1MAY 2016

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A CRITICAL COMPONENT OF THE IRISH ECONOMYWith technology continuing to transform business models across all industries, the overall prospects for the sector are positive, despite recent market woes, writes John O’Dwyer.

The Technology, Media & Telecoms sector continues to be a crucial component of the Irish economy

with a unique population of global market leaders coupled with an even larger pool of indigenous SMEs.

Ireland is frequently quoted as the second largest exporter of software in the world and home to 9 of the top 10 US technology companies and all of the top 10 internet companies. Impressively, the sector employs in excess of 100,000 people directly in Ireland with the indigenous sector responsible for well over 10% of that figure.

Start-up eco-system flourishesOur technology start-up ecosystem is flourishing and is benefitting from a dramatic reduction in the cost to build and prototype a digital product. The changing economics of building a software product coupled with an increase in the acceptance of entrepreneurship as a viable career route has spawned an uplift in Irish start-up activity.

The rise of technology entrepreneurship is of course a global phenomenon to which Ireland is not immune and our research in this Outlook report demonstrates the increasing proliferation of start-up Accelerators and Incubators as a means to start a venture throughout the country. Indeed, this month marks the launch of the PorterShed building in Galway city – a co-working space for fast growth start-ups and SMEs that is proudly backed by AIB.

Increase in capital deployed Indigenous technology firms raised over half a billion Euros of equity capital in 2015 according

to the Irish Venture Capital Association VenturePulse survey published earlier this year. Encouragingly, this figure represents a 90% increase in investment activity over the five-year period since 2010.

According to Brian Caulfield, Chairman of the IVCA: “2015 was another strong year for venture capital investment in Ireland with overall investment rising by 30% to €522m. “

The findings also demonstrate the increased interest by overseas investors in the Irish technology sector which is a tribute to the calibre of its entrepreneurs and technology capabilities. International investors invested €241m (46% of total funds raised) in 2015 compared to €132m (33% of total funds raised) in 2014. This source of funds has grown from €45.5m (17% of total funds raised) in 2011.

www.aib.ie/technology

TECHNOLOGY, MEDIA AND TELECOMSOUTLOOK

>>

John O’Dwyer Head of Technology, Media and Telecoms Banking, AIB

AIB VENTURE CAPITAL PORTFOLIO

€125M OF COMMITTED

EQUITY

… across 9 funds with €625m to invest

… in Irish business

2,300 JOBS CREATED TO DATE

2 MAY 2016

“A particular highlight of 2015 was the greatly increased interest from overseas (in particular US) investors in Irish companies. International investors invested €241m representing 46% of the total and 10 companies raised rounds of over $20m raising €280m in total. This reflects the increasing quality and scale of Irish technology companies. It may also reflect a search for value by US investors, with European valuations having been largely immune from the valuation inflation that has been seen in some sectors in the US market in recent years,” says Brian Caulfield.

92% of funds raised in 2015 were for growth and expansion rounds with a restriction in the amount of seed capital being deployed. The total amount of seed funds raised in 2015 was €43.8m (8% of total funds raised versus 17% in 2014) – an overall decrease in seed activity of 58% since 2010.

“A more worrying trend is the continuing decline in the availability of seed funding. Seed funding represented just 8% of the 2015 total. It is likely that this trend will start to reverse in 2016 with new seed funds being raised under Enterprise Ireland’s Seed & Venture Capital Programme starting to come on-stream,” adds Brian.

Strong equity and credit activity AIB’s commitment to the Irish venture capital market is a significant part of AIB’s support to the wider Irish Technology and Life Sciences sector providing equity finance to start-up and growth companies at various stages of their development. To date, AIB has committed €125m into 9 active venture capital funds, which when combined with other investors lead to VC funds of €625m to invest largely into the wider Irish ecosystem. Our current fund manager partners include ACT Venture Capital (including AIB Start-up Accelerator Fund), Atlantic Bridge Capital, Causeway Capital, Enterprise Equity/Dublin BIC (AIB Seed Capital Fund), Fountain Healthcare (life sciences), Frontline Ventures (including AIB Discovery Programme) and MML Growth Capital Partners.

According to Ray Fitzpatrick, Head of AIB’s Equity Investment Unit: “Investments made by these funds to date have enabled the creation of 2,300 direct jobs in Ireland”.

