Sean Kyne TD: I thank the Office of the Ceann Comhairle for selecting this matter and I welcome the Minister for Jobs, Enterprise and Innovation to the House to discuss it. The Minister was in Galway a number of weeks ago for a very informative meeting on the jobs action plan. The businesses and entrepreneurs in attendance got a great deal out of it. One of the benefits of such meetings other than the formal information session is the conversations one has during the tea breaks. One such conversation I had with a constituent, who is also the entrepreneur behind a successful Irish company in the medical devices sector, concerned finance for business. It is an area which can be complicated and require a great deal of time and scrutiny by policy makers as well as by those in the business community. I take this opportunity to commend the work the Minister has done to tackle many of the issues and barriers around access to credit and finance, in particular for small and medium sized enterprises. One such innovation is the microfinance scheme. I was delighted to hear today that Microfinance Ireland has approved its first €1 million in loans to 60 viable microenterprises to which the banks had declined credit. I am certain we will see the benefits of this worthy and effective scheme into the future.
There is another innovative idea which would help us to establish, grow and retain start-up companies in Ireland. Currently, the process is that an entrepreneur with an idea, which comes from myriad sources – often their work in a particular sector – conducts research, draws up a business plan and establishes a company to develop the idea. However, to grow the company finance is required. Unfortunately, many financial institutions are reluctant to take the chance with a start-up company, which leaves the entrepreneur with few alternatives other than to avail for a loan-for-equity arrangement with a venture capital fund. While the funding provides a much-needed boost to the new start-up and facilitates growth and expansion, the fund generally has a fixed term. If one receives funding in year five of a seven-year fund, one must repay the loan when that fund matures only two years later. Such an eventuality often results in entrepreneurs having to sell their companies to obtain the finance necessary to repay the loan. Sadly, it means the innovative product or service is snapped up by another company – often one which is based abroad – while the original company is asset-stripped, merged or wound down. As a result, Ireland loses out on jobs, both existing and potential, tax revenues and custom for other local businesses.
The process I have set out applies in almost all industries and certainly to the ones we are fortunate to have in the west, including those in the medical devices, pharmaceutical, ICT, energy efficiency and other sectors. There is a way to combat the loss, retain innovative start-up companies in Ireland and harvest their massive potential. The State could establish a special investment fund accessible to start-up companies for the sole purpose of meeting repayments to venture capital funds. This would allow companies to continue to innovate and expand in Ireland rather than have to be sold off. Further, the scheme could include a tax incentive feature whereby a citizen could opt to reduce his or her tax liability by contributing to it.
I ask the Minister to consider these plans.
Minister for Jobs, Enterprise and Innovation, Richard Bruton, TD:
The issue of funding for early start-ups is one in which my Department takes a very keen interest. Enterprise Ireland is the largest funder in Europe of seed capital to start-ups and has 800 companies in its portfolio. It invests through a mixture of different types of seed capital arrangement, including preference shares or, more often, through joint holdings with venture funds. Enterprise Ireland has gone out of its way to promote the development of venture and seed funding. As recently as the last budget, the Government announced an additional €178 million round of funding which will leverage up to approximately €700 million in seed and venture funding over the next few years. We have put a great deal of money into incentivising the availability of seed and venture capital because the risk many companies represent is such that bank loans are not the appropriate vehicle for funding them. We are trying to create a range of funding options. We have also introduced various tax driven schemes, including the seed capital scheme which allows promoters who have previously been PAYE workers to invest the last six years’ tax they have paid in their newly established companies. There is also the EIIS, which allows individuals who are at arm’s length from a company to invest in funds to provide for its growth.
A great deal of the effort by the State has not been on the exit side, it has been directed at providing funding to get start-ups off the ground and to establish jobs. The issue of exit is a vexed one. As the Deputy rightly points out, venture capital funds will want to exit a company. Sometimes this is achieved by a second round of funding, whereby a successful company will see new venture capital coming in while those who want to exit can do so. Sometimes, the company is placed on the shares register, which is very rare in Ireland, and sometimes exit is achieved by trade sale. Trade sales are a mixed blessing, although they are rare. There were two major sales last year involving Polar Lake and Cúram Software, both of which have added employment in Ireland since they were sold. It is not, therefore, an unmitigated disaster to see a company which cannot grow to the next level being purchased and then expanding. It is not always the case, however.
We are certainly willing to consider the Deputy’s proposal, especially if he has developed it in some way. It is fraught with difficulty, however, not least in terms of the obvious State aid issue. Why would the State favour an owner of a certain nationality as against another? Would it be viable to offer this concession to Irish entrepreneurs? One must consider what the market failure is and what are we trying to subsidise. Are we trying to subsidise ownership by particular individuals or the most rapid development of a company? It would have to be demonstrated and argued successfully that the best way to develop a supported company was to retain the founder’s shareholding. We are willing to look at this and we are continuing to look at the market. The Deputy will have seen that we have taken initiatives in the last 12 months, including the €700 million seed fund. The NPRF has recently emerged with €850 million in new sources of funding. These initiatives are all about getting new funding into companies rather than to subsidise the exit of some funding to allow the owner or owners to expand their shareholdings. More study is required to determine whether this is the right route to go. The difficulty in funding start-ups and obtaining bank loans has led us to focus in the last two to three years on getting money into companies which have the potential to grow.
If Deputy Kyne wants to elaborate on it, I will have it examined by Enterprise Ireland and my officials to see if there is scope in the area.
Sean Kyne TD:
I thank the Minister for his response and I commend the work of the Minister, the Department and Enterprise Ireland and the bodies involved in the seed schemes for start-ups. There have been many positive developments over the past number of years in the area and we have seen the benefits of it.
With regard to the venture capital fund, it depends on when the exit takes place. If it happens early enough there is a period of time to repay the money, but in the example I use the company does not have access until year five and has only a couple of years to pay the money back. There may be examples in which another Irish company buys the company and retains the jobs here, but it would be a shame if the company went through the process only to be gobbled up and the jobs exported.
I will put more flesh on this proposal and submit it to the Minister, the Department and Enterprise Ireland to see what can come of it in terms of protecting jobs that may go overseas.
Minister for Jobs, Enterprise and Innovation, Richard Bruton, TD: One of the initiatives in the action plan for jobs is to examine whether the Irish Stock Exchange can be a vehicle for exit. There can be an initial public offering, IPO, in which the company places a certain number of its shares on the open market for subscription. This provides an exit to the venture fund, but it is rare in Ireland and in Europe. Ireland and the EU are looking at making the option a real one. The pressure on access to finance and relatively low returns for venture capital funds have existed throughout Europe in recent years but are more acute in Ireland, and this puts renewed focus on how to fund this successfully. Ireland is ahead of the posse in terms of the State leveraging new seed and angel money in support of companies. Enterprise Ireland has been ahead and has been in the market for over a decade. I look forward to receiving further comment from Deputy Kyne and we will examine it.