Why give grants to tech startups?

The Irish tech sector has an elephant in its room. It is this: we are arguably now spending more taxpayers' money on grant-aiding indigenous tech firms and tech research than we are reaping.

So here's the thing: should we continue investing in tech firms? Or is it time to step back and reassess our priorities? Should we hold our hands up and say: 'we've achieved a bit in this game, but not much by way of indigenous success stories, compared to other first world countries'?

If Irish tech startups are to ask for grants, they need to have a good case why. It is not good enough to fall back on received wisdom of recent times -- that 'tech is the way forward'. That may well be. But that does not mean that it will be Irish firms leading the way. Or even keeping up. And we need to ask ourselves: will we compete? If so, in what areas? If not, why not? And if so, are tech firms deserving of grants over other industrial sectors?

Take an alternative Irish industry -- fiction publishing. Last year, at least 12 Irish novelists made the top 10 fiction bestsellers list in Britain.

Of these, three or four are global superstars, selling millions of books.

Now if I were in the publishing business, I would make the following argument: Not only does our industry bring in a lot of hard currency to the country (they all live here), but it also brings in other major publishers who scour the country looking for the next Irish best-selling novelist. In other words, it's an expansion industry.

And the key innovators, those from whom everything spurs, are Irish.

If I worked for Penguin Ireland, I would also argue that authors create ecosystems (of varying sizes) around them, both through the establishment -- and maintenance -- of publishing houses in Ireland and consequent films, plays and other productions that are generated from a single novelist's work. (Often it is foreign money paying for the film production, making it a big net gain for Ireland.)

Now relate this back to Irish tech companies. Which ones have the impact that, say, Maeve Binchy has (in economic terms)?

If you gave, say, €1 million to a selection of tech startups and €1 million in parcels of €40k each to 25 novelists, which group would provide the bigger return? I can't say for certain it would be the novelists, but wouldn't you say that they have a pretty good chance?

True, novelists do benefit from taxpayers' indulgence. Authors of fiction do not pay any income tax on sums up to €250,000, a large amount of money. But in this case, the tax exemption has worked. Authors now bring in far more money than they cost.

As unfashionable -- and taboo among this blog's readers -- as this sounds, we now need to provide evidence that it is worth the money we are investing. And why it would be worth investing more.

One big weaknesses to the tech sector's case: the low priority that Irish people place on working in technology. Even today, even after all the guff from the establishment and the media about the need for kids to pursue technology courses in third level, our young people are still far more interested in pursuing liberal arts or law or sales & marketing courses than they are engineering or computer science courses.

In other words, our young people are just like our old people -- largely uninterested in creating companies that innovate using technology.

Instead, they are more interested in writing, in story-telling, in selling things.

When people talk about high tech Ireland, what they really mean is that we have had a solid track record in executing the work plans and engineering schematics of foreign companies. Companies like Dell, Intel, Apple and HP.

But we have been in this game a long time, now -- where are world-beating technology companies? Indeed, even if we don't have any of them, where is the substantial cluster of large Irish tech companies?

If we do not have an answer to that question, we need other reasons to convince the taxpayer why tech companies are worth investing in, as a national strategy.

Unfortunately, large elements of the indigenous tech sector seem to have joined other industrial sectors in calling on taxpayers' money to crate their own viable companies. Call it a grant, call it a stipend, call it a bursary, call it whatever you want. But it's the same cry that goes out from the farmers, the builders, the bankers, the equine industry, the GAA and countless other industry lobbies that are looking for taxpayers' money to support their industrial pursuits. It's a handout from the public purse to whoever receives it.

Many in the tech sector would ask the farming sector: can you stand on your own two feet without our tax money? This is an excellent question. But it equally applies to anyone else asking for public money. Show us the proof.

I'm not saying that no grants should be given to tech companies. And I am not dismissing as 'crap' their efforts.