2015 marked the second full year anniversary of the dedicated Technology, Media & Telecoms sector team and lending activities continue to grow in line with the overall growth in the sector. AIB Business & Corporate Banking was delighted to be

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www.aib.ie/technology

acquisition of Soundwave, Rapid7 acquisition of Logentries), the interest of global private equity (Insight Venture Partners investment in Fenergo), and the re-emergence of the Irish SME investing in M&A.

John Fogarty, Managing Director of AIB Corporate Finance says: “Our Technology sector clients undergoing M&A activity remains one of our most active sectors – we expect this sector to remain buoyant for the foreseeable future as we see both Irish and international companies seeking to grow through acquisition”.

Positive Outlook Despite the stock market woes and wobbles experienced earlier this year on the back of China and global growth concerns, the one certain variable is that technology is being used to fuel transformation in every business model across all industries and overall prospects for the sector are positive despite these macro-economic headwinds.

A recent report from Forrester, an independent business and technology research firm, forecast US business and government spending on technology goods, services, and people will reach $1.43 trillion in 2016, up from $1.36 trillion in 2015. For companies reliant on corporate spending, demand should continue to bolster turnover for entities that provide major cost-reduction and revenue-enhancement products.

There is little doubt that excess liquidity in certain parts of global markets in the last couple of years has led to signs of excess valuation in a very narrow section of the Technology sector. Thankfully, this does not appear to be emanating from Europe nor indeed Ireland. Recent corporate earnings reports in the US have led to a narrowing of the excess premium enjoyed by a handful of these companies and is likely to cool this element of the market. Interestingly, it is just over 15 years ago since the dot-com bubble when the tech-heavy Nasdaq’s price-earnings ratio hit over 175 whereas today that same metric is hovering around 20 indicating the fundamentally different financial make-up of Technology companies going to public markets.

The indigenous Technology SMEs operate somewhat outside of this glare and are continuing to flourish and find new customers in domestic and export markets and AIB is delighted to be supporting them.

awarded the prestigious Finance Dublin Deal of the Year for the acquisition debt facilities provided to Ding—a global pioneer and the world’s leading provider of mobile top-up services. AIB facilities enabled Ding to diversify further geographically by supplementing their presence in the US and Mexican market and the transaction represented an excellent opportunity to support a strong indigenous SME in its global expansion.

In January 2015, AIB announced the establishment of a Mezzanine Finance unit, led by Ronan Burke, to provide an alternative funding source to Irish SMEs and corporates. The objective of this offering is to provide a layer of capital between senior debt and equity that can be used by established

companies with positive cashflows, to fund expansion and growth opportunities providing customers with greater flexibility. The unit has deployed mezzanine funding to the Obelisk Group, a telecommunication infrastructure service provider in Q1 this year.

AIB has also supported a range of indigenous SMEs at various stages of scale across subsectors such as IT services, software, digital publishing, HealthTech, FinTech, AgriTech, and telecommunications.

Irish M&A Market dominated by Tech dealsAccording to William Fry’s comprehensive review of the Irish M&A market in 2015, the value of deals rose from €45bn (120 deals) to €189bn (104 deals). Excluding the Pfizer/ Allergan “megadeal”, Ireland’s M&A sector recorded a significant increase, with value up 41 per cent on 2014 from €11.4bn to €16.1bn. In total, the Technology sector was responsible for nearly a third (29%) of deals last year, up from 21% in 2014 and Technology remains the biggest Irish M&A sector by volume. A few interesting trends were noteworthy such as the acquisition of niche Irish companies by multinationals (Spotify’s

AIB’s commitments to seed and venture capital funds is a significant part of the bank’s support to the wider Irish technology sector by providing equity finance to start-up and growth companies

3MAY 2016

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A VIBRANT ECOSYSTEMThe growing network of Accelerators and Incubators throughout Ireland is playing a key role in the development and nurturing of new start-ups, writes Andrew McGreal, Technology, Media and Telecoms Banking Specialist, AIB.

An integral part of the Irish start-up ecosystem is the network of Accelerators

and Incubators which has more than doubled since 2005. Research carried out by AIB, in conjunction with Qualtrics in Q4 2015 shows there are approximately 32 organisations now operating start-up support programmes throughout Ireland. This is up from 27 in 2013.

