Selling our silicon side

START-UPS IRELAND:IRELAND HAS repeatedly shown itself to be world class at attracting foreign direct investment, with the IT hub that's emerging along Dublin's docklands – nicknamed "Silicon dock" – incorporating household names such as Google, LinkedIn and Facebook, acting as a testimony to this.

Now the challenge has changed. As Enterprise Ireland launches a new €10 million fund to get top international entrepreneurs to move their start-up business to Ireland. But can the next Google or Facebook really be an Irish company?

The fund, which was launched in October, will be administered by Enterprise Ireland (EI) and will be targeted particularly at the Irish diaspora, international expatriates, the “new diaspora” (people from overseas who have previously worked or studied in Ireland), as well as serial and mobile entrepreneurs.

“In a country of our size we’re only going to get a certain number of good quality start-ups. If we want to get more start-ups we have to spread our net wider,” says Lorcan O’Sullivan, manager for overseas entrepreneurship at EI.

Alongside ambitions to become the tech hub of Europe, the time is ripe to position Ireland also as the region’s start-up capital.

“Ireland could be a very fertile ground for the launch of new businesses. Early stage entrepreneurs need to have a bit more confidence in what they do, and a belief in the possibility of becoming that new Facebook or Google. Companies could skyrocket from Ireland,” says Sean Killeen, who has just moved his company, Xintec, to Ireland from Luxembourg. “Who knows what the future holds, but there is great potential that needs to be harnessed and supported.”

The start-up fund marks a definite change in mind-set about the value of encouraging foreigners to set up their businesses in Ireland.

Sixteen years ago American Louis Ravenet came close to moving a business – which went on to employ 200 people – to Ireland, following discussions with the IDA.

However, he felt that, at the time, the government’s focus was on looking for large well-capitalised companies, and when the IDA’s incentives shifted to the regions and away from Dublin Ravenet decided against coming here.

“Now the Government understand that there is a lot more value in native IT companies,” he says. “It’s a very different flavour this time round.” Indeed serial entrepreneur Ravenet moved to Dublin earlier this year to set up his gaming company, 2 Paper Dolls.

And he’s not the only one. Of the 90 high potential start-ups (HPSU) EI expects to designate this year, about 10 have been set up by international entrepreneurs.

As O’Sullivan points out, the end goal is two-fold. “Firstly, it’s jobs and, secondly, it’s to build the whole start-up eco system, by bringing in people who have the capacity to set up an HPSU, you create a sort of synergy. We’re not trying to directly copy Silicon Valley but it’s a similar model.”

For the Government, the strategy is really all about creating jobs. “It’s not about making money. We do invest in a way that creates the possibility of making money, but the purpose behind that is reducing the net cost of building the eco-system.”

EI gives funding to start-ups in two forms – one is straight equity and the other option is a convertible loan note. This can be converted into ordinary shares if EI wants, or else paid back after five years with interest of 3 per cent.

While a straight equity share can prove to be a lot more profitable for EI, a debt structure is often more attractive for start-ups. After all, it’s not in many places that you can fund a start-up with a 3 per cent loan.

For David Smith, who runs EI’s office in Silicon Valley, it’s not just the money that will attract entrepreneurs, it’s more about the support EI can offer in terms of market access and market research. After all, if they have a good project they should be able to secure funding anywhere.

“These people will have choices of where to go and Ireland has to stand on its own legs. Ireland has to have an absolutely compelling proposition,” he says.

The fund will invest on exactly the same terms as an equivalent or local originating project, and O’Sullivan is keen to point out that extra money has been allocated for this purpose. Unsurprisingly, some indigenous entrepreneurs who were turned down for funding by EI have complained about the new initiative. “That’s to be expected,” notes O’Sullivan.

While the ultimate goal might be to attract the next Facebook or Google to start-up in Ireland, O’Sullivan notes that EI would be happy to get a couple of companies employing a couple of hundred people.

“If they’re not going to hit €1 million in sales and 10 jobs, unless we think there’s a very good probability, we wouldn’t be supporting them,” he notes of eligibility for the fund.

Such initiatives might hope to attract internationally based entrepreneurs such as Patrick Collison. While still a schoolboy in Limerick he and his brother John sold his start-up company, Auctomatic, which provided software for heavy users of eBay, for a reported $5 million back in 2008, after securing investment from a Silicon Valley-based firm.

The duo moved to Palo Alto, California, where they have embarked on their next project, Stripe, which makes it simple for website operators to accept payments online. The brothers recently secured some $2 million in funding from local venture capital (VC) funds for the business, valuing it at $20 million.

So would he come back now? “Our company, Stripe, is too far along for that. We’re now pretty firmly based in Palo Alto with 15 people and close ties to the Bay Area. We won’t be returning any time soon – perhaps in around 10 years.”