But I do think that, in a crisis, we have to consider all arguments. And perhaps we need to go back to first principles: look to what we excel at, relative to other countries.

And if that means addressing a few sacred cows, so be it.

Comments

[David Quaid]

It's an interesting argument Adrian and you've raised a lot of valuable points. For the record, I'm from a Tech company, we've been grant aided (about 5 years ago) and we paid that back in taxes over ten-fold within the first 2 years, let alone the jobs and other things that came out of it. In fact that initial grant aid was more than we could raise as private equity (from the banks, ourselves etc) yet it's now less than 1 month's turnovedr.

Tech hasn't received that much funding and I dont think it's been as wasted as you might think. The investment that goes into foreign multi-nationals is handled by the IDA. The funding that goes into indigineous Tech-startups - the High Potential, soon to be exporting, soon to be employing 15 people is handled by Enterprise Ireland.

Small start-ups are grant-aided by the County Enterprise Boards. I think I'll just deal with EI for this.

EI receive about €450mln from the state each year (Figure to best of recollection). They spend nearly half of this on themselves, maintaining salaries, rent, advertising, "Merit Awards" to the tune of some €6million (source: Shane Ross), expenses, travel etc.

To me this is €200mln wasted. It's €200mln that hasn't made it to business yet its cost the Irish taxpayer under the guise of "Investing in High-potential startups"

So to answer your questions directly: "Why do we need to invest in startups".

Well, we don't have natural resources on a large scale, we don't have an indigenous manufacturing base. To setup a big multi-national car company or computer company or investment bank or something else costs 100's of millions.

Tech startups are relatively low cost - you can start one from €100k. They have a relatively high success rate. ICT in Dublin in 2008 had a net increase in job creation, unlike any other sector. Tech companies can create a small piece of technology that can be exported. Tech companies can be invested in by private capital which tends to buy-out the state capital at a higher rate (if that capital is invested in, usually at stakes over €50k). 1 in ten of these companies could grow up to employ 50 people.

An example loosely based on start-up surival figures: If we invest in 20 inviduals setting up 10 companies, and 1 makes it to 50+, 2 make it to 10 employees, another 2 just survive and the other 5 are written off, we've managed to create and keep 64 jobs. These companies will pay PAYE/PRSI, they will pay VAT on a quarterly basis (VAT IS a tax on the value -add these companies make), they will pay corporation tax and THEY CREATE JOBS.

If we take your example and invest in an Author, we're only creating private wealth. That author, as you point out, is not liable to pay tax ever - not paye, not prsi, not vat, not capital gains, not corporation tax.

Jobs created: almost nil. It's unlikely their book will be published in Ireland. Yes, they will be out of the employment loop having lined their own back pockets with €1 million or so, but we've not created a job nor a company.

Why does Ireland as a government need to steup in? Simply put : because there is no startup capital for Irish start-ups and hasn't been over the last 15 years. Even the Limerick-born creators of Auctomatic were turned down in Ireland before raising $12million in Canada (shame on Ireland).

The banks and high-net worth individuals have been investing (wasting, bleeding, haemorging - you decide) money into property from tax havens, tax incentives, EU funds (like the €500 million South County Dublin M50 extension - of which €350mln of EU funds were wasted on acquiring OVERPRICED PROPERTY).

Now the property developers are nearly bankrupt, so are the banks and so soon will the country, if we don't do something.

There are no more NEW FDI's like Dell, Microsoft, Intel coming. There are no oil fields, gold mines (of scale), big car marques like Germany/Japan have, no big banking sector (like most of Europe), no big home doemstic market to speak of (whole of Ireland = smaller than Birmingham, 1 city in the UK).

Our only national resource is Tech Start-ups. We produce too much food, as does the EU as a large, we are too expensive, too remote, too small to manufacture. Proeprty & Construction which has been hiding and masking these deficits
went boom*bang*dead.

Bono, enya, * newly invested in authors you promote above * add little tangible goodies to Ireland. Sure, Kudo's abound, we create a more talented, artistic society which is exempt of tax - not very helpful to me.