Accelerators and Incubators assist new businesses and their entrepreneurs through their formative stages by helping them with pre-seed funding- typically ranging from €15,000 to €50,000- as well as intensive mentoring and coaching. The emphasis is on sorting out the product and any operational or strategic difficulties that might be facing the business”.

The growth of this start-up ecosystem has led to organisations operating a myriad of variations of the “traditional” Accelerator and Incubator models like SOSV’s IndieBio or Accenture’s FinTech Innovation Lab programmes, both of which focus on specific industry sectors.

“In the case of IndieBio our Cork based Accelerator, we have a great biotech sector in Cork, that helps attract companies from all over the world to Ireland”, says Conor Walsh, SOSV.

Despite the increase in the number of options available to entrepreneurs, the demand for places on start-up programmes remains high. Programme managers put the start-ups through their paces to ensure very high quality throughput that can compete globally. Indeed,

the research has shown that just 18% (14% in Dublin/30% outside Dublin) of applicants were accepted onto programmes in 2014 and that the programme managers noted that sourcing quality ventures was a challenge.

“Different supports provide different value and for a start-up, the key is to do your research about each support programme. This might include checking the track record of the mentors, speaking to alumni and making sure the objectives of the programme align with your own,” says Amy Neale of MasterCard’s global fintech programme, Start Path.

The biggest issue reported by programme managers was raising seed funding for ventures at the seed stage, an issue highlighted by the IVCA in its recent VenturePulse report.

“The early stage nature of many Accelerators and associated risk makes it challenging to attract private investment into the pre-seed gap. That’s why many

Accelerators internationally are raising next stage funds, addressing not just the sustainability of Accelerators but also a key funding gap for ventures,” says Gary Leyden, Commercial Director, NDRC.

Despite this, AIB’s research indicated that 40% of start-ups successfully raised follow-on funding after completing an Accelerator programme with 66% successfully bringing a product to market.

In terms of the profile of founders participating in start-up programmes the percentage of overseas founders (28%) is a real positive. It suggests that not only are we benefiting from the up-skilling of foreign talent via large FDI companies but also that Ireland is recognised as an important start-up destination.

However, the male to female ratio remains disappointingly low with female participants making up just 23%. Longer term this is expected to shift as stakeholders such as Enterprise Ireland drive

important initiatives (with organisations such as DCU Ryan Academy and NDRC) to improve the network and accessibility for female entrepreneurs.

“There is plenty of talent out there and our research shows females are interested in setting up but perhaps they are not as plugged into the start-up ecosystem as we know it. It tends to be very male dominated ecosystem although it is changing.”, says Eoghan Stack, CEO, DCU Ryan Academy

For its part AIB is firmly committed to supporting the high growth sectors of the Irish economy, and is focused on making sure our customers have the right support and funding to scale at every stage of the business life-cycle. We recognise the important role Accelerators and Incubators play in supporting ventures and we have developed strong relationships and supported programmes right across the country to help foster start-up growth.

Andrew McGreal Technology, Media and Telecoms Banking Specialist, AIB

ACCELERATORS AND INCUBATORS IN IRELAND POWERED BY

28% 77%

23%

23% <3 YEARS 75% >3 YEARS

FEMALE

WORK EXPERIENCE

OVERSEASMALE

72%IRISH

18%

30%

14%

AVERAGE NUMBER OF APPLICANTS

ACCEPTANCERATES IN DUBLIN

ACCEPTANCERATES

ACCEPTANCE RATES OUTSIDE DUBLIN

133 40%

66%

PARTICIPANTS RAISED FOLLOW ON FUNDING (IN 2014)

BUSINESS SUPPORTED

OVER 25 YEARS

3,887

PARTICIPANTS BROUGHT A PRODUCT TO MARKET (IN 2014)

NUMBER OF ACCELERATORS AND INCUBATORS

32 41% 59%DUBLINREST OF THE COUNTRYTOTAL

DEMANDFOR PLACES

PROFILEOF PARTICIPANTS

PERFORMANCE

2% OTHER

WITH

AND

Source: Data collected from AIB Survey Q4 2015 (25 responses).

4 MAY 2016

CASE STUDIES AIB is actively supporting Irish start-ups as well as the wider start-up ecosystem.

