Scale Ireland in Budget 2020 call to grow Irish firms

An entrepreneur-led organisation called Scale Ireland has made a pre-Budget 2020 submission to the Irish Government to remove roadblocks that are preventing start-ups and SMEs from creating jobs and rewarding staff and risk-takers.

Scale Ireland, which has raised its funding from private sources including successful entrepreneurs who have exited as well as internet giant Google, is guided by the principle that a flourishing SME sector will be just as potent a jobs engine for the future as well as multinationals.

Not only that but if more start-ups can successfully “scale up” to good revenue and headcount levels, this will result ultimately in more spin-out enterprises and more jobs across the country’s regions, communities as well as its cities.

“Great business ideas will start in Ireland, but to do that you need good policies helping businesses to scale”

Scale Ireland’s steering group includes leadership representation from Irish innovation-driven enterprises (IDEs) that include Teamwork, Pointy, Aylien, Aero, Fire 1, Restored Hearing, and Axonista.

In its priorities for Budget 2020, it called on the Irish Government to incentivise employees of entrepreneurial businesses by revamping the Key Employee Engagement Programme (KEEP) share options scheme. This is logical because offering employees shares in a business is a practical and effective way to ensure staff retention at a time of full-employment and a competitive jobs market.

Scale Ireland called on the Government to stimulate private investment in innovation by fixing the Employment & Investment Incentive Scheme (EIIS), once known as the “friends and family” round, that is key to seeding companies and widely considered inferior to its counterpart in the UK, the SEIS (Seed Enterprise Investment Scheme (SEIS) which is actually resulting in Irish start-ups locating operations in the UK.

The new organisation also called on the Irish Government to reward Irish businesses for investing in innovation by simplifying the R&D Tax Credit Scheme.

A crucial area for reform is also Capital Gains Tax, which in its present and limited form is failing to encourage serial entrepreneurship in Ireland, the organisation said.

The bedrock is innovation

Man with glasses gesturing at a table sitting beside blonde woman and dark-haired bearded man.

From left: Conor Gouldsbury and Liz McCarthy from Scale Ireland and Brian Caulfield, chair, Scale Ireland. Image Neil Donegan

At a press briefing in Dublin yesterday (25 September 2019) Scale Ireland chair Brian Caulfield from Draper Esprit– a successful entrepreneur and venture capitalist who has built and sold a number of tech companies –said that in the run-up to the upcoming Budget 2020 which takes place on 8 October the organisation has so far experienced “strong engagement” from Government on its proposals.

“The fiscal piece isn’t that attractive. It is a challenge, but we need to fix it now rather than wait until the next recession”

However, he said that some of the changes the organisation is seeking may only emerge on an incremental basis, but these changes are necessary if Ireland wants to see a thriving, growing SME economy.

Conor Hanley, CEO and president of successful Irish medtech company FIRE1 and former CEO and co-founder of life sciences company BiancaMed, said that when it comes to hiring staff, indigenous companies are often on the backfoot compared to the perks of multinationals. He said that often it comes down to new employees buying into the “dream” when it comes to medtech companies creating breakthrough or live-saving cures or products to alleviate heart disease, for example.

“The journey is hard and start-ups and scale-ups need support at an early-stage.”

Elaine Coughlan of Atlantic Bridge said that other factors need to be looked at such as visas and bringing in talent.

“Great business ideas will start in Ireland, but to do that you need good policies helping businesses to scale. That’s why Scale Ireland is so important. Stock options are about sharing the growth and wealth of companies, not just with founders and investors but also with staff so that they will get to participate. Companies need to be able to focus on growing value even through peaks and troughs, because we are tied in with the globalised economy.

“The bedrock of this is policy and our policies need calibrating, especially at a time when there are other pressures on the system such as housing, wage inflation.”

She pointed to the UK equivalent of Ireland’s EIIS as an example of where investors can invest up to €1m in an enterprise whereas in Ireland they can only invest up to €150,000, which is almost a 10X difference. “What has come through in the numbers is that London is now the number 2 place in Europe for founding start-ups – 10 years ago London and the UK where nowhere to be seen. The SEIS has definitely given a new line of seed capital to start-ups. It is vital that a piece of the hard yard is done locally, and that part of it has to be done locally at the EIIS stage in Ireland.

