business cycle in the knowledge economy consists, first, of a business idea. The next phase is to build a prototype to make real that idea. Then the prototype must be taken to market to see whether people will buy it and a team must be put in place to manufacture and sell it. Finally, it makes lots of money and creates employment - or else it does not. I am reminded of what Henry Ford said when he was asked how much research he had put into the Model T. He replied that if he had asked people what they wanted they would have said, "Build a faster horse". That is the idea behind the entire knowledge economy - thinking of ideas before other people do. Of course, this is risky. The idea is to be out there and win on the law of averages. It is about backing perhaps 1,000 companies a year instead of the 75 or 100 we do at present. Approximately one third of such companies fail and lose money. We would do well if we were to win in respect of 20% of them. It is on the back of that 20% that real jobs would be created and real money made.
There are good international examples, not just in Silicon Valley but also in Israel. The one action these successful regions and countries have taken is to invest in start-up businesses. I accept that there are spectacular failures, but there are also spectacular successes. For example, Google failed to obtain funding from Stanford University. When various fund managers had tut-tutted and sniffed at their idea, the young men behind Google went out into the market in search of money. Consider where the company is today. There is no need to travel to Silicon Valley or consider the position of Google to find examples of what can be done. There is one such example in Ireland, namely, the Collison brothers from Limerick who famously failed to receive funding from any of the agencies or institutions here and instead attracted investment from abroad. In 2008 they sold their successful company, Shuppa, to a Canadian company and became millionaires overnight. That was great news for them, but it was not good for Ireland because intellectual property rights, jobs, future income and downstream activity transferred abroad. This is similar to what we did in the 1970s when we exported cattle on the hoof. If investment opportunities had been taken, we could, perhaps, be contemplating an Irish-owned and based multinational company which would be creating employment and attracting foreign income.
How many more such companies are slipping through our fingers? What we are not short of is people with ideas, brainpower and entrepreneurial skills. However, we are short of a risk culture and, consequently, risk capital also. We should ask whether there are too few channels for start-ups in respect of early stage companies and the answer is probably yes. It will be difficult to decide how we can solve this problem. However, we must reach a point where we can consider optimising scenarios. If this means re-examining how we do business, so be it. All of the State's seed capital is managed and distributed by a limited number of privately managed funds. There are serious questions to be answered as to whether this is the best way to distribute scarce resources. There is a belief among some in certain sectors of the early stage business community to whom I have spoken that there is the equivalent of a cartel among those who operate the seed capital management companies. Once a person applies to one company for funding, it appears the information seeps out to all of the others. This means that there is no competition for seed capital and, as a result, it is an investors' market.
What is required is genuine competition among funds in the context of investing in high potential start-ups. This is happening in other countries that are serious about developing their knowledge economies. If the State is giving up to 41% tax relief to investors in business expansion schemes, for example, the least we should expect is that they would invest in risk. That was the intention behind the schemes in the first instance. I ask the Minister of State to engage in a serious review of the investment landscape for start-up companies and move outside the circle of the usual suspects when seeking advice. He should speak to entrepreneurs who have the ability to turn the economy around and are free from the traditional mindset which dominates the sphere of investment.
Intellectual property is the basis of the knowledge economy. In general, this cannot be touched, felt or weighed, nor can it be included in a balance sheet. However, it is no less valuable for this. We need to be bold without being reckless. As stated, our target should be up to 1,000 start-ups per year - instead of 75 or 100 - in order that we might win out in respect of the law of averages. To do this, we must fundamentally reconsider how we do business. Until we change the culture within the investment community, any talk about the knowledge economy will remain just that.