Venture Capital in Ireland in Comparative Perspective
Barry, Frank, O'Mahony, Clare, Sax, Beata, Irish Journal of Management
This paper assembles the most comprehensive set of data available to offer a comparative perspective on venture capital in Ireland. The paper charts the emergence of the sector and the co-evolution of the demand and supply sides of the market. On the demand side, a flow of investment opportunities emerged - particularly from the indigenous software sector - for which venture capital represented an appropriate financing vehicle. Concurrently, on the supply side, public policy - including publicly provided funding - dramatically enhanced its availability. State support of the demand side has been a multiple of state support to the supply side of the market. Developing a self-sustaining VC sector, however, is found not to be a straightforward task.
Key Words: Venture capital; development finance; high-tech start-ups
'Venture capital' refers to equity capital provided to early stage companies, where the venture capitalist also typically contributes management support to the enterprise. This type of capital is particularly appropriate to the needs of innovative start-up companies where informational asymmetries and the absence of collateral and reputation preclude access to more conventional forms of financing, and where the provision of equity relaxes the time constraints that enterprises would otherwise face.
Because of the link with innovative start-ups, the availability of an adequate supply of venture capital (VC) is usually seen as a necessary precondition for the emergence of innovative and dynamic regions. This draws on the model of Silicon Valley, which has been portrayed as an ecosystem consisting of two elements: (i) an economy of established firms, universities, research laboratories, etc., which produces output and innovations, and (ii) an institutional infrastructure, with venture capital at its core, which enables the creation and growth of new start-up firms (Kenney, 2004).
Governments across the globe have responded by adopting policies aimed at ensuring the availability of venture capital at the regional level. Many such policies have ended in failure however. Avnimelech et al. (2005) suggest that part of the problem has been one of conceptualisation, where the absence of VC is seen as a purely supply-side deficiency. They point to necessary demand-side factors in sustaining a VC market, noting that 'a vibrant VC industry is dependent upon a flow of investment opportunities capable of growing in value quickly enough to provide capital gains justifying the investment risks' (Avnimelech et al., 2005: 199). An inappropriate focus solely on the supply side is one of the grounds on which Mason and Harrison (2003) critique the United Kingdom (UK) regional venture capital initiative.1
The venture capital market expanded dramatically in Ireland in the early to mid-1990s, just as such a flow of investment opportunities emerged, primarily in the indigenous computer software sector, the most dynamic indigenous high-tech sector of the 'Celtic Tiger' era (Crone, 2004; Ó Riain, 2004).
This paper is structured as follows. The next section presents an overview of venture capital and private equity (PE) markets in the US, Europe and Ireland. The following section looks in more detail at the supply of VC and how it has been influenced by legislation and by the provision of public funds, with the latter ranging from unimportant in the case of the United States (US) to being of well above average European importance in the Irish case. This section also illustrates the very high degree of internationalisation of the Irish VC market and addresses the justification for state provision of VC funds under these conditions. The fourth section analyses the sectoral allocation of VC and the demand side of the market, investigating the role of Ireland's development agencies in directly supporting the types of firms for which VC finance is appropriate. The concluding comments focus on the co-evolution of the supply and demand sides of the VC market and seek to draw lessons of broader applicability from the Irish experience. …