Meeting the Needs of High-Tech Start-ups: A study of the subvention process in Ireland"

Transcription

1 Meeting the Needs of High-Tech Start-ups: A study of the subvention process in Ireland" Paper submitted by: David Coggans, Peter Fuller, Colette Henry, Shane Hill (Dundalk Institute of Technology) Contacts: david.coggans@dkit.ie peter.fuller@dkit.ie colette.henry@dkit.ie shane.hill@dkit.ie School of Business Studies, Dundalk Institute of Technology, Dublin Road, Dundalk, Ireland. Telephone: (0) Fax: (0)

2 Abstract Entrepreneurship needs to be fostered within a dynamic and growing economic system. Indeed, it has been argued that entrepreneurial start-ups are essential for continued economic stimulus, as it is through the process of entrepreneurship that economies sustain themselves and prosper. However, in Ireland, there is a fear that there is more emphasis on attracting foreign owned multi-nationals, than encouraging the establishment of new indigenous firms. This paper involves a national comparative study to assess the extent of mismatch that exists between the needs of the practitioners - the SMEs, and the providers of subvention funds. A subset of Enterprise Development Agencies will be surveyed, namely the County Enterprise Boards in the Republic of Ireland. These Boards were established in 1993/1994 to develop the small indigenous sector in each county of Ireland. They are clearly the first point of contact for any SME engaging in the start-up process. Since the need for start-up subvention for small firms will be examined from both the practitioners' and the fund providers' perspectives, this study will also include a survey of a high-technology start-up to ascertain their perspectives and direct experience of state subvention. This study will involve a short case study of an export oriented, Irish based high-tech firm. Industry, in any sector, is characterised by continual change, and rates of change seem to be most dramatic within high-tech industries where the rapid adaptation of new technology is critical. The policy implications of this study are, therefore, significant, as the extent to which the needs of high-tech entrepreneurial start-ups are being satisfied is central to further economic development. The authors will conclude by offering suggestions as to how the subvention process might be further enhanced. A change in both attitude and approach may be required by practitioners and funders alike if the entire subvention process is to become more effective.

3 The Importance of Entrepreneurship to the Economy Entrepreneurship can be thought of as the engine that drives the economy creating jobs, employment and wealth (Jack and Anderson, 1998; Gorman et al., 1997). It has been suggested that new business creation holds the key to economic regeneration as it is through the process of entrepreneurial startup that industrial bases are renewed and economic structures maintained (Musson and Cohen, 1996; Jack and Anderson, 1998). A high birth rate for businesses is not only positive but also beneficial and necessary for sustaining a healthy economy, creating jobs and encouraging growth (Hisrich and Peters, 1998). The arguments for deliberately encouraging and supporting entrepreneurial start-ups are compelling. Gibb and Cotton (1998) suggest that greater uncertainty and complexity highlight the need for an entrepreneurial response. They suggest that the benefits entrepreneurship brings are significant and they illustrate these in terms of the various changes and pressures at global, societal, organisational and individual levels. At all these levels there will be complexity and uncertainty and therefore there will be a greater need for people to have entrepreneurial skills and abilities to be able to deal with life s current challenges and an uncertain future. Specifically, the explicit benefits to be gained from the fostering of entrepreneurship in the areas listed above are as follows: Global level At the global level, the reduction of trade barriers and the reality of the euro currency, together with the advancements in telecommunications, technology and transportation, all combine to provide more opportunities as well as more uncertainty in the world. Societal level At the societal level, privatisation, deregulation, new forms of governance, mounting environmental concerns and the growing rights of minority groups are all presenting society with greater complexity and uncertainty. Organisational level At the organisational level, decentralisation, downsizing, re-engineering, strategic alliances, mergers and the growing demand for flexibility in the workforce all contribute to an uncertain climate. Individual level The individual is now faced with a wider variety of employment options, the probability of ending up with a portfolio of jobs, more responsibility at work and more stress. In additional, on a personal level, today s individual may be a single parent with more responsibility for managing credit and securing finances for their future. (Adapted for Gibb and Cotton, 1998, p.8-9) Atherton et al. (1997) sets out the case in favour of intervention to support the start-up process in the UK by identifying among other things the contribution of start-ups to the development of the economy. They suggest that start-up companies are not only one of the largest creators of employment in the economy, but that job creation costs are lower for start-ups than for most existing businesses. Their thesis is supported by Frank and Landström (1997) who suggest (quoting figures from the European Observatory for SMEs) that small firms were more positive in developing employment opportunities than larger firms in 13 out of 16 European countries. Bannock and Peacock (1989) also support the findings of Atherton et al. They suggest government

