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Technology in Ireland

Since 1994, the number of technology companies in Ireland has increased by over 250 per cent. This has contributed to an increase in Irish private equity dealflow. Private equity firm Delta Partners looks at the dramatic growth of the sector, details the types of investors in the market and the routes that institutional investors can take to participate in it.

The technology sector in Ireland has seen unparalleled growth, particularly since 1998. Together with Israel, Cambridge and Munich, many large European investors see their most interesting investment opportunities in Ireland. Software rather than hardware predominates. A large number of start-ups operate in specific sub-sectors such as security, payments, wireless infrastructure and silicon design. The worst excesses of the e-commerce era were largely avoided as the small size of the domestic market meant that Ireland was not viewed as a good launching pad for large multi-country e-commerce rollouts. While the downturn in the public markets has tempered private company valuations, it hasn't tempered the flow of investment into technology start-ups.

The investment pattern is well formed. Local venture capital firms with very strong networks fund Irish start-ups to the point where the investment rounds become significant (€5-10m or greater). At that point, overseas investors - generally from Britain or Benelux - are brought in, typically via relationships with the local VC firms. Exits have been through trade sales to large technology companies, (mainly US-based) and, to a lesser extent, through public offerings, which normally involve a dual listing on NASDAQ and the Irish Stock Exchange.

Until 2000, only local pension funds and banks invested in Irish VC funds. Since the start of 2000, this has changed. The new funds raised by the Irish VC firms have a familiar set of US and European investors.

Why is Ireland such a vibrant market for technology investing?
First, some facts to put the Irish situation in perspective. Ireland is the largest exporter of software in the world, even ahead of the US. Admittedly, much of the exported software is from international technology companies based in Ireland. But there has still been huge growth in the domestic sector in recent years. The number of Irish technology companies has risen from an estimated 450 in 1994 to 1,200 in 2001. At a more granular level, the signs for the future are good. Ireland graduates 70 per cent more science and engineering students per capita than any other country in the OECD and the Irish government has just committed €1bn to basic research in IT and life sciences.

The underlying factors driving the market are as follows:

• Extensive presence of large technology multinationals - A very large percentage of people employed in the private sector work for high-technology development companies. While Ireland has roughly one per cent of the EU population, it receives 33 per cent of US IT investment in Europe. Most of this investment is into software development units, rather than manufacturing facilities or hardware development. The list of high-tech companies represented in Ireland is long - Motorola, Ericsson, Lucent, Nortel, Analog Devices, Xilinx, Microsoft, Tellabs, Sun, to name a few. The presence of multinational technology companies is critical for two reasons. Firstly, it creates numerous spin-offs from development teams working on interesting problems. Secondly, it produces large numbers of skilled business development and marketing people who already have strong international networks.
  
  
• Critical mass in interesting sub-sectors - While Ireland's overall strength is in software development, especially in communications, there is now a critical mass of companies in sub-sectors such as security, payments, silicon design and wireless infrastructure. Examples include:
  • Payments: Trintech, Artic Web, Cardbase
  • Silicon Design: Parthus, Toucan Technologies (sold to PMC-Sierra), Massana
  • Security: Baltimore Technologies
  • Wireless infrastructure: Aldiscon (sold to Logica), Apion (sold to Phone.com), Xiam

  Critical mass in these sub-sectors will stimulate the future flow of opportunities.
  

• Early successes - The successful IPOs by companies such as Iona Technologies, Baltimore Technologies, Riverdeep, Trintech, Smartforce, etc. have created role models across a wide variety of technology sectors.

Who are the players?
The players in the Irish market can be classified into a few different groupings. There are the major local VC firms, seed capital providers, brokers, large investment VC firms without a local base, but that are quite active, and, finally, Enterprise Ireland.

• Major local VC firms - The major local VC firms are Delta Partners, ACT, Trinity Venture Capital, ICC and the Irish branch of Cross Atlantic Technology Partners (a US headquartered firm). All invest in technology companies and some also invest in traditional companies. Within technology, each company has a relatively different investment strategy, either by stage of development or by size of round, etc, but all are interested in strong early stage companies irrespective of the sector. A clear trend among some is to make larger commitments to individual companies. The major advantage that each VC firm exploits is the strength of local relationship networks.
  
  
• Seed capital providers - Given the general strength of the Irish economy since 1995, and the wealth created in the technology sector, some of the capital amassed has been recycled into very early stage investing. Wealthy private investors investing directly or via small commingled funds (values of EUR5m) have been very active in the market, particularly up to Summer 2000. This source of fund is much less of a force in the market today.
  
  
• Stockbrokers - At the height of the market, brokers had a very strong presence, particularly given the large pools of capital available from their private clients' divisions. Some deals bypassed venture capital firms and were funded directly by private clients of brokers. This is no longer the case.
  
  
• Large international VC firms active in Ireland, but without a local base - While the vast majority of large European investors will have looked at deals in Ireland, there are a number that appear to view Ireland as a core market for sourcing investment opportunities. These include 3i, BancBoston Capital, Vertex Management, Intel Capital. These firms are often most interested in companies seeking second round investment that have some level of track record. Where they come across a company seeking first round funding, they typically aim to co-invest with one of the local Irish VC firms, in particular to ensure effective ongoing management of the investment. Some of these firms are developing an on-the-ground presence in Ireland.
  
  
• Enterprise Ireland - When looking at Ireland, it is important not to underestimate the role played by Enterprise Ireland, the state body supporting domestic industry. Enterprise Ireland makes seed investments in companies, often alongside the VC firms, and invests in funds as well.

Dermot Berkery joined Delta Partners as a general partner at the start of 1999. Prior to this he was a senior manager with McKinsey & Co. From 1995 to 1998, he helped Irish companies in a range of sectors to develop and pursue accelerated growth strategies. Before McKinsey, he was a senior in the corporate financial services division of Arthur Andersen in Dublin and London, where he specialised in financial restructurings. A graduate of University College Dublin in Commerce, he holds an MBA with distinction from the Harvard Business School and is qualified as a chartered accountant. He can be contacted at Dermot@delta.ie

Delta Partners is a European venture capital firm based in Ireland, which focuses on early stage technology investing. With over $100m under management, the team has made over 30 investments in the following technology  sectors: communications - internet - software - life sciences

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