The scale challenge facing Irish start-ups

Venture capitalists are sounding the alarm over what they see as a threat to Ireland’s start-up ecosystem. According to research from the VC industry, as well as the Department of Enterprise, Ireland’s VC market has grown four-fold since 2010 but in the last few years there are signs it is losing momentum.
Since 2016, investment in Ireland has failed to keep pace with European peers as deal sizes shrink and there are fewer exits for investors. In 2022, the average VC deal in Ireland was half the size of the European average. Irish businesses are less likely to progress through subsequent funding rounds, be acquired or list on the stock market, too. More worrying, the proportion of early stage businesses that go bust is higher than the European average — a third go bankrupt.
The reason, according to those in the industry, is a lack of funding after companies get beyond the initial start-up phase. There is apparently abundant finance from private funds, as well as Enterprise Ireland, for new companies getting off the ground, but when it comes time to scale the money dries up.
“If you’re looking to raise up to €3 million, the market is well served,” said Brian Caulfield, chairman of the start-up lobbying group Scale Ireland, and a veteran venture capitalist.
“Above that level it gets pretty tricky, and in recent years it’s been getting materially worse. Our analysis shows a big gap in the €3 million to €10 million range.”
The problem, Caulfield says, is that Irish venture capital funds are too small to support businesses as they begin to grow, or “scale-up” as the industry jargon puts it. The typical Irish VC fund has between €50 million and €100 million to invest, he said. Practically speaking, that means roughly 20 deals per fund with up to €5 million committed through multiple rounds of investment. More than that risks breaching concentration limits or skewing the fund structure.
“If you’re that size, the cheques you’re able to write are maybe a couple of million,” Caulfield said. “Even with government support, Irish funds don’t have the scale to size up their investments. There was an idea that you’d prime the pump and other investors would come in, but that’s not going to happen.”
Without funding from elsewhere, Irish VC funds can’t take companies up the scale ladder. The ticket size is just too big. At the other end of the spectrum, the Irish Strategic Investment Fund (Isif) has been instrumental in directing finance to bigger businesses, but there is a gap in the middle range.
That analysis tracks with what the VC industry in Ireland says more broadly and, crucially, what the Department of Enterprise believes. A report commissioned by the department and written by the UK consultants SQW found that the Irish equity ecosystem for start-ups was strong and well supported by government funding, but that businesses as a whole were underfunded, particularly as they needed larger injections of capital to maintain growth. SQW concluded that the ecosystem needs a long-term policy response focused on getting money to businesses in the scale-up phase — an area that has been neglected.
It recommended state grants as well as VC investments, and the establishment of a large-scale patient capital fund to take over from the seed and venture capital supports that already exist.
Two weeks ago, though, when the department announced that it was upsizing its seed and venture capital commitment from €175 million over five years to €250 million — an increase of 42 per cent — there was nothing allocated for the missing middle in start-up finance.
A spokesman said that the minister, Peter Burke, was trying to address this gap and had made several proposals to the finance minister, Jack Chambers, for the budget. He has also tasked a group of officials to work with industry to come up with solutions.
The Irish Venture Capital Association (IVCA) is trying to push on that open door. It is worried that research and development is being starved of resources, dampening the growth of the indigenous economy and making Ireland ever more dependent on the windfalls from foreign direct investment from multinational companies.
“The Irish economy has only been vibrant, growing and industrialised since the 1980s,” said Sarah-Jane Larkin, director-general of the IVCA. “We simply do not have sources of private matching capital, so unless we do something about the private capital piece, we’ll need state capital.”
In its pre-budget submission, the IVCA calls for a mandatory “opt in” to invest in Irish companies or funds by participants in the new auto-enrolment pension scheme that is due to start in 2025.
France and Denmark, which have outpaced Ireland in terms of VC finance in the last decade, already have similar schemes. The UK has also come to an agreement with domestic fund managers to allocate a minimum of 5 per cent to unlisted British companies by 2030.
“It wouldn’t take a massive commitment to really drive scaling companies,” Larkin said. “Unless someone mobilises private capital, though, we’ll always struggle.”
In the United States, where wealth is more embedded and capital markets are more mature, public sector pension funds and university endowments provide 50 per cent of the money for venture capital. The rest comes from family offices and trusts, as well as high net worth individuals, many of whom made their money in start-ups.