4 intervention in the creation of small firms is necessary in order to compensate for the disadvantages that they experience by their small size and to offset the adverse effects of other government policies. Economic Background For the past seven years Ireland has enjoyed a remarkably strong economy. Performance in all areas has been impressive not least with regard to employment growth where the figures indicate a significant reduction in unemployment from some 14 per cent to less than 4 per cent. Despite this, the emergence of figures that suggest a slowdown in the Irish economy have not come as a major surprise. Most commentators predicted a deceleration in the growth rate with the emergence of infrastructural and labour market constraints. Along with these capacity constraints the slowdown in the American economy and the foot and mouth crisis have exacerbated the economic difficulties. The US is an important market for Ireland accounting for some eighteen per cent of exports. However, despite the adverse shocks that have recently emerged the evidence suggests that Foreign Direct Investment (FDI) from the US is still strong. This, in the main part, is due to emphasis on exporting chemicals and pharmaceuticals rather than information technology. Even in the IT sector it seems that US FDI is mainly geared towards supplying the European Union (EU) market. Given the relatively strong EU growth performance in the face of the US setback it is easy to see why employment has been largely maintained in US firms based in Ireland. Other indicators of the Irish economy seem to collectively point to a softening of economic sentiment. Consumer confidence while still strong has eased from the very buoyant levels in the past. Studies suggest a slight weakening in the performance of indicators like retail sales and tax receipts. Because of these emerging trends it is expected that inward FDI will be lower than in recent years. There seems little evidence to suggest that the low value of the euro will continue into the medium-term. Because of this the environment for exports is likely to become more difficult. Most estimates suggest the economy is operating well above its potential. The inference is that domestic inflationary pressures are unlikely to abate for some time. The nature and theory of business cycles suggests that after every boom there inevitably follows some sort of slowdown. The evidence presented in relation to the Irish economy suggests that we are experiencing what amounts to a slowdown of the economy. Although the encouragement of entrepreneurial start-ups is important at all stages of an economy s business cycle, the need for small business regeneration is particularly important when an economy s growth rate begins to slow. For these reasons it is particularly important to investigate the mechanisms in place to facilitate the entrepreneurial start-up process. It is vitality important that these processes match the needs of target

5 audience, namely start-up companies. In order to investigate the efficiency of the funding agencies, the role of the County Enterprise Boards is examined. County Enterprise Boards and other State Agencies The County Enterprise Boards are an initiative launched by the Department of Enterprise, Trade and Employment in October The Community Support Framework ( ) identified a dichotomy in the Irish industrial sector between the high technology, high productivity foreign-owned sector and a less productive indigenous sector. The County Enterprise Boards primary aim is to promote enterprise and job creation at local level and to assume responsibility for business areas not already covered by the state industrial development agencies e.g. small firms, start-up projects, service projects. There are thirty-five County Enterprise Boards covering all county and municipal districts in the state. The Boards have 14 members drawn from elected members of the local authority, the social partners, state agencies, and community / other representatives. The presence of four elected representatives of the local authority in grant giving is unique and affords the County Enterprise Boards considerable autonomy. The Boards provide support in the form of grants, loans, and advice. Emphasis is placed on the promotion of enterprise initiative and job creation at a local level. Projects are funded directly from resources provided to the Boards under Sub- Programme 1 of the Operational Programme of Local Urban and Rural Development. This provision encompasses, in broad terms, projects in manufacturing and in services, the latter including tourism. Each Board has an Evaluation Committee, which makes recommendations on the most appropriate level and form of assistance for all eligible enterprise projects. County Enterprise Boards provide a flexible range of financial assistance involving a mix of capital, employment and feasibility grants. Capital grant assistance a maximum of 50 per cent of capital outlay, in a new or expanding business, subject to a maximum limit of 50,000. Employment grant assistance a maximum of 5,000 for each newly created full time job, limited to a maximum of 50,000 for any one enterprise. Employment grants will only be provided where it can be demonstrated clearly that labour shortages do not exist. In the case of both capital and employment a percentage of the grant is refundable. Depending on the grant amount this refundable portion can be as high as 50 per cent. Usually an interest rate of 3 per cent applies with a moratorium on payments up to two years. The repayments are usually then spread over a five-year period by monthly standing order.

