VC picture not as rosy as financials suggest

Michael Murphy and Regina Breheny, Irish Venture Capital Association

19 May 2017

Billy MacInnesI was heartened by the news last week that investment in Irish technology SMEs in the first quarter of 2017 had risen to €247 million, an increase of 4% on the same period in 2016. While that’s impressive enough in itself, it’s even more admirable when you consider it improves on a 2016 figure (€237 million) that was double the investment for the same quarter in 2015.

The figure was contained in the latest VenturePulse survey from the Irish Venture Capital Association, which also reported that the increase had come despite a 12% fall in funding from the US and an 11% drop in investment from the UK.

According to IVCA chairman Michael Murphy, Irish venture capital was the main source for funding for Irish SMEs through direct investment or as the local lead investor for international syndicate investors. First round seed funding also grew significantly, up by a third and accounting for 14% of all funds raised.

Software/IT services took the largest chunk of funds, with 51% of the total. However, the figure was distorted somewhat by the €90 million invested in one company, Version 1. In fact, investment in the company was so significant that it accounted for 36% of total funds and 70% of the funding for software/IT services.

Last year’s figures were also similarly affected by a single large deal, in that case Oneview Healthcare which raised €40 million (or 17% of the total). However, if you strip those deals out of the figures for their respective years, the underlying trend may not be quite as healthy as it appears on the surface.

Taking Oneview out of the equation would reduce the 2016 figure for investment in all the other Irish technology SMEs to €197 million. While that’s a big enough hit, it’s nothing compared to the effect of stripping Version 1 out of Q1 2017, which would slash the total investment to Irish technology SMEs to €157 million, a 20% reduction on the 2016 equivalent.

This might seem like an arcane calculation based on something that didn’t happen, but it does show that without single big deals, the figures for each quarter would not only be different but there would have been a decline in overall investment in Irish technology SMEs.

This suggests that an increase in the overall figure for Q1 2018 may well be dependent on one or more big deals taking place in the first three months of next year. It could well happen but it’s not a certainty. Which leaves us with the other question: will the underlying funding trend for technology SMEs, beyond one-off big deals, rise or fall?

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