“In the US, the main players are the big pension funds that can take a long view,” Caulfield said. “European pension funds don’t put a lot into alternative investments, so the participation of the state is crucial. There wouldn’t be a VC industry in Ireland without the state.”
He believes the Department of Enterprise will hive off a portion of the €250 million seed and venture capital fund to support a new scaling fund, potentially with investment from Isif and the European Investment Fund, alongside private participants. Like IVCA, he is keen to see funds collected through pension auto-enrolment directed to venture capital as a “quid pro quo” for the state’s contribution to private funds.
In many ways, the challenges in Ireland’s venture capital market parallel what has been going on in the equity capital markets for listed companies, where liquidity has been draining away.
Not only have multibillion-euro businesses such as CRH, Flutter and Smurfit Kappa chosen to move their listings to the New York Stock Exchange, there have been several private buyouts from Euronext Dublin in the last five years — and few initial public offerings to replace them.
Market sources point to the decline of a domestic asset management industry to champion local PLCs as a key reason for the Irish stock market’s decline. But stakeholders including stockbrokers, accountants, law firms and Euronext have joined together in the Irish Equity Market Forum to put forward fresh ideas to get growth capital on the economic agenda again.
Not unlike the venture capitalists, they want to see the government — together with domestic fund managers — devote money to a cornerstone fund that will support IPOs, providing “comfort capital” to private investors. Another idea is to promote tax-advantaged personal savings accounts, modelled on the UK’s ISA, to invest in Irish equities.
Coincidentally, Euronext has also identified companies needing to raise between €3 million and €10 million as the missing link in the equity ecosystem. To address the gap, the exchange is launching a light-touch springboard stock market, called Euronext Access, for start-ups and scale-ups that need to raise capital to fund growth.
Ironically, Ireland doesn’t suffer from a shortage of capital per se. The level of personal cash savings is significant, with nearly €140 billion on deposit, and household wealth is well over €1 trillion, much of it tied up in real estate.
The problem, it is widely agreed, is that Ireland hasn’t developed an equity investing culture, meaning the capital available to VC firms is limited compared with those other countries where family offices and trusts are consistent investors in start-ups, not to mention pension funds and endowments.
That is slowly changing. Tommy Kelly, the EShopWorld entrepreneur who made an estimated €500 million from the sale of the business in 2021, is an investor in Molten Ventures’ fund of funds, as well as several direct tech investments. Barry Napier of Cubic Telecom, fresh from last year’s €473 million investment by Japan’s Softbank, is known to be active as an angel investor.
But in the long term, patient capital investment required by VCs is still a rarity in an economy that has known wealth for barely a generation and is still nursing wounds from the crash of 2008 and the deep recession that followed.
Elkstone, an entrepreneur-focused investment firm that has backed dozens of Irish start-ups including Manna and Flipdish, decided to take matters into its own hands and tackle the problem.
Last year, it closed a new €100 million venture fund for early stage companies — but with a twist. Thanks to a change in legislation, the fund qualifies for investor tax relief under the employment investment incentive scheme (EIIS), making venture capital both more attractive and accessible to individuals.
Instead of putting their money into a single company, which is typical for EIIS investments, investors in Elkstone’s fund are spread across numerous investments within a portfolio.
“We felt there was a gap and the angel community was not as vibrant as it needed to be,” said Elkstone chief executive and co-founder Alan Merriman. “Bringing private money together with tax relief in a portfolio fund is very powerful. Making it €100 million allows us to write meaningful checks.”
Since closing in May 2023, Elkstone’s EIIS fund has supported 17 companies with an average investment of €1.4 million each. The firm expects to reach its initial target of 30 investments next year.
According to Merriman, Elkstone is holding back €50 million to put into companies that need capital to scale after angel and seed rounds. “We’re moving up the curve,” said Merriman. “It’s not going to solve everything, but having a local investor able to participate in Series A is very meaningful.”
And Elkstone won’t be stopping there. The firm is planning to launch a bigger successor fund in 2026 that writes initial cheques at the Series A stage and follows on with further investment at Series B. The idea is to nurture local companies up to the stage where international venture capital will take an interest.
Of course, Elkstone isn’t doing the heavy lifting alone. Enterprise Ireland and Isif are limited partners in its fund, so the state is providing material support for efforts to scale up. “The government is listening but I’m concerned there are so many things they have to sort out right now,” said Merriman. “The more stars we have emerging, the more we’ll attract the international community to leverage off of high-quality local VC players. But right now the level of funding is patchy.”