She pointed out that the UK, which will soon be unshackled from EU rules after Brexit and will be able to even go further with its supports for SMEs and start-ups, has a vision for London to be “Singapore on Thames.”

Coughlan added that EIIS policy changes need to be implemented and correct funding mechanisms – including allowing employees to invest out of their own pensions – need to be looked at.

“We have a badly broken system that needs to be optimised for the future.”

Paddy Walsh, founder of Dogpatch Labs in Dublin, didn’t mince his words either and said that enabling share options is a vital piece of the toolbox that SMEs and scaling companies will need to compete. “The fiscal piece isn’t that attractive. It is a challenge, but we need to fix it now rather than wait until the next recession.”

How to win the war for talent

Red-haired woman with glasses.

Grainne Dwyer, Ludgate Hub Skibbereen and founder of Stori Creative. Image: Neil Donegan

In the war for talent, Scale Ireland chair Brian Caulfield outlined how Ireland is missing out by citing the example of one fast-growing Irish company that was recruiting a senior engineering manager from the US. “His choices were to locate in Ireland and he was offered 1pc of the company’s shares. But in Ireland he would have had to pay full income tax. In the UK under entrepreneurs’ relief he only pays 10pc income tax. This resulted in the company moving 10 engineers from Ireland to the UK to work with the manager.”

“Philip King once said that Other Voices was successful because it took place in Dingle, on Europe’s edge. When you are on the edge, you work harder and you are hungrier for success”

Crucially, both Caulfield and Coughlan pointed out that while Ireland has a vibrant entrepreneurial ecosystem, the scene has never returned to the pre-2000 heyday when companies like Iona, Trintech, CBT, Norkom and others each employed hundreds of staff.

But not only that, these companies generated spin-outs too with Iona alone producing 60 spin-out companies led by former workers.

“The policy challenges of 2020 are different than in 1997 when Iona went public. We don’t have a failure problem, we have a scale problem and we haven’t been successful at producing companies at scale since then.”

Grainne Dwyer from the Ludgate Hub in Skibbereen pointed out how in Europe various economies are ratcheting up their arsenals to boost entrepreneur and scaling up firms. “Macron in France recently announced a €5bn fund to support entrepreneurs and Paris has infrastructure like Station F.”

Dwyer said that the answer lies in Ireland’s regions and innovation hubs and said companies like Xsellco and Six West are doubling their remote workforces in locations like Skibbereen.

“Philip King once said that Other Voices was successful because it took place in Dingle, on Europe’s edge. When you are on the edge, you work harder and you are hungrier for success. Every region of Ireland has its niche. But we need to look at what Europe and China are doing in terms of taking risks on scaleable companies.”

A synergistic opportunity

Man in blue shirt with glasses talking and gesturing with his hands.

Paddy Walsh, founder, Dogpatch Labs Dublin. Image: Neil Donegan

Dogpatch Labs’ Paddy Walsh concluded that Ireland has a massive “synergistic opportunity” that is waiting to be unlocked due to the country’s unique infrastructure of multinational and SME companies and that there is nowhere else on Earth quite like it.

But as Elaine Coughlan pointed out, development is unequal when it comes to supports for start-ups and SMEs versus multinationals.

“We have to get this right as a country. We have unhinged, unequal development on the east coast.”

The biggest lament is, however, why more companies in Ireland don’t grow beyond 50 people when in reality with the right policy environment the potential is there to grow to 500 people.

Coughlan pointed out that while failure rates among start-ups are typically between 50pc and 60pc, those failure rates go down once companies start to reach scale. “If you do not scale, the failure rates are quite high.

“We have to get the policy environment right in terms of talent and capital. You create more risk, but you create more jobs and can hit bigger numbers.”

Brian Caulfield concluded by pointing out that every town and community could be enriched if local companies can go from start-up to scale-up with the right policy environment.

“It is not about getting perfection and stopping, it is about continuous improvement.”

Main image (from left): Grainne Dwyer, Ludgate Hub Skibbereen; Conor Hanley, FIRE1; and Elaine Coughlan, Atlantic Bridge. Image: Neil Donegan

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Written by John Kennedy (john.kennedy3@boi.com)

Published: 25 September, 2019