6 Feasibility study/technical assistance grants In a limited number of cases grant assistance may be considered for detailed studies to investigate the commercial and technical viability of the project being considered. A maximum of 60 per cent of commercial research costs and 50 per cent of prototype construction (i.e. design and fabrication) costs may be awarded. The maximum grant allowable is 5,000. Ancillary services such as e- Commerce assistance and training assistance are also provided by most County Enterprise Boards. The paper has thus far focused on a subset of funding agencies namely the County Enterprise Boards. The other enterprise development agencies that currently exist in Ireland, as well as the methods of intervention they employ, are summarised below. Enterprise Ireland Established in July 1998 and comprises Forbairt (the former State agency for indigenous enterprise development), An Bord Trachtala (the Trade Board) and the industrial training division of FÁS (the State training agency). This agency aims to work with Irish businesses to help them create profitable new business, build their share of international markets, harness new technologies, deepen Research & Development capability and build people skills and capabilities. The agency provides development grants, equity, consulting, training and specialist assistance to existing growth businesses or new businesses employing more than 10 people in the manufacturing and internationally traded services sector. Foras Áiseanna Saothair (FÁS) - Training and Employment Authority, was established in January 1988, under the Labour Services Act 1987 to provide a wide range of services to the labour market in Ireland. Its functions as laid down in the Act are to provide: training and re-training; employment schemes; placement and guidance services; assistance to community groups and workers co-operatives towards the creation of jobs; assistance to people seeking employment elsewhere in the European Union; consultancy and human resource related services, on a commercial basis, outside the State. FÁS is divided into 10 regions comprising 20 Training Centres and 56 Employment Offices. In 2000 about 95,200 unemployed job-seekers or other individuals completed FÁS programmes, and, at the end of the year, 52,000 persons were on FÁS programmes. The agency also provided financial support for the training of an estimated 8,700 employees in about 1,800 companies. FÁS activities are funded by the Irish Government, the National Training Fund and the European Union. Industrial Development Agency (IDA) IDA Ireland is a state-sponsored agency funded primarily through Government grant aid. It reports to the Minister for Enterprise, Trade & Employment and operates under the terms of the Industrial Development Acts 1986 to Broadly, the IDA's objective is to contribute to Ireland's economic development: specifically its role is to attract foreign-owned manufacturing and internationally traded services companies to invest in Ireland. The Industrial Development Agency Ireland (IDA) was established in 1994; its predecessor, the Industrial Development Authority, established in 1969 was

7 responsible for developing Irish-owned industry as well as attracting inward investment. Following a restructuring in 1994, Forfás, the policy advisory and co-ordination board for enterprise, trade and science and technology in Ireland, became the body in which the State's legal powers for industrial promotion and the development of trade and technology are vested. Through Forfás, powers are assigned to Enterprise Ireland for the development of indigenous industry and to IDA Ireland for the promotion of inward investment. Research Methodology The preparation of this paper has involved a questionnaire survey and a single case study of an indigenous high technology start-up, Havok, which was established in On Wednesday, 27 June 2001 a two page questionnaire consisting of nine questions was ed to thirty-three County Enterprise Boards. The questionnaire was designed to elicit the views of the County Enterprise Boards on a broad range of funding issues particular to indigenous entrepreneurial start-ups. The questionnaire specifically focused on the funding implications for high technology companies. By Wednesday, 18 July 2001 response rate was 46 per cent (15 out of 33). The following section aims to discuss the findings of the questionnaire. Question one asked the County Enterprise Boards to detail the services offered by them to indigenous start-up companies. Along with grant aid, all Boards offer training and mentoring services. Forty-seven per cent offer to facilitate equity arrangements with 80 per cent offering consultancy (legal and financial) services. Other services listed included e-commerce initiatives and also Women in Business and Plato Business Networking Programmes. With reference to indigenous high-tech ventures twenty per cent of Boards stated they offered additional services including specialist mentors and networking initiatives specific to the high-tech sector. The relative importance of the County Enterprise Boards was examined along side some alternative funding sources. The respondents were asked to rank the various alternatives in order of importance. (Figure 1) The results suggest that the respondents regard banks as the most important source of funding for high-tech start-ups. The County Enterprise Boards themselves were ranked second, possibly highlighting the fact that the Boards are often the first source of funding for unsecured / higher risk ventures. Firms can then use these funds to leverage funding from other institutions / organisations. Personal sources were considered the next most financially important means of funding a startup, followed by the use of venture capitalists. Alternative state funding and business angels were ranked fifth and sixth respectively in order of funding importance.