Irish Tech needs all the help it can get - if it has to come from the government until it's ready for private equity, then so be it. It seems even the writer of YourTechStuff doesn't believe investing in Irish Tech is worth it...What will Joe the Plumber or Mick the Farmer or Tony the accountant think?

[Evert Bopp]

Both Adrian & David make very good points, however there is a more important point to be made in my opinion. We should not look at supporting the tech sector only. We need support for ALL national industry period. Don't concentrate on one sector only as this is exactly what has gotten us into this mess (construction/property industry anyome?).
What we need, and what we need urgently, is a support structure for localy grown businesses at the earliest stage. Help someone solidify their business idea by getting providing the structure that the business need to facilitate growth.
Do not assign support by sector but create a fund for any and all and judge every applicant on their won merit independent on what sector they operate in.
As for the lack of interest in the tech sector, this might be true but all those solicitors, artist, accountants etc. will end up using technology in some shape or form ( there was a tweet yesterday that every student across two floors of the UL library was using a laptop). So yes, do support tech startups but not because they operate in the tech sector but because they are viable businesses!

[Evert Bopp]

Note to self: please drink coffee before replying as this prevents stoopid typos..

[David Quaid]

Hi Evert, thanks for the reply and for pointing out that we shouldn't just focus on ICT/IT Tech.

When I said Tech, I would like to include Manufacturing Technology, Bio-Tech, Green Tech - which can include any of these verticals, Agri-Tech, Telecomms, Software, IT etc. Exporting companies.

There is one small problem with not identifying who we want to support or who have failed in the past: There is no point in encouraging companies who want to go into retail, who want to Retail, more farming, food production, property development, construction companies, car companies, etc.

If we can't identify our mistakes how can we plan a new future? I'm not suggesting we gang up on sectors, I think the solution is going to involve us all but we need some direction.

[Adrian Weckler]

David,

First of all, thanks for the considered, excellent reply. Some good points raised.

I would take issue with you on one or two of those points.

First, the amount of taxpayers' money invested in the tech sector. You seem to limit the amount of money invested in tech companies and research to a small portion of EI's €450m. It is nothing of the sort: it is far, far more. The government has pledged €8.2 billion for scientific and technology research until 2013 in the National Development Plan

So far, €760million has been spent by the state’s largest research funding body, the SFI. It has pledged a further €400 million in grants. Last year, it granted €365 million to 570 college research projects, or roughly €600,000 per project.

Now, the best indice of success is whether innovative high tech companies are breaking through and establishing critical mass. (This does NOT include companies that service computers or other service-linked firms.)

For that €360m spent last year -- PLUS the Enterprise Ireland money -- what have we got?

It's very hard to establish. But maybe there's another way of measuring progress, right? Like new intellectual property created, for example?

Okay, let's look at where we stand on how Ireland is doing in creating and filing patents.

Uh-oh.

In total, just 415 European patents were filed from Ireland last year, far off what similarly-sized countries such as Denmark (1,408 applications), Austria (1,379 applications) or Belgium (1,900 applications) filed.

Even then, a considerable number of the patents came from subsidiaries of multinational companies.

Is this not a legitimate question to be raised?

Since 2001, about 200 patent applications have been filed by SFI-funded researchers, making the cost of investment just under €4 million per patent. €4 million!

Now, you might come back and say that you would do it differently. Sure, everyone has their own masterplan. But I hope you will forgive me if I say that it usually corresponds to the business or sector they earn their money in themselves. (If they work in the tech sector, that is 'the future'. If they work in agriculture, 'high quality food production' is the way of the future. etc etc.)

Above, you castigate Enterprise Ireland for 'wasting' €200 million of its budget. Fine. Let's start with that, then? Maybe have a discussion around that? Of course, the minute you do, there will be a half dozen people posting comments that we're pursuing the wrong policy, that we should be targeting the bankers or some other sector (that they don't work in).

