Many young firms desperate for funding

Business Opinion:  Talk to any company looking for venture capital investment at the moment about the current funding climate, and they're likely to note that it's grim and getting grimmer.

VC funding has largely dried up, especially early-stage seed funding, they'll say. Most money is going into established companies that are in need of second or third round funding. And terms of funding deals are getting tougher as VCs, once used to some colossal, quick returns on boom-days technology companies, look to squeeze out at least some return in a sputtering economy.

This state of woe is largely due to the death of the IPO. Weak markets have almost annihilated the initial public offering (IPO) opportunities for information and communications technology companies. Worse still, with accounting scandals the business topic du jour, the IPO - once the hallmark of corporate success in the boom - has come close to being seen as an embarrassing symbol of corporate hubris in the bust, a prize snatched by too many over-eager and under-prepared companies after some creative accounting.

Whether warranted or not, in all cases IPOs brought quick cash to VCs and their investors. So no IPOs, no fast and hot returns. The situation is unlikely to change until an economic turnaround becomes tangible rather than tentative, giving the IPO the image make-over it needs. And until that shift in both reality and perception, companies will find fund-raising a challenge because VCs are more likely to just say no - or to expect a much larger slice of longer-term deals with the companies they fund.

Statistics gathered in various reports on VC funding in Europe over the past six months certainly bear out the concerns of Irish companies on the state of the funding ecosystem here.

A recent study by the European technology investment magazine Tornado Insider states that VC funds in the Republic fell from €480 million to €330 million between 2000 (technology's big boom year) and 2001. And an annual PriceWaterhouseCoopers report released at the start of July noted a similar 31 per cent fall in Irish funds between 2000 and 2001.

The two reports are roughly similar in their totals calculated for 2001, with PwC guessing about €355 million in total was either raised or placed into companies in 2001, compared to Tornado Insider's €330 million.

Both reports also note a sheer drop in the amount of early-stage seed funding available to companies, with PwC measuring a 50 per cent drop in such financing between 2000 and 2001.

Yep, the situation is bad. Or is it?

Stop for a moment and cast your mind back deep into the history of the Irish technology success story - oh, say, to 1996. That's about the time that many of us realised that a surprisingly large amount of discretionary income seemed to be floating around and the Celtic Tiger was beginning to roar (setting aside the fact that it never roared for about a quarter of the population).

It's also a point in time when neither PwC nor Tornado Insider could have said much about the state of the Irish VC industry because the amount of funding available was very small. A likely start-up company might have been lucky enough to eke some funds out of Enterprise Ireland, or perhaps get an investment out of the few VC firms as existed then. But the transatlantic and pan-European funds that today keep an eye on the Irish market and pump funding into it would have seemed a pie in the sky notion just five years ago.

In other words, the Irish, and indeed the European and North American VC markets are enormously rich compared to the middle of the last decade. The Tornado Insider report emphasises this: despite the funding drop-off, the last 30 months still represent the most active period of VC funding in Europe ever.

American statistics in particular highlight this change. Around 1995, less than $5 billion was available in the US. By 1999 and 2000, some $156 billion was raised in the US for start-ups, according to US technology investment magazine Red Herring. That's dropped to $37 billion in 2001 - but still, that's more than a 700 per cent increase in six years!

So there's far, far more money available to companies now than five or six years ago. The problem is, the amount around now is far less than in the past few hyper-accelerated years of investing, and the drop comes just as Irish entrepreneurs felt they were getting into their stride.

Thus the situation is particularly tough on companies in an economy like ours, where we are only now beginning to spin out a range of companies that need all-important seed funding - the kind of cash they are least likely to find right now. Also, many of the young companies that managed to get initial funding before the current slump are growing anxious - or desperate -- about raising badly needed new rounds of investment.

One thing is certain. The young companies - and, indeed, the established ones - that can navigate through and survive this harsh downturn are those that will have the business skills for future success. In addition, many of those in companies that are going to fail will nonetheless, through that experience, gain invaluable management knowledge and will be tomorrow's entrepreneurs.

All very well in the abstract, isn't it, but such truisms won't relieve the pain companies are going through right now. At least when the world economy does show it is on the mend, Irish entrepreneurs will find that there is more money waiting to be released from funds here than there has ever been in the history of the State.