8 Financial Importance of Funding Sources (ranked) 4.5 Rank - Lowest Most Important County Enterprise Boards Venture Capitalists Business Angels Banks Personal sources Alternative state funding Funding Source OF the fifteen respondents, 80 per cent reported high-tech companies returning to them for supplementary growth funding. Explanations for this included ventures returning for increased employment or capital subvention support. Interestingly, a number of respondents reported that often, successful high-tech start-ups do not return to enterprise boards for supplementary growth funding as larger investments can often mean seeking aid from Enterprise Ireland. Half of the responding Enterprise Boards indicated that between zero and twenty five percent of high-tech ventures returned for supplementary growth funding while forty three percent of responses suggested between twenty five and fifty percent of start-ups return. (Figure 2) The Reported % of High-Tech Firms Who Seek Supplementary Funding From CEBs Percentage of Respondent's (CEBs) from Questionnaire Results and up to 25 per 25 and up to and up to and up to 100 cent per cent per cent per cent The Percentage of High-Tech Firms Returning for Supplementary Funding

9 Finally, enterprise boards were asked about how, in their opinion, subvention funding arrangements for high-tech start-ups might be further improved and enhanced in the future. The issues outlined here included: Increased linkages with third level institutions and building on established initiatives such as the Enterprise Platform Programme. Facilitating product transfer opportunities between indigenous hightech companies and, for example, US ventures within a similar field. A number of respondents suggested a widening of supports currently available to high-tech companies. This might include such things as increased mentoring, operating funding supports, consultancy and increased management development and training initiatives. Other important issues outlined were the possibility of a more flexible approach to the funding of research and development and prototype development and the possibility of workspace and incubation units. An increase in the overall resources available to enterprise boards and the widening of networking supports for high technology entrepreneurs. Case Study Havok was established in 1999 by Hugh Reynolds and Steve Collins, who were lecturers at Trinity College, Dublin along with Alan Murphy, a management consultant with broad business development experience in Price Waterhouse Coopers and Norkom. This high technology venture creates and licenses real-time motion control software for integration into their customer s products. The firm, whose products are now used by some of the worlds leading multimedia corporations, employs 45 personnel (most of whom are highly qualified software engineers) at three locations, Dublin, Munich and Palo Alto. In June 2000, Havok acquired its main technology competitor, Ipion GmbH, and is now regarded as a major force within its highly dynamic, technology driven, world marketplace. The motivation for the creation of this firm came from a desire by Hugh Reynolds and Steve Collins to build on the experience they acquired during Forbairt sponsored research undertaken with Trinity College. In June 1999 the firm began operations in an incubation unit at the Dublin Business Incubation Centre (DBIC). At this stage, the staff consisted of six people, Hugh Reynolds and Steve Collins, another Trinity College lecturer and three computer software engineers. The major initial expenses were salaries and these were kept at a minimum through low pay coupled with share options. Havok successfully applied for an Enterprise Ireland feasibility study grant (matching funding from personal savings) and set about developing a product prototype, conducting market research and writing a business plan. In October 1999 the company negotiated funding under the Business Expansion