Nonetheless, Collison is complimentary about the Government’s latest initiative. “It’s exactly the right idea, getting more entrepreneurs to come into Ireland,” he says. Looking at the success of centres such as London, New York, Silicon Valley and San Francisco’s Bay Area, Collison observes that these areas attract highly ambitious people from all over the world.

“We need to become the magnets,” he says. “Ultimately investors will go to wherever the entrepreneurs are. If we manage to create a really good community of entrepreneurs, eventually the investors will come. They’re used to reacting to trends in the market but you can aid the process by helping investors come in earlier than they would naturally.”

In this respect it is hoped that the Innovation Fund, which has set aside €100 million to invest in international VC funds on the basis that they will consider investing in Irish companies, will fulfil this aim.

Already top international VCs such as Polaris, through its Dogpatch Lab, and DFJ Esprit have set up Irish offices as part of the scheme, while there is “broad agreement” on another three investments. “The fact that they have come to Ireland means that other people sit up and take notice,” says Smith.

So far, the international start-up fund is attracting interest, with Smith having numerous meetings with prospects in the US, and O’Sullivan pointing to “20 reasonable prospects” in the week following its announcement.

But nurturing start-ups is a very different ball-game to attracting established, well-capitalised global players. As such, Collison feels a gap exists in third-level education.

“I wish it would become a general hub for ideas of all kinds,” he notes. In this respect he points to his experience at MIT, which he says, is “not a school for people from Boston, it’s for people all over the world”.

“We need to make the universities better, as they are the magnets for the best students in the world,” he says, adding that to truly succeed Ireland should look at establishing one or two world-class research institutions.

“It would be costly but I don’t think it’s undoably costly. Someone with the right knowledge and ambition could do it.”

O’Sullivan concedes that going after international start-ups is a risky strategy, but notes that over the past two decades, of the companies in which EI has invested, 75-80 per cent are still in existence. Moreover, he points out that the €10 million fund is just one element of the funding available.“It’s just kick-start money,” he says.

Indeed following the recapitalisation of the banking sector, seed capital has never been more available, with €124 million in the four funds that EI supports, as well as private funds such as the ESB’s €200 million Novus Modus fund which invests in energy projects.

“It’s by far the highest per capita in Europe,” says O’Sullivan.

But, while seed capital may never have been so available, problems can develop at later rounds of funding. “It strikes me again and again when I see it in local, successful Irish entrepreneurs, who are going to California for funding and marketing,” says Ravenet.

As Ravenet points out, VCs like to be close to the businesses they invest in, so that there is an ecosystem of funding/technology start-ups. Smith likens it to a VC being able to hit a golf ball to all the companies they invest in – if they can’t reach you they’re unlikely to invest.

It would be a shame if a company with the potential to be the next Google or Microsoft actually comes to Ireland as a start-up, but ends up having to leave to get closer to funding sources.

“The Government needs to continue to act as a sort of shepherd to bring to Ireland VCs that don’t have a risk-averse mentality,” Ravenet says, adding, “Otherwise they will end up going out of the county for funding.”

Entrepreneur’s Experience

SERIAL ENTREPRENEUR Louis Ravenet took a somewhat circuitous route to Ireland, but got here in the end. He first started visiting Ireland many years ago, but much of his time was focused on building and selling four technology companies in the US.

As he says himself, he has “entrepreneurial DNA”, and when he sold the last company, iCommunicate, to Microsoft, it necessitated a move to Seattle. There he found a city which has since reminded him of Dublin. A relatively small city, it has become a hub for technology companies such as the aforementioned Microsoft, Expedia and Amazon.

Having sold this company, Ravenet and his family embarked on a year-long trip sailing around the world, before eventually settling in Paris, where they spent five years there before the entrepreneurial bug hit once more, and he started building a team to develop a new software company. But, he soon realised that French bureaucracy was a problem. So, with France out Ravenet then looked to Amsterdam, spending a few months there, and then London and Dublin. “It became a shoot-out between the three,” he recalls. In the end, Ravenet set up 2PaperDolls, which creates mobile social games, in Dublin. The structure of Enterprise Ireland’s funding swung it for him, which he saw as a “win-win”.

By EI agreeing to invest convertible debt in a company, rather than straight equity, it effectively puts a cap on how much of the wealth of the company the owners have to give up. In Ravenet’s case, the debt will convert to 10 per cent in equity upon a merger or acquisition, or can be repaid with interest by his company at the end of five years.

But it’s not just about the money. It’s the hands-on support that EI also offers, such as helping out with visa issues and information on the Chinese market. We got quality responses very quickly,” he recalls. Since setting up last year, 2PaperDolls now employs six people, and expects to employ 15-16 staff within the next six months.