At the beginning of 2007, young Irish companies were feeling a bit anxious. By a sheer coincidence of the timing of the cycle, all of the main Irish VCs were in the fundraising market at the same time, having already deployed much of their existing capital. In a country where the private equity market is almost synonymous with early-stage investment, there was much fear that Irish start-ups would have to wait a whole year before obtaining funding from mainstream sources.

The first half of 2007 seemed to confirm these fears. According to figures compiled by the Irish Venture Capital Association (IVCA), total venture investment during the first half of 2007 reached only €62.6 million ($91.7 million), down from the €83.7 million that was recorded in the same period of the previous year

“We were all out there fundraising at the same time,” says IVCA chairman Michael Donnelly, who is also chairman of Dublin-based VC Growcorp. “It's just the way that things happened, and it will probably never happen again. So the fundraising, which started in the mid to latter part of 2006, dragged on a lot longer than any of us would have preferred.”

Yet Donnelly dismisses the notion that 2007 was a slow year for deployment, pointing out that though there were not a lot of new investments made, there were a large number of follow-on investments, which is a promising sign for the industry.

Donnelly says a down year for first-time funding was perhaps not a bad thing because Irish entrepreneurs are being encouraged to wait longer to spin out from universities or research institutions. In 2001 and 2002 many Irish IT start-ups spun out quite early, often before they were ready. The result was that many of those IT spin-outs crashed and burned, having attained funding before they had developed a workable business plan.

Enterprise Ireland, a national development agency which has been supporting domestic venture funds since 1994, has been actively encouraging entrepreneurs to stay in universities and research institutions longer, and the scheme has been providing funding for them to do so. The Government has also been active through Science Foundation Ireland, which has been spending millions to attract people into doing research. Grant money has been flowing quite generously over the past year.

Enterprise Ireland manager William O'Brien says the Irish Government has been involved in a big R&D push since the middle of 2006, so in some ways the ‘fundraising year’ that has just finished was well-timed. “We're only four million people on this island,” says O'Brien. “It's a challenging market, we will be affected by companies establishing operations in China, India and Eastern Europe rather than Ireland. In terms of wage competition we can't compete with those countries. We have to stay ahead of the competition, which is why there's been a very heavy emphasis in this country on R&D.

Donnelly points out that all of the big universities and research facilities in Ireland now have innovation and incubation facilities. “There's a whole infrastructure available on campuses now that wasn't there six years ago,” he says. “We continue to see a large amount of money, in the billions, going to research in the universities and the private sector.”

The new European Venture Capital Centre, launched in Dublin in 2006 by IBM, has also been generating a large amount of research. Having entered the country in the 1950s, IBM is today one of Ireland's largest employers.

We have to stay ahead of the competition, which is why there's been a very heavy emphasis in this country on R&D

William O'Brien

In the same way that start-ups are now waiting longer to seek VC funding, VCs are starting to hold onto their companies longer before exiting. This has been evidenced by the large number of follow-on investments in 2007 compared with the relatively low number of exits. “The strategy now seems to be to hold on to portfolio companies longer,” says Donnelly. “Since 2000 a lot of Irish companies were sold and got good returns for their investors, but if they had waited longer they maybe could have gotten more. The [instinct to hold] is partly driven by the fact that some of the portfolio companies that are out there right now, they're the second start-up for the entrepreneur. They might have gotten an exit already in 2001 or 2002, made a bit of money and they aren't rushing to get an exit.”

Another promising sign of the last year was that VCs seem to be diversifying away from their traditional technology focus. In 2005, for instance, fully 84 percent of VC investment in the country went into technology. But in 2007, drug discovery was actually the most popular niche for investors, according to the IVCA. Out of the nine funds that have received investment from the Enterprise Ireland scheme, two are dedicated to the biotech area. Others have a general remit that will include IT as well as biotech investments.

“The fact that there were so many people in the IT area has made investors look for other areas,” says O'Brien. “Medical devices, therapeutic biotech and medical diagnostics are some popular areas. These have good potential for returns but they are a long-term play, it could take ten years to get a return on a biotech investment.”

Still, IT remains the dominant force in Irish start-ups. Are LPs ready for a significant shift toward a more diversified industry? Enterprise Ireland seems to be. O'Brien says the scheme has made diversifying Irish venture one of the central tenets of its mission, and says it is ready to take on longer investment periods. Pointing out that the Irish VC industry is young, only 20 years old at the most, he adds that it is only recently that the industry has reached a point of maturity where it could branch into these more long-term sectors.

Donnelly says most of the funds that were being raised last year achieved their targets successfully – and, as a reason, points to the fact that they were offering more diverse strategies. The four big established funds, ACT Venture Partners, Delta Partners, Trinity Venture Capital and Enterprise Equity, either achieved or are close to achieving their fundraising ambitions, Donnelly says. “There were a couple of smaller funds that weren't able to raise funds because they had bad performance, but the rest were able to because they had a diversified story,” he says.

Trinity has maintained its original focus, while ACT has now expanded its remit to include biotech. But the two dedicated biotech funds being raised in 2007 were from relative newcomers: Fountain Healthcare Partners and Seroba Bioventures.

Donnelly says diversification is welcome news for Irish LPs, some of whom experienced a hangover when they dived head first into the dotcom boom back in 2000. New healthcare-focused funds, as well as the generalist funds launched by established players, have provided a safer way for Irish LPs to invest their money.

The phenomenon of all of the GPs fundraising at the same time will now be followed by all of the GPs investing at the same time. Donnelly predicts that up to €1.4 billion will soon be available for investment in technology and life science companies, and that most of the funds raised will be in excess of $100 million, falling roughly in the $100 million to $200 million range. But given that the keywords of the day in Irish VC seem to be “hold” and “wait”, it's unlikely that cash will be released in a flood. See Privately Speaking on the following page.