Anyway, I digress. My basic point is that our national strategy has drifted into a program for fairly massive spending into tech and R&D. And this has not been questioned much, if we're being honest. And it needs to be questioned. If only to get the best for our money. What's wrong with that?

Now, you present an excellent example above of how a €2 million investment in 20 tech start-ups could yield 64 jobs. I can see how that would happen in favourable conditions.

And you also say that ICT was the only sector to increase employment in Dublin last year. I'm not so sure about that, but can't really challenge it, so fair enough.

These are exactly the kind of points we need to be raising.

I would completely disagree with you on your analysis of authors' economic effect. I'll choose one, Cecilia Ahern. In the past couple of years, at least two movies have been shot in Ireland of her books. I'm not sure how many Irish jobs that sustained over that period, but I'd say it was considerably more than 64. Then there adaptations for TV, theatre and more. That's quite apart from the publishing houses here (yes, there are some left). And also the fact that if she earns €1.5 million per book, she'll probably spend or invest at least half of that in the local economy. Also, your assumption about her income tax is wrong -- she pays tax over €250k (a small point, probably, but worth as much as several tech employees' tax contributions).

I am thrilled by success stories in the tech sector. God knows I've written enough stories for the SBP trying to big young companies up. We all do in there.

But we need to have a completely honest discussion about all of this. And not become just another lobby which wants its share of the pie.

[Evert Bopp]

David, any innovative idea in the retail, farming, food production, property development, construction companies, car companies, etc.should be looked at.
We have entered an age of a new type of economy where there are opportunities for an innovative approach in every sector.
Support programmes should be open to one and all but with very strict criteria. Support for earlys stage start-ups (when done right) also costs a whole lot less...

[David Quaid]

Evert: yes, but new innovation in Farming, construction, cars is going to be technology based - i.e. a new technology. I'm saying we should't be creating more farmers, more retail...we're not disagreeing!

[David Quaid]

Hi Adrian, I was only dealing with Enterprise Ireland as that is the state body that deals with Irish Tech Start-ups. SFI is mostly funding for Scientific Research and large scale funding, bio-tech, not necessarily funding small start-ups. I agree that a lot of money is wasted here but it's not a part of Irish tech startup funding. SFI and Research grants go to universities and university participation or for research institutes or collaboration.

As for the number of patents filed - Austria is double our population.

I think we need to also forget the idea that Ireland is a rich nation. We're not a rich nation. We never became rich. We had a high Per Capita GDP thanks to the nature of the Multinationals clearing money through Ireland. But we're not rich.

We need government money for Irish Startups. As far as I'm aware that can only come from EI or the Enterprise boards. Some spin-offs may happen from SFI but that's not it's primary goal

[Evert Bopp]

David, yes we are.
I know of one local farmer who is doing very innovative things in regards to diversification etc. which makes his substantial farm more viable from a business perspective as well as a lot more environmentally friendly and sustainable.
I think that these type of efforts should get a smuch merit for funding and support as tech start-ups.

[David Quaid]

so he's using new techonlogy through innovative business practices - I think we should support that!

[Dave Concannon]

I believe the incentives given to startups are often at odds with reasonable business practices. A lot of government grants are designed to create jobs - a noble aim but a startup needs to be a lean, bootstrapped organization that delivers revenue before jobs.

I believe that support for a solid, lean business plan that delivers profit before jobs would have a far higher level of success. Undoubtedly job creation is important, but it needs to be organic and in lines with the revenues of the company.

[Evert Bopp]

No David, he's not using new technology.He is using the same technology he has been using for ages. However he is growing different crops, rotating crops, not producing food but sustainable fuels instead etc...

[David Quaid]

a technology doesn't have to be high tec or new. It can also mean a different combination of techqniques and materials. Using sustainable fuels for example is a different practice and a new technology.

Promoting his idea to other farmers is a good idea. Thats not the same as encouraging NEW farmers.

