OPINION:Commitments to reward venture capital investments are extremely encouraging, write Terry McGuireand Mark Heesen
IN A speech given in 1959, future US president John F Kennedy offered a reminder regarding troubled times. He said: “The Chinese use two brush strokes to write the word ‘crisis’. One brush stroke stands for danger, the other for opportunity. In a crisis, be aware of the danger – but recognise the opportunity.”
The guidance is seemingly very appropriate to the situation faced by Ireland and other countries around the globe, including the United States, as we seek to address the economic crisis. The recent proposal put forth by the Government to build Ireland’s smart economy focuses correctly on the opportunity, not only to survive this crisis but to grow a sustainable, thriving innovation ecosystem that will reward the country and its citizens in immeasurable ways.
The US venture capital industry understands well how a country can profit from an environment in which entrepreneurship, innovation and risk-taking are embraced. Last year, venture capitalists deployed just under $30 billion into US start-up companies, bringing to market the latest innovations in information technology, life sciences and clean technologies. The most successful companies will one day go public, creating millions of jobs and revenues that did not exist before.
Many economists will assert that these companies are the life-blood of long-term US economic leadership. At just 0.2 per cent of annual gross domestic product (GDP), venture investment has produced companies that account for 10 per cent of all US jobs and 18 per cent of that country’s GDP. Many of the US’s most innovative technology companies were founded with venture investment, including Intel, Microsoft, Cisco, Apple, Google and Genentech.
For decades, the venture capital phenomenon was unique to the US, but today many countries are committing significant resources to build their own venture and start-up communities. Simultaneously, US venture capitalists are realising the wealth of global innovation.
Given this confluence of forces, it is extremely encouraging to see a commitment to funding innovation through venture capital investment in Ireland as part of the Taoiseach’s renewal proposal. The country is uniquely positioned to grow its enterprise ecosystem exponentially. Not unlike the regions of the US that have become innovation hot spots – such as Silicon Valley, Boston and Research Triangle Park – Ireland possesses the ingredients to transform itself into a global destination for new technology investment. The country has an enthusiastic, highly skilled workforce, renowned universities and a base of entrepreneurial corporations. Unlike many other countries that have made strides in technology development, Ireland is free of the political and legal uncertainties that keep many US investors at bay.
Yet, more important than any of these attributes is an environment and infrastructure that supports this unique form of risk-taking. Venture investment involves an equity infusion into a company for the sole purpose of growth. Unlike private equity investment, there is no financial re-engineering and no leverage. More importantly, venture capitalists commit substantial amounts of time to their investments, taking a seat on the board and working daily with management. Venture investment is also long-term in nature, with a typical horizon being five to seven years. Even in the US, many start-up companies fail, but those that succeed create quality jobs and sustainable, long-term value.
For this reason, those professionals who agree to take that risk must be rewarded when they realise their goals. The Government demonstrates a keen understanding of this by proposing a tax structure that motivates the risk-takers through lower rates for stakeholders when companies succeed.
Now is the time for Ireland to embrace its strengths and begin to build an economy that will continually renew itself.
Terry McGuire is a founder of Polaris Venture Partners in Boston, Massachusetts, and chairman-elect of the US National Venture Capital Association;
Mark Heesen is president of the National Venture Capital Association