Ireland may be the best small country in the world in which to do business, but it’s a long way from being the best country in which to start one.
The budget the government announced last week would do little to change that, says Dublin Commissioner for Startups Niamh Bushnell.
Hours after it was made public on Budget Day, Bushnell wrote a blog post entitled “Last Week, This Week, and Next” on the Startup Dublin website.
“Last week the government led enthusiastic celebrations of entrepreneurial culture across cities and towns in Ireland,” she wrote. “This week they refused, on almost every level, to create an environment where that culture can actually thrive.”
The government had said a big no to encouraging angel and seed investment in Ireland, to enacting a capital-gains-tax policy that competes with the UK, and to using stock options to attract talented employees, she said.
It was the last straw for some investors and start-ups, said Bushnell.
“Since the budget announcement this afternoon, I’ve been receiving farewell emails and texts from people who say they’ve had enough and are bound for the UK,” she wrote.
Bushnell’s frustration was heightened by the fact that after more than 40 submissions had been made to the Department of Finance’s Entrepreneurial Review in July, an open call for consultation on how to increase entrepreneurial activity, none seemed to have been acted upon.
Attracting Angels
They only had one request.
The Dublin Startup Leader’s Group (DSLG), an umbrella organisation spearheaded by the Dublin Commissioner for Startups, involves individuals from outfits such as the Dublin Chamber of Commerce, Startup Ireland, and the Irish Software Association.
In responding to the consultation call, the DSLG decided to make only one request, but they felt it was one that would significantly improve the lot of start-ups.
Since the greatest challenge facing a start-up is early-stage funding, the DSLG’s suggestion was to encourage private, early-stage investors, also known as angel investors, to put their money in start-ups, by providing tax incentives similar to those in the UK.
In 2012, the British government introduced the Seed Enterprise Investment Scheme (SEIS) to encourage investors to back start-ups they might otherwise have deemed too risky. The SEIS provides income-tax relief to investors who put up to £100,000 into a company in a single tax year.
The tax relief they get is equivalent to 50 percent of what they invest. So if an investor sinks £20,000 into a company, she’ll get £10,000 in tax relief; if she would have owed £15,000 in income tax for the year, that would be reduced to £5,000.
The scheme also exempts from capital gains tax half of gains reinvested in shares under the SEIS. So, if Deirdre sells an asset worth £200,000, makes £80,000 and reinvests it all, she can claim half of it (£40,000) exempt from capital gains tax.
Under the SEIS, there is not only an incentive for investors to back start-ups, but also a lure for them to reinvest. Since its launch, £250 million has been raised for nearly 2,900 companies through the scheme.
A similar scheme was launched in Ireland in 2011 – the Employment and Investment Incentive Scheme (EIIS) – but the incentives, such as income tax relief of 30 percent (and an additional 11 percent if the company was still in business after three years), aren’t nearly as enticing the SEIS’s.
In 2012, only €13.4 million was invested under the scheme. And while this figure increased to more than €40 million in 2013, it was still far short of the €138 million a year the government had anticipated, according to a review of the scheme by the Department of Finance last year.
One reason for the low uptake, the review suggested, having consulted with a number of stakeholders, was that the initial 30 percent relief was “too low when compared to the risk level of their investment”.
Rolling Out the Red Carpet
The Dublin Chamber of Commerce agrees with a lot of Bushnell’s criticisms, says its communications head, Graeme McQueen.
“We did our own analysis,” he says. “We looked at 11 tax rates that the UK has, and compared them to what we have here. We trail the UK in nine of those. That tells a pretty telling story really.”
“David Cameron said a few years ago that they were going to roll out the red carpet for start-ups, and they’ve followed through on that,” McQueen says.
He says that the UK has made it very attractive to start and build a business, and that we haven’t done the same.
“We’ve a lot of start-ups here. The opinion of the chamber would be that we’re not doing enough to help those,” he says.
McQueen says there are 80,000 micro-firms in Ireland, many of which employ between 1 and 3 people. Tax relief for these firms that would enable them to employ one additional person would mean 80,000 new jobs.
“We need to up our game,” he says. “There’s a lesson to be learned with what happened to the Web Summit. The warnings were there.”
“If you hear start-ups saying, ‘Look, if you don’t help us we’re going to move elsewhere’ . . . they will eventually move. There’s only so long they’re going to put up with it.”