[Damien Mulley]

200 Million alone spent on the process to keep High Potential Failures off the dole and then there's all the rest. Says it all. It's social welfare for companies we have here, not investment in the future. When a Government gives you money to create jobs that you don't need to create for your company then it's dangerous territory. The Government are investing in slowing down your company, not making it lean.

I find it amazing that I can have an idea and play with it for at least three years without it making a penny and all the time taxpayers are paying my mortgage. And it's funded not because it's a good idea and has potential but because the philosophy of the Government is keep dole numbers down whatever the cost. An inheritance from the 80s that never evolved.

Tech companies want a silicon valley yet also want the thick feathered cushion of grants. I don't think that's possible.

[David Quaid]

The startup feasbility study from Enterprise Ireland doesn't really cover someones salary. It's 50% of €38k as a grant of which less than 40% is spent on wages - so only 20% comes from the government. That doesn't really buy you 3 years of sitting around doing nothing. you won't survive on that for long.

RDI or 250k grants are a lot harder to come by and are related to getting a company into a selling position.

I agree that the way this is handed out can do with a lot of examination.

[Shane Mc Allister]

Great Discussion going on here - great to see. Disclosure - I'm a tech company that got a grant from EI to get started. A small feasibility grant that cushioned the blow from leaving a very well paid job to investigate my idea for a business. A portion of that grant covered my own salary - very welcome, but nothing to what I was earning prior and just over 3 times what I would have got if I was on the weekly dole. The rest of the grant was in the form of 50% of costs - so you had to pay it out, in order to claim it. This grant lasted for 6 months and most of it has yet to be claimed as the process to recoup grants in onerous in the extreme (another topic). The company is now 18 months old and in January took on its first employee - no further grants needed nor wanted.

Anyway, here's my point - Give all business, depending on their plan, the founders, the market etc, access to some start up money (like the feasibility grant) and give them the cushion to get started. After that, cut them loose for a period of time and fund them on the basis of Sales and Revenue generated. For example - in year one after start-up company x made €40k of sales - then €40k of further funding should be made available so that the company can make and chase more sales in year two. Therefore - help the companies that CAN sell - it's the lifeblood of Business. Too many company's fall into the rat hole of surviving on Grants, Employment assistance funding etc, and they never turn a sale. These are the dead companies - as mentioned above, SFI funds lots of research, but does this spawn companies, and can the technology be sold?

Forget the current model of matching funds, seed capital relief and all that guff - as Damien says - bootstrap you company, and wear out your shoe leather traipsing around endeavoring to sell your product. If funding is still then required, then match actual sales, rather than the promise of sales and you will prosper.

[Justin Mason]

re 'Tech companies want a silicon valley yet also want the thick feathered cushion of grants':

Actually, there should be _more_ money out there using an SV model. Didn't Enterprise Ireland invest EUR175m in a fund in 2006 to be disbursed by VCs? ( http://www.enterprise-ireland.com/annualreport2006/section4sub5_1.html )

I wonder how that's going.

While I'm posting a comment -- Adrian, if you're going to take Cecilia Ahern as an example, you should note that she's published by Harper Collins -- a UK and US-based company. They don't seem to have an Irish office. so publishing her work is probably not contributing much to our economy.

[Liz Fleming]

Hi Folks,

Very interesting discussion going on. Two brief points:

1. EI's No.1 objective is exports not jobs. (yes there is increasing pressure on job numbers however exports is the main focus)

2. The days of living on grants are well and truely over (presuming they really existed in the first place). Many companies will find it hard to get a second grant, next step should be investment and as we all know this is not easy to secure.

[kiramatalishah]

Often we forget the little guy, the SMB, in our discussions of the comings and goings of the Internet marketing industry. Sure there are times like this when a report surfaces talking about their issues and concerns but, for the most part, we like to talk about big brands and how they do the Internet marketing thing well or not so well.

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