OUTLOOK#backedbyAIB

While Galway has already cemented its position as a leading global location for the international medtech sector, its growing reputation as a hub for innovative start-ups received a major boost with the establishment of the Galway City Innovation District

(GCID) in 2015.

Developed by Galway Chamber of Commerce, Galway City Council, NUI Galway and the Galway Mayo Institute of Technology, the GCID will oversee the development of a start-up and innovation hub in the heart of Galway city, close to Eyre Square, which will complement the existing start-up infrastructure in the region.

The first phase of the initiative, includes the launch of PorterShed, a new space that will provide co-working facilities to

entrepreneurs, start-ups and SMEs and will also house an Accelerator programme aimed at innovative, growth based ventures.

Backed by AIB, which has entered into a partnership with GCID, the 7,500 sq. ft. PorterShed is also being supported by KPMG, IBM and CIE.

“The idea of creating an innovation hub in Galway has been around for a few years. The rationale was that there’s lots of good things happening in the tech and medtech sectors in Galway but they tend to be scattered on the outskirts of the city and throughout the county,” says Dr John Breslin, a senior lecturer

in NUI Galway and one of the founding directors of GCID.

“A lot of start-ups want to be in a city centre location, close to transportation links and other local infrastructure. Dublin, with its Silicon Docks, is a good example of this. When fully up and running, the PorterShed will provide start-ups and entrepreneurs with access to co-working and incubation facilities as well as an Accelerator programme that is currently being devised. In addition, it will provide a meeting space where start-ups and entrepreneurs can network or attend seminars and workshops and where our partners can interact with the companies operating there,” he says.

“We also wanted to provide a place where incoming tech companies and investors visiting Galway can visit and see what the West has to offer and, over time, the aim is to expand into neighbouring buildings and create a cluster of companies that will make up the Galway City Innovation District,” he adds.

www.aib.ie/technology

Certain opinions and comments expressed in this Outlook Update do not necessarily reflect those of AIB. Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Lending criteria, terms and conditions apply. Credit facilities are subject to repayment capacity and financial status and are not available to persons under 18 years of age.

Trevor Parsons is uniquely positioned to talk about the merits of Ireland’s burgeoning start-up ecosystem. Having started out in NovaUCD in 2010 as a spin-out from the Performance Engineering Laboratory in the UCD School of Computer Science, Logentries, the

company he co-founded with Viliam Holub, then went on to participate in the NDRC’s LaunchPad programme. This was then followed up by a spell in Dogpatch Labs in Dublin. Then in October 2015, the company was acquired by the US security and analytics company Rapid7 for $68m, making it one of the most successful Irish start-ups in recent years.

“When we started out, we were academics in UCD and we didn’t really know much about running a business or indeed the wider industry we were trying to target,” says Trevor Parsons.

“The good thing about the Irish start-up

environment in is that there are plenty of Incubators and Accelerators to get you started but my advice would be to choose carefully and then get in and out again as quickly as possible because they’re really just a way for a business to work out what it needs to do and learn about particular sectors. After that, it’s up to the business to get out there and make it happen,” he adds.

Logentries provides a cloud-based solution for collecting, searching, visualising, and analysing machine data and logs. Now headquartered in Boston, with a development team in Dublin, the company employs over 80 staff and serves more than 3,000 customers in over 65 countries.

“Apart from the practical help we received along the way, one of the biggest things for us was the connections and relationships we made with other start-ups that were going through the same process as us. We could talk to a lot of our peer companies if we needed to figure something out and likewise they could talk to us. That was a great help,” he says.In terms of the funding environment, he says

that seed funding for start-ups in Ireland is relatively easy to secure but when it comes to bigger Series A funding rounds, most companies are forced to look outside the Irish market.

“While all the resources in terms of getting started and getting seed funding are in place in Ireland, the big difference between Ireland and other markets like the USA, for example, is that it’s much harder to raise Series A funding in Ireland. While there is funding available, the market is much smaller and many start-ups have to look elsewhere,” he says.

A customer of AIB since Logentries was first set up, he says the company has enjoyed a good relationship with the bank.

“Fortunately, we have always had a good relationship with the bank from the outset and it has always been very helpful as we were growing the business. It was never a problem picking up the phone to Maeve Lavin in the AIB branch in UCD and any issue we had would have been sorted as quickly as possible,” he concludes.

Trevor Parsons, Logentries.

John Breslin, GCID.