What's this all about?
At LEVERIS, we believe that the future of banking starts at the core. Core by LEVERIS is a new interview series where we address the issues at the core of banking, fintech and financial services. We speak to those working at the intersection between tech and finance about everything from the future of money to investment in fintechs. Through their insights, we explore current trends, predict future outcomes and get a taste of what it takes to succeed in the new age of banking.
Our latest guest in the series is someone who understands the trials and tribulations faced by founders when seeking investment. Holding the position of Director General of the Irish Venture Capital Association (IVCA) for the past three years, Sarah-Jane Larkin is responsible for the leadership and management of the membership body for venture capital and private equity funds providing equity investment to innovative Irish start-ups.
In the following interview, Sarah-Jane discusses current trends on VC funding for fintech companies in Ireland, the role the venture capital industry will play in a post-COVID recovery, and why founders need to keep their cool when pitching their business.
LEVERIS: For any readers unfamiliar with your organisation, could you provide some brief background on the Irish Venture Capital Association (IVCA) and what you do?
Sarah-Jane Larkin: The IVCA is the representative body for venture capital and private equity firms on the island of Ireland. Our full members are venture capital and private equity firms that provide equity funding to growing unquoted companies. Associate members of the IVCA include firms that provide advisory services including corporate finance houses, commercial and intellectual property law firms, accountants and other advisers experienced in the venture capital field.
LEVERIS: How would you describe the typical company that attracts venture capital and private equity?
Sarah-Jane Larkin: Venture capital and private equity are long-term investments in private, unlisted companies. Typically, companies that attract venture capital and private equity have high growth potential, are capable of scaling quickly and are global in their ambition.
LEVERIS: Your latest Venture Pulse Survey shows that capital funding into Irish tech firms reached €364m between April and June, the highest quarterly total on record. What does this tell us about current VC funding trends?
Sarah-Jane Larkin: Given the exceptionally high Q2 total, we were keen to understand what was driving the numbers and to analyse the impact of Covid-19 on funding experience for Irish SMEs. The fact that we recorded a record quarter in this period seems counter-intuitive but it may be down to VCs looking to assist existing portfolio companies in overcoming the threats caused by the pandemic and increasing their investment in this quarter to help them get through the next 12 to 24 months.
The high total disguised a worrying trend in first time funding rounds as VCs focused on backing existing portfolios rather than seeking out new investments. This is a metric that we will be watching closely in Q3.
LEVERIS: How do you view current trends on VC funding for fintech companies in Ireland? What were the fintech companies to receive major funding in the last year?
Sarah-Jane Larkin: The two areas globally and in Ireland that have thrived since the onset of COVID-19 are life sciences and fintech. The opportunities for fintech solutions have jumped forward by at least five years with the increase in digital engagement. Fintech companies raised 21 per cent of funds in Q2 and this ranged across all stages of fundraising. Fenergo raised €73 million in Q2, which was one of the highest rounds of the quarter.
LEVERIS: How has COVID-19 impacted the Irish venture capital community's investment in innovative Irish companies?
Sarah-Jane Larkin: The working and business event environment has changed in a way that severely limits crucial interactions and networking with VC investors. In addition, there is a potentially smaller pot of available funding, as VC providers accelerated investments in existing portfolio companies to a record €364m in the second quarter, leaving potentially reduced fund reserves.
LEVERIS: It is said that a VC should be both a cheerleader and challenger for a company it invests in. What areas of the business can the VC generally help with?
Sarah-Jane Larkin: Private equity and venture capital take equity stakes in businesses in Ireland across a wide range of sectors. In return for investment into the company, private equity and venture capital funds receive an equity stake in the business and for the duration of the investment, they work with the investee company management teams to support growth plans and make improvements to the business with the aim of increasing its value.
The duration of the investment varies but generally, it is between four to seven years. This means there is a long-term relationship between investor and investee. Creating long-term and sustainable value in a business is key to the private equity and venture capital model. It means improving the business over the lifetime of the investment so that when the time comes to sell the equity stake, the company is stronger and is worth more than when the investment was first made.
LEVERIS: Are there any policy changes that need to take place to ensure that fintechs here and start-ups more generally have a better chance of receiving investment? And are there other ways we can encourage entrepreneurship and risk-taking in Ireland to flourish?
Sarah-Jane Larkin: The Employment and Investment Incentive Scheme (EIIS) provides tax relief of up to 40 per cent but investors naturally tend to gravitate towards lower-risk investment areas such as property or nursing homes. We need to encourage more private investment in higher risk, high tech start-ups by increasing tax relief in these companies to a much higher level or, as in the UK, introduce a seed EIIS scheme and other measures to mobilise private capital to this sector. As private savings increase during the pandemic, this becomes increasingly important.
For the longer term, ensuring a long-term sustainable source of private capital to complement State investment through Enterprise Ireland and Ireland Strategic Investment Fund will be crucial. The design of the proposed pension auto-enrolment scheme should be cognisant of the success of schemes in other countries that allowed investment in VC as an asset class. This ensures that the pension savings of Irish citizens can be put towards creating the Irish companies and jobs of the future.
LEVERIS: How do you predict venture capital investment levels proceeding in 2021? What role with the venture capital industry play in a post-COVID recovery?
Sarah-Jane Larkin: The announcement by Government in the October budget of a fund in the region of €100m will ensure that levels of investment remain strong and that the most innovative Irish SMEs will be able to secure the equity finance needed to grow and scale. This is vitally important for our economic future as research undertaken by DCU last year shows, these companies typically grow jobs and exports 16 times faster than the rest of the economy and, in some years, contribute up to 40 per cent of the R&D spend for Irish SMEs.
LEVERIS: Any advice you can give fintech companies pitching their business and seeking VC funding?
Sarah-Jane Larkin: The pandemic has definitely added new considerations to how SMEs seeking funding will be viewed compared to last year. Indeed, the whole structure of the business model will be put under the microscope as never before. For example, in relation to sales and given global travel restrictions, can they prove the market or customer base is ready for remote or online selling? VCs will also want to know the impact COVID has on turnover and cash flow within an environment that has a slower, more difficult sales cycle.
The pandemic has reduced opportunities for networking and building relationships through conferences and face-to-face meetings so we would advise companies not to wait for a roadshow to get to know people. See if you or your contacts can set up some chats to build relationships. Given face-to-face meetings have become more problematic to arrange, it is even more critical to ensure companies’ investment decks and pitches are complete, to the point and impactful.
LEVERIS: Thanks for chatting to us for the Core by LEVERIS series. Any final comments?
Sarah-Jane Larkin: Securing seed funding can be really hard, so, getting an anchor private investor is crucial. It is key to unlocking public sector investment.
Finally, our members would say that founders and promoters need to be open to debate, feedback and constructive criticism. If they can’t handle it in a meeting or show signs of antagonism, they won’t get a second chance. Business is all about keeping cool and learning from all stakeholders.