As you may know, Enterprise Ireland intends to disburse â‚¬175m to Irish VCs in the period 2007 to 2012. This is a follow on to a previous scheme which ran from 2001 to 2006. EI has produced two documents related to this scheme the first entitled, “Enterprise Ireland, Seed Venture Capital Scheme, 2007-2012, Guidelines for Calls for Expressions of Interest” and the second a shorter document which is the text for an advertisment.
These documents reveal some of EI’s thinking in this area. The impetus for the whole exercise is defined in the opening paragraphs,
Many firms have found it difficult to access growth and development capital because of the lack of private equity being invested in small to medium sized enterprises (SMEs). Irish entrepreneurs have continued to testify to the difficulties in accessing funding. The Small Business Forum stated that, â€œdespite the broad range of finance sources and the fact that interest rates are at historically low levels, small businesses continue to report difficulties in obtaining sufficient finance for start-up and growthâ€?.
On this basis EI want to seed investment in small firms by increasing the amount of VC capital available. This is all well and good and it makes sense. Every dollar invested in an Irish VC leverages many more dollars overseas.
However EI wants to have its cake and eat it. While expecting the Irish VCs to play ball and divert these funds into “…those sectors that are difficult to finance” (e.g. SMEs and early stage startups especially those outside Dublin) it also wants proportional treatment,
Private sector investors and Enterprise Ireland will be treated proportionally in terms of both dividends and capital distributions (sharing of risk and reward in line with relative amounts invested)
So EI wants the VC to make riskier investments when using EI money, but EI gets to play on level playing field with the other limited partners? Well why would an LP invest in a fund like that? The VC model is simple, give us your money and we’ll beat the market by 2-5 times by leveraging risk against return. Its not about developing an export market for Irish companies or developing a vibrant tech sector or a fledgling biotechnology industry. Those are accidental byproducts of VC investment. Why would I take on more risk than I need to?
So if EI wants to develop these areas surely the right thing to do is to subordinate its investment so that it gets paid last, and then it can swing the big stick over the VCs and get them to fall into line and focus their investments on the SME sector. As it is, they will have all the rights of existing limited partners, which is to say, give us your money and we’ll tell you how we’re doing every year, with very littly actual clout to leverage those investments in a direction it would prefer.
Final bit of advice to EI, you might do a better job of selling this kind of thing to your constituents (the SMEs of Ireland) as opposed to lobbing it over the wall to be picked up in dribs and drabs by the press.