I’ve been both planning and procrastinating this article for months. With Ireland teetering on the brink of default, there’s still plenty of optimism in the tech sector, with various new funds allocated to small enterprise and new incubators arriving on the scene. However, having spent the latter half of 2010 on the local fundraising circuit, I find myself a bit cynical about how capital is made available to small enterprise and the direction this is going in. I’ve talked with various other local startup people, and many of them share my opinion.

I believe that online technology companies are the way forward for Ireland. It is now clear that online technology companies can be as financially successful as more traditional businesses. However, unlike other sectors, it takes very little money to start an online tech company. Neither does your geography limit your market. All you technically need are brains, and enough money to pay other brainy people to work for you. No need for factories, or 20 years of lab research, or anything like that.

Unfortunately, there are problems providing capital in the relatively small amounts these companies need to initially launch themselves (say €20K to €200,000). There aren’t enough sufficiently cashed-out former technology entrepreneurs to fund at this level as angels. Instead, we rely on small investment firms doling out government money, and a couple of loose angel networks that can make small aggregate investments. At this scale, it’s not viable for investors to have excellent in-house domain expertise to help understand and vet opportunities. Because of this, the dynamics are not what you might expect. You may encounter:

  • Folks on the investment side getting confused and thinking they are on Dragon’s Den
  • Rife suspicion that entrepreneurs exist to con money out of investors so they can run away with it to paradise island

The most popular ideas with small investors are those that are either: easy to understand, widely understood, or already commercialized and generating profit. Unfortunately, funding these ideas doesn’t do much for our country. The competitive landscape for simple and/or popular business ideas will generally rule out any serious kind of success. Meanwhile, providing seed funding to companies that are already profitable is a misuse of the money (these companies can do a Series A round). Anyway, predicting future performance only on the basis of past performance is just naive speculation, and prone to failure (what goes up must come down, after all).

What’s really needed are seed-level investors who have specialist knowledge, and the in-house ability to understand and vet complex ideas that are presented to them. Perhaps this is a tall order, but with the surge of new micro-finance funds and incubation centres, this problem may be set to worsen. The smaller the fund, the less affordable is the specialist expertise.

So what’s the solution? Investors must acknowledge that money is made by knowing something others don’t. There will never be much success to be had investing in businesses that are copying widely understood business models, or investing in companies that are already well on their way to success (impossible to get a big enough bite of equity).

Investors must specialize, and develop in-house specialist knowledge. In the case of the online tech sector, they need to get some former technology entrepreneurs in, and have them vet potential opportunities. Where this is not affordable (e.g., when funding amounts are less than €50K), the focus must shift to creating an entrepreneur network. The various incubation centres and micro-finance funds should work to create a well-connected technology entrepreneurship scene in Dublin city. With this in place, they will have better access to experts, and may even get to a point where they can invert their application processes. Instead of many young companies applying directly to one of these funds and being somehow vetted, a young company would find its way into the technology entrepreneur network, and be referred forward if it is deserving. When this critical mass is hit, there won’t be a cost to reliably and fully vetting new startups - they will come in the door pre-vetted through a trusted referral.

This ability to identify real investment opportunities will allow much needed early stage capital to flow to the young companies who can put it to work. It will also make for a better return, with more equity bought due to the early stage of the investment.

A corollary to the above is that the investors must also be ready to invest in a experienced team. You would expect this to already be the case, and indeed many investors love to talk this talk. But although an excellent team is a requirement, it is often considered insufficient by itself. Investors also want to be comfortable with the business model, the vision, the technology, and preferably have several years profitable trading too. Not only is this unnecessary, but it’s unrealistic. The point of having an experienced team is that they can do things the investors don’t understand, like invent new technologies and business models. An experienced startup team has probably already invested more in terms of their unpaid salaries than they are seeking in seed capital. An experienced team probably contains the same people investors should be trying to hire as consultants. Simply put: if an experienced team is investing their time in an idea, they should be trusted and supported immediately. Making capital easily available to these people is also a great way to kickstart an entrepreneurial network.

To recap:

  1. Small scale investors need to develop specialist knowledge so that they can invest rationally
  2. The incubation centres, micro-finance funds and seed finance funds should immediately start trying to bring the community together. Finding and vetting investment opportunities can be crowdsourced to this investment community
  3. Meanwhile, give experienced startup teams money on spec

My hope is that this can develop into a self-sustaining ecology, which can provide apt early-stage capital at low cost and effort. This will beget a generation of new successful startups. In time, the founders of this wave of successful startups will become the Irish angels - personally capable of vetting and capitalizing companies in their own niches. Perhaps then “Silicon Liffey” will be a bit closer to Silicon Valley.

Archived Comments

June 2, 2011 at 2:16 pm Kieran says:

Hi Sean

Just a follow up on one of the points you’ve raised:

“Rife suspicion that entrepreneurs exist to con money out of investors”.

Equally amongst the startups is a suspicion or belief that many > investors are there to move the founders aside once the startup grows > through dilution etc. It has happened regularly.

Good thought provoking post, thanks Kieran

8June 3, 2011 at 11:54 am, Simon Dobson says:

Sounds like the situation hasn’t changed much from a decade ago when > we did Aurium. I think the point about the lack of specialised > expertise is a good one: maybe there’s a niche for a consultancy that > provides this to the various incubators around town? I’d be up for it… > 🙂

June 3, 2011 at 4:34 pm, Cormac says: Great post Sean.

My co-founder & I spent the month of April 2009 fundraising in Ireland (this was after we spent Jan-Mar ’09 in the Valley with Y-Combinator). Our experience was similar to yours – the first two bullet points certainly sound familiar.

The contrast between Ireland/Dublin and the Valley is so stark that it > seems almost impossible to fix. As you said, you need people who’ve had successful exits to become active angels in Ireland, but if they can’t get their companies funded there in the first place then it’s unlikely that they’ll become angels there – they are more likely to stay where they’ve had success e.g., in the valley.

When our company was acquired we were in a position to sit on the > other side of the table. Any time I think of angel investing it’s never in Ireland because my belief is that founders have a better chance of success if they are around a strong ecosystem, so this means I have a preference for valley startups. This is obviously selfish but it’s a real concern for people with limited capital (which is presumably most people) – if you’re going to spend your money then you > want to make sure it has the best chance of returning. Unfortunately, the side effect is that Ireland misses out and the situation doesn’t improve.

June 16, 2011 at 8:07 am, Startup Capital says:

Sean Blanchfield nails it.

September 10, 2011 at 5:49 pm, craig says:

Sean, I really enjoyed your post. Completely agree that there can be > no large success if investors only invest in already profitable > companies or those whose business model is easy for them to grasp and > see an exit. One thing which I think the government could do to help these kind of > startups is use some of the endless empty office space around our > cities and create centres for startups to get a desk or two etc. I > actually wrote a post about this on my blog at http://craigbrookes.com/> 2011/08/24/cultivating-a-startup-environment-in-ireland/