Why Ireland will never be a relevant Startup hub
Budget 2015 and its supporting documentation was a nail in the coffin of Ireland pushing on and being a true player on the international tech scene. We are not in the top 20 worldwide by most metrics and to be honest we are a long way off being so. 2015 Global Startup Ecosystem Ranking
In this budget the government further enhanced their strategy of being a good tax haven and EMEA headquarters location for foreign multinationals while simultaneously deciding that local startups don’t hit their election buttons and therefore don’t matter.
Sod the web Summit leaving — this is what really matters
Where is the outrage from startups? We had a whole hullaballoo about the web summit leaving but except for the usual few stalwarts barely a murmur from the tech community in relation to the Government’s “Tax and Entrepreneurship Review”. This boring crap is the stuff that will define how your startup will be funded.
We are dying slowly
Startups are about money. Some people may think they are about hanging out in a cool office, coding on a comfy beanbag or getting to have a pint with the CEO of a unicorn at a pub summit. They are not. They are about money. Making money. Selling product. Selling Companies. Re-investing the winnings (if there is any) and doing it again but bigger.
Startups are expensive. There is a myth that you can launch your startup for a tiny amount of cash. Yes you can if you can code and if you can translate that small amount of code into customers (or investors) straight away but the odds are even then you still need cash to scale.
For most software startups there is a lot more coding needed than people realise and those coders need to eat, pay rent and live, etc. In the meantime, for the non-coding founders of whom there are many, then these costs can be even higher.
For hardware startups the costs can be even higher again. Yes we all know about Arduino chips and the host of simple and cheap tools that can be used to prototype but it still costs a lot to build something of substance.
In short startups need investment to get started. Most founders don’t have it so they need help. They are too small for debt so they need Investors.
In Ireland the government is killing investment in startups. The great community we have won’t last long of it is slowly strangled to death.
Governments Pick Policy
Governments have choices as to how they support and promote businesses.
The UK government decided to let the market decide who should get funded. They give tax breaks to incentivise the investors not to put their money into their pensions or saving schemes but to risk it on early stage ideas.
The Irish government decided they knew better than the markets and they gave a pot of money to a semi-state and allow people to queue up and ask for grants, investment and advice. This semi-state, Enterprise Ireland, once referred to themselves as the biggest VC in Europe.
There are two problems with the Irish Solution. Maths and Business Logic.
Maths
Giving a government agency €1 or giving an investor a tax break of €1 costs the taxpayer the same amount……but the difference to the startup is huge.
The government agency will spend about 70c administering the grant/investment. This means the startup ends up with 30c. Even if the startup has to raise matching investment this still only comes to 60c that the startup has in their bank account. 70c goes to the state agency — that is more than the total the startup gets.
With a tax break the situation is much better for the startup and the taxpayer. The taxpayer has little or no overheads but says to the startup, “If you can find somebody crazy enough to give you €1.50 we will give them €1 tax back”. In this case the startup gets €1.50.
In real terms the gap can often be much bigger than 30c/60c to €1.50 shown above. Quite often it can mean 5–10 times as much cash for the startup.
Meanwhile the taxpayer gets all the same upside in terms of jobs, taxes, exports, etc — in fact they get more as the startup has more to spend.
Business Logic
Every year thousands of Irish startups queue up to ask a civil servant for a grant/investment. New Frontiers, CSF, HPSU, etc, etc…the list goes on. This is not fair on the civil servant.
Why the civil servant? Well they are giving out the taxpayer’s money and they have a duty of care to the taxpayer. They can’t just throw the cash about. That is why the process is slow, procedural, rigid and of course infuriating to startups.
Of course the startup suffers hugely too. Despite the fact they are trying something new they must fit within a formulae that a government employee somewhere defined as leading to a successful business. Innovation and rigid, slow systems don’t often work well together.
So what made this budget so Depressing?
The Tax and Entrepreneurship Review. The government put out their response/findings from their recent public consultation on tax and entrepreneurship. Feel free to read it but the short summary is that nothing is changing and if anything it’s about to get worse.
Budget 2016: Tax and Entrepreneurship Review
Key Findings
EII: This is the main investment incentive for investors. In Ireland investors get 30% back on investing and a further 11% 3 years later if the business is still operating. In the UK the investors gets up to 84% back
What the government pretty much said, “We looked at that in 2014 and won’t be changing it. We promised to take a look again in 2016 if people are not investing”
We have shown through freedom of information requests that investments are down 1/3 since the system became more draconian. Hardly any accountants encourage the system to their clients as a tax incentive scheme anymore. Changing Tax Schemes in Ireland
The government increased how much a company would receive under the system while knowing full well that hardly anybody is actually getting investment.
R&D Rebate: In Ireland the rebate is paid over 3 years. In the UK it takes 3 weeks.
What the government said, “We are happy to leave this as it is”.
This is disgraceful. It’s costing thousands of R&D jobs a year.
CGT Relief for entrepreneurs: This is the tax you pay as an entrepreneur when you sell your business. In the UK it’s a special rate of 10% for the 1st £10m. In this budget we moved it from 33% down to 20% but only for the first €1m.
