Venture capital funding into Irish technology SMEs in the third quarter of 2023 fell by 38 per cent to €190 million, from €309 million over the same period in 2022, according to the latest Irish Venture Capital Association/William Fry Venture Pulse survey.
At the time, observers suggested that this is the start of a worrying trend – the Irish Venture Capital Association said it “raised alarm bells” – but others believe it to simply be a bump in the road, as the Irish market begins to mirror what is happening globally.
Richard Watson is managing partner of Furthr VC, one of the most active early-stage VC investors in the country.
“The stats were down in Q3 relative to 2022 but if you look at the year overall it’s actually up six per cent on 2022,” Watson points out. “It’s just one quarter and I wouldn’t read too much into one quarter. The amount of international venture capital has reduced a bit but that’s just reflective of the global venture capital situation, which has slowed down.”
Indeed, the boom in the aftermath of the Covid-19 pandemic saw record levels of valuations and money being raised, says Dannie Hanna, of counsel, M&A, at Taylor Wessing.
“Since then you have had global uncertainty [and] high inflation rates,” he notes. “That has affected businesses and tech in particular, and you would expect that to trickle down to VC funding. It wasn’t unexpected from our perspective and we think it was simply a bit of a blip in terms of downward trending.”
James Toomey, partner, M&A with Deloitte, agrees.
“The market has been steady for two of the last three years, with a notable blip in 2023 driven by geopolitical and economic factors which create uncertainty,” says Twomey.
“This was likely a temporary blip impacted by headwinds from the wider macro environment. Everything we are seeing points to a very positive 2024 with pent-up demand for VC firms to deploy capital into the right businesses.”
Looking at the bigger picture, last year’s figures show a proportionate increase in key areas, particularly “envirotech” or climate tech, digital health and life sciences, artificial intelligence (AI), and fintech. In the nine months to the end of September 2023, envirotech raised €580 million, or 50 per cent of the total VC investment.
“What start-ups try to do, they look to offer solutions,” says Hanna. “And the big questions we have right now are around climate and sustainability as well as digital health and AI.”
Ireland ranks fourth in Europe in terms of start-ups per capita, he adds, with half of the 20 largest capital funding raises last year in climate tech.
“So while we have certainly seen a drop in Ireland and across Europe, we have actually seen an increase in certain areas, which we think is going to carry on into 2024,” he says.
In the climate tech space, Taylor Wessing acted for Verdane in the €26 million investment into Irish solar energy company Urban Volt, which was one of the biggest deals of last year.
Early stage SMEs are one of the most vulnerable sectors, notes Hanna.
“You’ve got early stage founders, who are often backing themselves and looking for funding while potentially not being revenue generating,” he says.
According to Toomey, there are “huge opportunities” for companies. “This year’s Fast50 awards saw the highest percentage growth ever and the average turnover was also a new record at almost €100 million.”
He cautions, however, that in the current environment it is clear that investors have become increasingly risk averse and are focusing their capital on sustainable business models with a clear route to profitability.
But Government supports, including from Enterprise Ireland, are continuing to bolster early stage companies, Toomey adds.
“It’s with this support that companies can continue to scale,” he says. “The current market has more supports than ever with Scale Ireland offering a huge support to the entire ecosystem. And, with regular summits, the CEOs and business leaders can collaborate on an ongoing basis.”
What 2023 also showed was Ireland’s reliance on US investing, though the value of international VC investment in the third quarter fell by 69 per cent, Hanna points out.
“These were more reticent last year due to instability but we know a number of funds are currently sitting on investments so we will see more US money coming in as they have had a year of watching and waiting and it just takes a couple of investments to get going,” he says.
“The thing is, there never is enough venture capital,” adds Watson. “In Ireland we don’t have a large number of institutional investors investing in our funds and that’s the challenge. The only institutional investors are Enterprise Ireland, who are very supportive, and also the Ireland Strategic Investment Fund, which is managed and controlled by the National Treasury Management Agency.
“Our main problem is that we don’t have pension funds investing in venture capital in Ireland like you do in most other economies, such as the UK and US. We really need them to start doing that. Otherwise there is a limited availability of venture capital in Ireland relative to the opportunities.”
But Watson says the downward trend seen in Q3 should not be looked at negatively.
“There are new funds coming into the market which will shake it up again,” he says. “There is good deal flow here, the environment is good, there are more funds here than ever before. Success does breed success. It might take a while for international venture capital to start flooding back in here but it will definitely happen.”