David McWilliams did an uncharacteristically bad fan-boy analysis on his blog recently of the latest attempt by the government to bootstrap home-grown high potential businesses. His post lacks any real substance and drowns in Minister-style knowledge economy buzzword bingo.
It kicked off a very long comment thread, most of which is unreadable, but which contains some real gems. The best of the lot is by Johnny Dunne who has a deep knowledge of the investment environment in Ireland.
Johnny does a brilliant analysis of how wrong-headed the â‚¬500m approach is in the short term, whilst accepting that long term it could provide benefit. It’s just a pity that those who are making these fundamental decisions are taking their advice from the foxes minding the hen-house who have already killed all the chickens.
I’m quoting it here with Johnny’s permission:
The â‚¬500 â€œInnovation Fundâ€ is a great â€˜medium to long termâ€™ idea to help fund the development of businesses based in Ireland selling valuable good and services to international customers.
Our problems are a lot more urgent – we face a serious fall off in economic activity again in 2009. For example, Dell alone pulling out of Ireland with â‚¬10 bn+ / 10% of GDP gone in one go !
David, if the government can invest NPRF of â‚¬1.5 billion in â€˜cashâ€™ within â€˜one monthâ€™ in a bank with â€˜poorâ€™ assets and without a CEO and therefore you would have to assume NO business plan. I have never heard of a VC or a bank investing in a company without a Chairman, CEO and agreed plan !
Why not focus the â€˜special finance unitâ€™ in Anglo (and AIB,BOI) to invest say â‚¬500 million in growth companies without taking security as the government is not doing so! This unit which exist already invest in many â€˜largerâ€™ growth oriented companies some of them would be Enterprise Ireland clients. For example, the main criteria used for lending in Anglo are people, cashflows and asset quality. The government have guaranteed the liabilities and injected cash so the banks should lend to â€˜goodâ€™ people with a â€˜credibleâ€™ and (dare I say it) innovative business plans without recourse to personal guarantees and propert / assets backed security.
There needs to be urgent action with a â€˜fundâ€™ launched in January with say â‚¬500 million to invest in 2009 – why not? Anglo increased lending by â‚¬9 billion in 2008! A medium term plan to invest â‚¬500 million over many years is not enough. This money may not â€˜startâ€™ investing for at least another 12 to 18 months, even then if it is in the hands of US VCs it may provide little employment in Ireland – assume investee companies will need qualifying Irish operations ? If the local VCs like Delta, Atlantic bridge and NCB canâ€™t find opportunities with their strict â€˜VCâ€™ criteria, then the international VCs will find it harder unless we open the â€˜flood gatesâ€™ to fund earlier stage / developing companies.
There is a requirement (and suggestion) for many small funds say of â‚¬10 million each investing less than â‚¬1 million in a number of firms in order to open the â€˜pipeâ€™ of funded start-ups which can access further development capital at a later stage. Enterprise Irelandâ€™s policy with the latest round of â‚¬175 million of VC funds which 2 years after itâ€™s announcement has only allocated to 5 of the possible 8 funds. There is a â€˜believeâ€™ within Enterprise Ireland that small funds donâ€™t work as they donâ€™t have sufficient fund to follow their money. There has been calls for proposals from VCs, one in 2006 and another this year for the same money as the selected VCs couldnâ€™t seem to raise matching funds ? While over 20 funds applied on each occasion, only 8 were selected as 5 of these could only raise sufficient funds of at least â‚¬30 million inclusing state money. EI says this initial funding has leveraged â‚¬500 million for investment but already some of the more active funds like Delta and Atlantic Bridge have made multiple investments in non Irish companies. The reason ? based on their â€˜investmentâ€™ criteria not sufficient opportunities in Ireland ?
So why are the Government allocating Irish â€˜pensionâ€™ funds to US VC funds on a 50:50 basis now, when it could have done this many years ago when it was suggested before. Instead the â€˜mandarinsâ€™ in the NPRF and â€˜beancountersâ€™ in the Dept of Finance felt it was better to invest in international equities which we know where theyâ€™ve gone – south! US â€˜Tier 1? VC funds are well able to raise their own funds without state support 9this should apply where the market wonâ€™t go – remember there was 20 unsuccessful applicatns locally for the previous EI VC funding rounds). Why not just use the â€˜preferentialâ€™ tax to ensure they invest through and in Ireland not invest directly when they can access other sources of finance and need to be free to invest on an international basis. Local fund and banks can invest !
There is â‚¬400 billion of loans outstanding but AIB have contributed â‚¬15 with Enterprise Ireland to a â‚¬30 million seed fund and BOI have invested about â‚¬20 million in a â‚¬70 million fund which EI would have invested a similar amount. Recently Ulster invested a smaller amount with EI in the NCB fund. We are investing over â‚¬ 5 billion within 3 months in 3 banks with â€˜no securityâ€™ and a relatively small return up to 10% (VCs look for 30% and use preference shares all the time but ensure they can convert to control the business if management donâ€™t execute on the business plan). Why not pass the same terms through to ANY business certified by Enterprise Ireland or the IDA with a â€˜qualifyingâ€™ export oriented operation with the potential to generate more jobs and exports in the short term generating tax revenuesâ€¦.
The â€˜mind changeâ€™ needs to be within the Irish financial services sector to fund this â€˜Smart Economyâ€™ of the future.
Or should we just let â€œScience Foundation Ireland spend â‚¬7 billion on education and training in the years aheadâ€ with no medium term opportunity of generating sales !
There must be independent advisers with experience of investing or raising VC and banking funds better placed to advise the Minister rather than â€˜City folkâ€™ from Merrill Lynch generating massive fees to â€˜give awayâ€™ tax payers and pension funds money in return for no equity in the 2 major banks AIB and BOI which are obviously undervalued, as they donâ€™t seem to understand where the irish economy is and what it needs to survive over the next decade ???