3 years CT relief: So startups don’t have to pay a tax almost all of them don’t pay anyway?
Share Options: Forget about it. No change here. If you are an employee of a startup then you have just been seriously hit!
There are lot of others but I won’t bore you with them. Needless to say it’s pretty much all the same thing. “No we won’t be doing that anytime soon…we can’t afford it”
But what about the ½ Billion Euro?
Yes well this was the nugget thrown in by Brendan Howlin. In 2016 Ireland will give €500m or (€1/2 Billion) to our enterprise agencies.
Just to make the difference clear that is about €12m-€15m on investor tax breaks and €500m to government agencies.
The problem in Ireland is the Balance is off
Less government and more investors. We need to have less CSF, less HPSU, less New Frontiers and more private investors. It would be great to have both but the country can’t afford it.
This is not a dig at the nice people working in the IDA — they are selling Ireland well and should continue.
This is not a dig at the nice people working in Enterprise Ireland — they are doing what they are mandated to do. It’s just that their mandate is misguided.
If you think I am wrong about our Irish model then look at how unsuccessful Enterprise Ireland’s scheme to attract early stage startups to come and launch their business in Ireland was.
We said come here and take advantage of our government led investment schemes. How many came? I can only think of a handful.
How is it that we can attract all the top American Startups like Hubspot, Twitter, Adroll, LinkedIn, etc but we couldn’t get more than a few early stage ones? The answer is simple. Startups go where the money is and there is not enough here. Plus government money takes ages to get.
Compare this to London, right next door to us and our main startup hub competitor in the region. They are a global centre of finance, their startup investment numbers are going through the roof, their eco-system is top 5 worldwide, etc, etc. I would wager than I could find a lot more Irish startups that moved to London, than startups our agencies could get (from anywhere in the world) to move to Ireland.
Ireland has so much going for it but we are about to be totally dominated by London.
So should we shut down Enterprise Ireland?
Absolutely not. But we should give the guys in there a chance to do more meaningful work. Cut back the HPSU and CSF investments. Give tax breaks to investors and then get Enterprise Ireland to work with companies that have some market validation to sell, scale and export.
Enterprise Ireland and the IDA have built an incredible global network and we should use that, instead of having us founders driving them all nuts looking for the latest grant.
Will Budget 2016 affect how the Lucey Fund operates?
Unfortunately yes.
1. The simple fact is that as an investor in extremely early stage businesses it’s vital that our portfolio companies have access to a range of seed and follow on investment.
2. UK & US businesses are more appealing to us as they will have a better chance of being financed properly.
3. We will actively encourage Irish startups to raise money in the UK
a. From January onwards we are extending our services and directly raising follow on money in the UK and US for our clients.
b. This will however mean that some will have to move much of their business to the UK and/or the US. This will costs Irish jobs. It’s unfortunate that this is the consequence of these Government decisions.
How do we make Ireland Relevant?
1. Keep telling the politician that shows up to your event that you want private investors and not government investment…..it’s that easy!!!
a. Tell them without money you can’t compete.
2. Tell Enterprise Ireland you want their help getting investors and not getting their investment.
a. Tell them they must be more like the Israelis and they must help get International investors for you.
b. Tell them to spend their money getting you out to meeting international investors and customers
3. We have a friendly community and enthusiastic people. Keep selling Ireland.
4. Sell your product and scale your business.
a. Try look after the rest of us when you do.
Remember every time you hear an announcement about more HPSU, more CSF and more investments all you are hearing is more about our failure to see the reality of government led investment.
Disclosure: My Entrepreneurial/Enterprise Ireland/Government/Banks Experiences
Finally just for the sake of full disclosure I will outline my personal experiences
1. I found raising money in Ireland almost impossible.
a. Granted I started in 2009 in the middle of the recession
b. It felt impossible then and it seems the same now for many of the startups we deal with.
2. No advisors in Ireland
a. There are hardly any Irish investment bankers, financial advisors or accountants helping early stage companies raise money in Ireland
b. Why? Because the investment market is not there. Founders may not realise it but when you launch it is really helpful to have a range of advisors who will sell you really useful services like raising money.
c. London is full of people offering the service and with access to real money
d. Irish accountants are particularly poor with only a handful of specialists
3. Enterprise Ireland were good to me
a. They gave me good advice as a first time founder
b. They gave me a grant within 8–10 weeks of meeting them
i. I would point out that a prior company I worked for had made them a lot of money so it was an easier sell
c. They invested €200,000 into our business
i. They said it would take 9–10 months and it did
ii. It was too slow and extremely costly but it was all that was available.
d. The best things Enterprise Ireland did for me cost them very little money
4. The government can drive you out of business
a. It’s disgraceful that companies all over Ireland are waiting for R&D rebates. We are owed hundreds of thousands of euros right now.
b. In England I have been paid and have re-invested it already in my business and others.
5. Banks
a. They are better than you think.
b. Learn to speak their language and they will give you money. Even Irish ones.
In conclusion wouldn’t it be great if we were debating scaling companies and business models rather than government policy?
