In his introduction to the Taskforce report, the Taoiseach notes that members of the Taskforce:
have focused, correctly, on how to deliver a step-change in the level of company start-ups and their growth to international scale in order to drive job creation in innovation, export-focused sectors.
In my commentary on some of the thinking behind the Innovation Taskforce report, I stressed:
Start-ups are really key.
We need start-ups as a pool from which candidate indigenous multinationals can emerge. We need them to help sustain our own indigenous multinationals for the long term. We need them to help embed foreign owned multinationals in Ireland.
The more start-ups we nurture, the more serial entrepreneurship we create; the more spin-outs from indigenous companies we create; the more successes we will have; and the more that others will be strongly tempted to try their own luck.
We need to build a positive feedback loop to drive our smart economy: by priming the engine appropriately, it can gain its own self-sustaining momentum and lead to an exponential growth of jobs. I believe thatengineering a positive feedback loop is the critical insight and most critical objective for the smart economy: if there is a positive feedback loop, then we will create sustainable growth and a rapidly increasing number of direct and indirect jobs.
I believe it very important that we consider all possible mechanisms to continually grow the number of start-ups in the economy.
The most obvious source of innovative start-ups may appear to be the academic sector. Indeed, I co-founded IONA Technologies with Annari O’Toole and Sean Baker as a spin-out from Trinity College Dublin. But as I noted in an earlier post on the Irish Smart Economy:
from 1992 until 2001, 10,530 start up companies were backed by venture capital in the USA. Of these, just 903 were academic spinouts – only 8%.
Perhaps we can achieve a higher percentage (than 8%) in Ireland than the USA did in the period 1992-2001, but even so it does seem prudent to anticipate that only a relatively small number of start-ups will emerge from our academic sector to be sufficiently attractive for external risk capital.
So, where are our other start-ups going to come from ?
Successful start-ups release founders and senior management to re-cycle and form their next start-up. Serial entrepreneurs like Joe Moore, Dylan Collins and Paddy Holohan – just as examples, and there are others – create a steady stream of innovative companies.
Successful companies spin-out further start-ups: e.g. ex-IONA staff have created over 30 such companies, although not all in Ireland.
Large company operations can lead to start-ups. In the last few years in Ireland, there has been policy interest in encouraging multinationals operating in Ireland to license dormant intellectual property into new Irish start-ups. As examples, in September 2007, HP licensed intellectual property to Crospon to enable a smart drug delivery patch. In June 2008, Zignals licensed Microsoft’s solver foundation engine; a year later, InisTech licensed software protection and licensing software from Microsoft.
Intellectual Property, which is not seen as core by senior management to the mission and corporate objectives, may not just come from technology based multinationals. In 1996, AIB commissioned an established small Irish company, Peregrine Expert Systems, to develop some smart software to automate the handling of disputed credit card transactions. As a result, the retail bank was able to redeploy 60% of its headcount allocated to this activity. Although the resulting software was owned by AIB, nevertheless it was not core to AIB’s business. AIB licensed the software to Peregrine, who then developed a market of twelve other banks in eight countries, before being acquired by (the Irish company) Trintech in November 2000.
In Ireland there are many substantial corporate operations. Intel, HP and Wyeth are amongst the obvious multi-national ones, but there are also a number of domestic companies that employ tens of thousands of employees, e.g. AIB, Bank of Ireland, and Hibernian/Aviva.
Every year most of these operations commission multi-million Euro projects of one type or another. This may be software development; it may be the creation of new back-office administration processing centres; it may be the building of specialist facilities like laboratories or clean-rooms. Once complete, these projects result in there being a team of people who are providing a resource to their employer.
Viewed very simply, if such a “resource” were turned into an independent company then from a probability of success point of view they have some promising characteristics:
- They have a recurring revenue stream, at least covering all staff wages and premises
- They have a substantial first reference customer
- The product or service has been developed successfully
- There is a cohesive proven team in place
Thus, non-core projects within a larger corporation can be an excellent source of start-ups, since the risk of failure is reduced: there is already a paying customer, a working solution and the nucleus of a team. Pearse goes on to note:
There are several sound reasons why it may be in the company’s interests to spin out such resources:
- Reduction in direct head-count
- After it is spun out they can continue to use the same service or product
- As it achieves economies of scale resulting from selling on the product or service, the cost to them will diminish
- They stand to gain from their shareholding in the new entity
- They will benefit from improvements to the product or service as it is developed for other clients, without they alone having to fund such improvements
- It will generate positive publicity for their company
- It will appeal to the public spirit of the decision makers in the company, some of whom may seek a role in the new venture
For an employee leading such a spin-out the incentive is that they can become the founder and significant shareholder in a new entity which will start out with a significant revenue stream.
I was therefore very interested indeed to note that Richard Bruton identified the opportunity for non-core projects as a driver for start-ups, in a Dail debate with Brian Lenihan (Minister of Finance) on 24th February last (see section 50 of the debate).
As I noted in my post last weekend, I am not a member of the Fine Gael party!! However, I think it is interesting to note that Fine Gael have raised the issue in the Dail.
Deputy Bruton stated:
This issue was brought to my attention by my colleague, Senator Paschal Donohoe. His point is if we want to encourage commercialisation of innovation, we need to encourage spin off companies that engage in the commercial exploitation of research. That will lead to jobs and positive benefits. People looking at our expenditure on research and development, particularly in the State sector, are critical of the lack of spin off commercial activity. The proposal is to use the research and development tax credit to provide a financial incentive for Irish-based firms to create spin off companies, which would commercialise technologies that were originally developed within these firms for their own use, and the spending on intellectual property that is transferred to the spin off company would be made allowable for a research and development credit claim. It is a way of encouraging a particular weakness in the Irish system, which is moving from research and development spend to commercialising projects and get companies into job creating mode. I am sure Senator Donohoe will pursue this in the Seanad but it seems to be a valuable way to encourage a sector in which we are weak.
I am delighted to see such topics being actively debated in the Dail!!! The Minister of Finance recorded his appreciation of the proposal, but had concerns:
I appreciate the motivation behind the amendments. However, concerns and difficulties arise and, taken in the context of the existing range of research and development incentives, I am not convinced they will provide an effective incentive to increase research and development activity or to represent the best use of resources because instead of incentivising further research and development, the effect of the amendments is to reward commercialisation after the research and development has been undertaken.
I wonder whether perhaps the full intent of the proposal was understood by the Minister and communicated by Deputy Bruton: the purpose appears to create employment and growth by spinning out R&D that has already been undertaken, and which would not otherwise be commercialised. By taking the R&D out into the setting of a new start-up, “wood can be put behind the arrow”, further customers sought, a new market stimulated, and with new jobs being created — exactly as AIB did with Peregrine.
I sincerely hope the Dail and the Seanad can continue to actively spend time focussing on enterprise policy, and in particular incentives to very substantially increase start-up activity. I am particularly delighted to see a healthy debate, and I trust that the Minister of Finance can creatively find a mechanism to address the opportunity for a further pool of start-ups, as identified by Fine Gael and as suggested to the Taskforce by Pearse Coyle.