Phelan decries ‘scattergun approach’ to seeding foreign start-ups

Enterprise Ireland (EI) has come under fire from serial tech entrepreneur Pat Phelan for spending millions on seeding foreign start-ups and assisting them with visas and accommodation to relocate to Dublin and other Irish cities.

Phelan thinks EI's policy of relocating "waves" of foreign start-ups and medium-sized firms from Russia, Ukraine, Belarus and Central and Eastern Europe needs to be reassessed.

"I don't think it works long-term," Phelan told The Irish Times. "I think I know a lot of them, and I would love to see their proven business model. If they are looking outside Ireland to bring start-ups in, there are obviously not enough start-ups in Ireland and I would try to figure out how to get scaling start-ups."

Phelan, who invests in a number of businesses following the sale of his payment fraud detection firm Trustev for $44 million in 2015, recently closed Nohovation, a €25 million investment fund, to help Irish companies scale globally.

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“We couldn’t find enough opportunities even though we looked at 114 start-ups,” he said. “There is probably a dearth of Irish early-stage start-ups, and that can happen when there is a booming economy, when you have people who are very comfortable in jobs and there are not as many start-ups.”

Burgeoning start-up scene

Even though Ireland is home to tech multinationals such as Apple, Facebook, Google, Amazon and Twitter, the country still only has a burgeoning start-up scene.

Phelan dubbed EI’s competitive start fund (CSF) programme, whereby start-ups receive an initial €50,000 investment for a 10 per cent stake, as “tourism for entrepreneurship”.

“If I bring a three-man team from Russia and I give them a €50,000 grant, in reality it’s tourism for entrepreneurship,” said Phelan. “If you were looking at for a pure investment logic, stay in Russia and I will give you €50,000 and it will last longer and you will have a better opportunity of them scaling there. In Ireland, that €50,000 won’t go far.”

Moving three people from Leningrad to Dublin is a dramatic life experience

Rather than just “a scattergun approach”, Phelan believes EI and other agencies should focus on bringing foreign direct investment (FDI) into the country and maintain Dublin’s status as the European headquarters for US tech giants and a growing base for fintech disruptors.

“Moving three people from Leningrad to Dublin is a dramatic life experience and it probably means if they were good enough they would have been funded there,” he said. “It’s more of an experience for these guys but some may stay and end up getting jobs in the sector.”

The criticism follows a recent announcement by Heather Humphreys, the Minister for Business, Enterprise and Innovation, of two new CSFs totalling up to €1 million to support international entrepreneurs and start-ups led by experienced business professionals.

Each fund provided up to €50,000 in equity funding for up to 10 successful applicants.

The CSF for international entrepreneurs is specifically for start-ups that are currently internationally-based but are willing to relocate to Ireland, while the CSF for experienced business professionals is directed at highly experienced entrepreneurs with 25 years or more business experience in Ireland or abroad.

Successful applicants

As well as securing up to €50,000 in funding, the successful applicants will have the opportunity to participate in a business development programme delivered over three months by DCU Ryan Academy. The fund is part of the agency’s strategy for increasing the number and quality of high potential start-up companies (HPSUs) that have the potential to employ more than 10 people and achieve €1 million in export sales within three years.

Joe Healy, manager of EI's HPSU division, said 33 international start-ups had received funding since the first round was launched in August 2015.

“Enterprise Ireland is committed to the support and development of Irish companies with global ambition. However, we also believe that the Irish start-up ecosystem is very attractive and as a small, open economy, can be attractive for certain international entrepreneurs to set up their businesses here,” he said. “That being said, we are looking for exceptional projects that will bring new technologies and innovations to Ireland which will potentially build a large international customer base.”

Healy said the €50,000 equity injection was “very valuable fuel” and it typically gave a new business about six months of runway to progress its project.

‘Specific milestones’

“We fully recognise that investing in early-stage companies is risky and that many will fail,” he said. “Our hope is that these projects will work towards specific milestones which will allow them to progress on their journey to becoming viable, or to fail fast, learn and hopefully reposition their business to continue on their entrepreneurship journey.”

Medium-sized tech firms are also relocating to Ireland with backing and support from EI and other government agencies

Healy said it was too early to break down the success or failure rate of the CSF programmes. “These are important inputs into the pipeline of projects that we hope will develop, scale and become high potential start-ups, he said. “It is too early to be definitive regarding success or failure rates, however every project receives significant non-financial support to help it achieve the next milestone in its business plan.”

Medium-sized tech firms are also relocating to Ireland with backing and support from EI and other government agencies. Retail analytics service CountBox, gyroscope manufacturer InnaLabs and Eireatech Robotics all received an initial €250,000 when they moved their operations from Russia.

KamaGames, which didn’t receive any investment from EI to relocate, keep their technical capabilities in Russia because tech talent is too expensive here.

The company, which has only 20 of its 250 workforce in Dublin, retains its programmers and software developers in Moscow because they are too expensive and hard to find here, according to chief executive Andrey Kuzentsov.

Deterrent

EI doesn’t agree that the recent increase in the cost of living and the dearth of accommodation in Dublin been a deterrent to attracting foreign start-ups relative to other cities.

"While the cost living in Ireland is very high, particularly in Dublin, there has been a recent increase in co-working spaces and start-up friendly initiatives," said Healy. "Enterprise Ireland has also funded four regional accelerators in Galway, Shannon and Waterford to encourage start-ups to locate in these regions."

Constantin Gurdgiev, adjunct professor of finance at Trinity College Dublin, knows many of the Russian start-ups that have relocated and believes the €50,000 stake is less important than the logistics and visa support.

“The EI programme offers a pathway to new markets that these start-ups often lack,” he said. “While it would be more impactful to invest €500,000 instead of €50,000, the introductory grant also offers EI a chance to bring the start-ups in-house and to potentially open other EI funding sources to them.

Gurdgiev, who is originally from Moscow, believes attracting foreign start-ups to these shores is more value-accretive to the Irish economy and society than luring more multinationals. “I know of several companies that came through similar EI schemes and have 50-plus Irish employees, and consider themselves to be not Belarussian or Russian, but Irish.”