10 Scheme (BES) and set about establishing itself within the market. As sales revenue came on line during 2000, Havok was able to attract private equity funding and in 2001 obtained equity funding from both ICC and Enterprise Ireland. It seems that state assistance has been very important to Havok initially in terms of the low cost incubation unit and the feasibility grant. The second phase of funding came from Business Expansion Scheme (BES), which is a government tax incentive scheme, and just recently the firm has attracted equity from Enterprise Ireland. Hindsight suggests a missed opportunity to attract financial assistance from Enterprise Ireland on completion of the feasibility study. It seems that state sponsored incubation centres could be improved in terms of space, communication services and business development consultancy. Such consultancy could include sourcing finance and legal issues and might be provided by secondment (possibly on a part-time basis) of a suitably experienced person from one of the station funding agencies. This would also serve to make such agencies and their various supports more accessible to entrepreneurs. The reorganisation of state funding agencies can cause major headaches for new enterprises. The Business Expansion Scheme (BES) seems to play a vital role in financing high technology start-ups and there is a need for research into this role and the effectiveness of the various terms and conditions under which finance is provided. Conclusions This pilot study has sought to ascertain the extent to which current funding arrangements are meeting the needs of indigenous high technology start-ups in Ireland. This has been attempted through a questionnaire survey administered to the County Enterprise Boards and a short case study of an Irish high-tech venture. It seems the County Enterprise Boards provide a great deal of assistance to high-technology enterprises. Presently, this includes grant aid, training and mentoring services. A number of Boards supplement this with such provisions as networking initiatives specific to the high-tech sector. With regard to funding, respondent s comment that, in their experience, Enterprise Board funding is highly important for their particular high-tech clients and place this source of funding ahead of other options, such as personal sources, venture capitalists, alternative state funding and business angels. Interestingly of the fifteen respondents, eighty per cent reported high-tech companies returning to them for supplementary growth funding. As to how funding provisions might be improved in terms of further developing indigenous high-tech startups, respondents suggest a number of issues worthy of consideration. These include such things as further linkages with third level institutions, product

11 transfer arrangements, increased mentoring facilities, consultancy, training, R&D Funding and networking supports. The case study briefly outlined the development of Havok, an Irish start-up who products are now used by some of the worlds leading multimedia corporations. The case study highlights the role of state funding particularly at the early stages of this venture. It also made reference to the possibility of the expansion of important services provided by incubation centres, and a need for further research into the role of the Business Expansion Scheme (BES) in high-tech entrepreneurship. The present authors regard this preliminary study as preparatory work for possible future research involving an examination of other funding bodies, nationally and internationally, and exploring, through case study, a variety of high-tech ventures.

12 REFERENCES Atherton, A., Gibb, A. and Sear, L. (1997). Reviewing the Case for Supporting Business Start-ups: a policy overview of current thinking on business start-ups, Durham University Business School. Bannock, G. and Peacock, A. (1989), as cited in Storey, D. J. (1994). Understanding the Small Business Sector, Routledge. Central Bank Summer 2001 Bulletin Enterprise Ireland Annual Report and Accounts, 2000 Frank, H. and Landström, H. (1997). Entrepreneurship and Small Business in Europe economic background and academic infrastructure, in Entrepreeurship and Small Business Research in Europe: an ECSB Survey, H. Landström, H. Frank and J. M. Veciana (eds.), Avebury: Gibb, A. and Cotton, J. (1998). Entrepreneurship in Schools and College Education Creating the Leading Edge, background paper to the conference on Work Futures and the Role of Entrepreneurship and Enterprise in Schools and Further Education, London: 8. Gorman, G., Hanlon, D. and King, W. (1997). Some Research Perspectives on Entrepreurship Education, Enterprise Education and Education for Small Business Management: a ten year literature review, International Small Business Journal, Vol.15, No.3: Henry, Colette., (2000). The Effectiveness of Entrepreneurship Training Programmes in Supporting and Developing Aspiring Entrepreneurs an investigative study. Ph.D Thesis, The Queen s University of Belfast. Hisrich, R. D., and Peters, M.P. (1998). Entrepreneurship: (4 th Edition), Irwin McGraw-Hill. Jack, S. L. and Anderson, A. R Entrepreneurship Education within the Condition of Entreprenology, Proceedings of the Conference on Enterprise and Learning, Aberdeen. Musson, G., and Cohen, L. (1996). Making Sense of Enterprise: Identity, Power and the Enterprise Culture, Proceedings of the 19 th Institute of Small Business Affairs National Small Firms Conference, Birmingham: OECD Economic Survey of Ireland, May Detailed information available on the functions of County Enterprise Boards. - Special reports section for Economic analysis. - Information on the functions and composition of FÁS.

13 - General information on funding and the specific role that IDA Ireland plays in fostering entrepreneurial development. - Functions and goals of Enterprise Ireland and other funding agencies.