The changes in policy need to be enacted now, McQueen says, not to stop start-ups and investors from relocating to the UK, but to reverse the trend that is already happening.
“For about six to nine months, we’ve been aware of start-ups who are moving to the UK,” he says. “It’s not something that’s going to happen; it’s happening.”
Moving to Newry
One such start-up that has made the move is ShotClip, a cloud-based software that enables multiple users to collaborate and make movies through an interactive story-building app on their smart phones and tablets.
In October last year, the company moved its base from Dublin to Newry as part of a deal to secure funding from investors.
Shotclip founder Conor McNally says the start-up began unofficially five years ago, but he’s been at it full-time for three years now.
Securing early-stage funding was “extremely difficult, next to impossible”, he says.
He managed to get some from angel investors, enough to keep things moving. ShotClip then got on to the National Digital Research Centre (NDRC) LaunchPad programme, a government-backed accelerator for digital start-ups, which got the company “pitch ready”, McNally says.
The company also got some funding from Enterprise Ireland, which “took a long time to get”, he says.
“But you still have to get private funding, and that’s the hard part,” he says. “That is extremely difficult in Ireland. It’s next to impossible for start-ups.”
The investment community in Ireland is quite conservative, says McNally. “There’s not as much risk capital in Ireland,” he says. “That’s where the UK scheme really helps.”
ShotClip was fortunate enough to find investors willing to put significant sums into the company. The funds were there, waiting. The only thing that stood in the way was that the company was based in the wrong country: Ireland.
To close the deal, McNally needed to set ShotClip up as a UK company. Hence the move to Newry.
ShotClip is going after a big consumer-type play that is high-risk, high-return, McNally says. “Generally that kind of thing doesn’t get funded in Ireland.”
Because of this, he doesn’t believe “a YouTube or Facebook or Twitter would ever get funded in Ireland”.
What Ireland Offers
Ian Lucey, CEO of Lucey Technology, which invests in early-stage start-ups, couldn’t agree more.
“Ireland is very competitive at getting 200-, 300-person companies to move to Ireland. But what they’re terrible at is actually building a 200-person company out of Ireland,” he says.
“The problem is you’re trusting your economy on all this foreign direct investment. Whereas, actually, Ireland has the skill sets to build up international businesses on its own. But you’ve got to put it in an environment that makes it easy to do it,” he says.
The government relies too heavily on semi-state bodies like Enterprise Ireland to stimulate start-ups through the provision of grants, according to Lucey.
Giving Enterprise Ireland money to give to entrepreneurs is costly and inefficient, he says. A substantial amount of taxpayers’ money that goes into Enterprise Ireland goes on administration, not to companies.
Enterprise Ireland’s financial support to industry was €186 million in 2014. The cost of administration, operation and promotion was €80 million.
Instead of a government grant which costs money to administer, a tax break like the SEIS is better for the start-up and the taxpayer, Lucey says.
The cost is the same to the taxpayer whether she pays €1 into a grant or €1 into a tax break, but the start-up gets the whole €1 with a tax break, as opposed to only a portion of it with a grant.
It’s a trick the government is missing, according to Lucey, but it’s not the only one.
There is an R&D rebate in Ireland, but it’s paid out incrementally over three years. In the UK, it takes three weeks. This is costing thousands of R&D jobs, says Lucey.
Capital gains tax is another area where Ireland is lagging the UK in terms of competitiveness, says Lucey. In Ireland it’s 33 percent; in the UK, it’s just 10 percent.
2016 Budget Changes for Start-ups
However, last week’s budget ushered in a reduced capital gains tax of 20 percent on the disposal of assets worth up to €1 million.
In his budget speech, Finance Minister Michael Noonan said this decision was made on the back of the consultation process with entrepreneurs that took place earlier this year.
The consultation process also led to a change in income tax for small business owners or entrepreneurs.
Noonan said that the way income tax was structured, an employee will take home a greater proportion of their salary than a small business owner on the same gross income.
To address the disparity, he introduced an Earned Income Tax Credit to the value €540.
In addition to this, the three-year corporation-tax relief for start-up companies, which has been in operation for three years, will be extended to 2018.
So, to say the government failed to listen to entrepreneurs in the consultation process as well as failed to introduce measures to aid them and new start-ups is a little unfair.
Not Enough
But Lucey says the measures will have little or no effect.
The reduction in capital gains tax is still uncompetitive against the UK’s, so it’s virtually useless, he says. And the extension of the corporation tax relief for start-ups will have little significance, he says.
“If you start a business, you’re not going to pay profits on your business for the first three years. But none of these early stage companies make that much bloody money anyway; they lose money in the first couple of years. So that’s actually a pile of shite as well,” Lucey says.
In a blog post entitled “Why Ireland will never be a relevant start-up hub”, put up the day after the government presented its budget, Lucey said that as an investor he had little choice but to encourage start-ups to raise money in the UK. This means some will have to relocate.
That’s where the money is, Lucey says. To get it, start-ups need to be based there.
“Ah, they’ll have to go,” he says. “They have to do it. We’re constantly on to them. They’ve no choice in the matter.”
Going, Going . . .
Restored Hearing, a start-up that allows users to stream sound-therapy to alleviate tinnitus, will probably have to make the move.
The company, which was started in 2009 by three Leaving Certificate students from Sligo, has had great success in raising early stage funding from Enterprise Ireland and private venture capitalists.
After six years of building the company, Restored Hearing now will be looking to raise follow-on investment in the next six to nine months, somewhere in the range of €1 million, says CEO and co-founder Rhona Togher.
“We’re not even trying to look for it here,” Togher says. Just from what she’s heard, Ireland is not the environment in which to raise that sort of funding.
“We will be starting around Web Summit time to speak to investors from further afield,” she says.
Will that mean the company will have to relocate?
“Honestly, we don’t know,” Togher says.
However, it seems inevitable.
She went to London for the first time in a business capacity a few weeks ago, to the Irish International Business network.
The energy and the access to funding was phenomenal, she says. “The SEIS programme just seems like a no-brainer.”
“If you meet the right kind of investor and it’s easier for them and you if you’re based a hundred miles east or west, you’d do it because you’d do anything for your company,” she says “You want it to thrive and you want it to grow.”
She has spoken with a lot of founders on the issue, and some have said, “I’m out of here,” but others have expressed a desire to stay to try to make it work.
“We’re very patriotic here,” she says “We hold out hope, and we’re very optimistic.”
If this patriotism didn’t exist, Togher believes that many more start-ups would have already left.
Going Global
Regina Breheny, managing director of the Irish Venture Capital Association (IVCA), is concerned about the flight of Irish start-ups. She also feels that the budget presented last week would do little to help the situation.
Her reasons as to why it will fail in encouraging entrepreneurial ventures are similar to those expressed already. She even feels that the reduction in capital gains tax will have a negative impact.
The problem with the 20 percent cap on relief of up to €1 million is that it might encourage entrepreneurs to sell a business earlier instead of building, it up because it would mean paying 20 percent capital gains instead of 33 percent.
Breheny points to technology start-up Logentries, originally Dublin-based, now Boston-based, which sold for €68 million last week. A sale of this size is unlikely to happen in Dublin, she says.
“The guys might say, ‘Sure, if we sell a bit earlier, we’ll be able to pay tax at 20 percent on a lesser profit,’” she says.
Breheny says the government is not listening to the warnings.
“We have been doing pre-budget submissions for years; I could nearly take my pre-budget initiative of several years ago and blow the dust off it and change the date and submit it. There has been very little progress made to support and incentivise entrepreneurs,” she says.
“What’s happened since is that the UK has addressed the issue and have just absolutely galloped ahead of us,” she says.
Over the last few years she says the “UK has got very quietly aggressive and they’re beating us hands down.”
She has heard that there were people from the British government at the Web Summit last year trying to encourage Irish start-ups to make the move to UK.
“So they’ve got really good at promoting what the UK has to offer,” she says.
It seems to be working. According to a 2014 report by the Centre for Entrepreneurs, a UK think tank, 14 percent of UK companies were started by migrant entrepreneurs. At the top of this list, were Irish entrepreneurs.
At present, Ireland cannot compete with the UK in terms of attracting and keeping start-ups, Breheny says. The time to act and to implement measures to reverse this trend is now.
“If you want to play in a global space you have to compete globally,” she says. “That’s the point.”