Ireland’s technology industry is the envy of the world. But the nature of human beings is to never be satisfied, so the Irish covet the technology industry of Israel.

Israel is the other technology-focused small economy success story. What’s different about the Israeli technology industry, relative to Ireland’s, is that the Israelis did it all by themselves. The Israeli technology industry is indigenous, where Ireland’s is imported from America.

Israel is brilliant at science and technology. It spends more on research and development than anywhere else, has more companies on the technology-focused NASDAQ exchange than any other outside North America, and proportionally is a world leader in numbers of patents, scientific publications, and researchers. Google chairman Eric Schmidt called it “the most important high-tech centre in the world after the US”.

Irish policymakers covet Israel’s homegrown tech industry. Sure, Ireland’s imported tech industry has transformed the economy and it employs hundreds of thousands. But there’s still the nagging feeling that Irish companies should be doing more. That the foreign tech companies could just disappear, like a thief in the night.

This is why a big goal of the Irish state is to support and nurture indigenous companies – particularly technology companies. There’s a panoply of government programs to help them: local enterprise offices, business and innovation centres, the Western Development Commission, the Regional Enterprise Development Fund, the Brexit loan scheme, the Microenterprise Loan Fund, grants for exporters, grants for startups, grants for expanding businesses, grants for market research, grants for innovation, grants for university spinoffs, grants for managers, grants for rural tourism, grants for seafood processing, and grants for blue-chip management consultants. To name only a few.

The government’s biggest tool for helping businesses is Enterprise Ireland. Enterprise Ireland has a budget of €268 million, of which €210 million goes on the above-mentioned grants to industry. Enterprise Ireland also has a role as Ireland’s official venture capital fund. It has invested in 1,500 Irish startups in total; 200 in 2019 alone. According to PitchBook, an advisory, Enterprise Ireland was the second most active venture capital investor in the world in 2019.

The national accelerator

Not mentioned in the panoply of government supports for business is the NDRC, or National Digital Research Centre. The NDRC is Ireland’s government-funded startup accelerator. What’s a startup accelerator? It’s a short, intensive programme to help small startup companies ramp up their growth. Academics Susan Cohen and Yael Hochberg say accelerators are defined by four features: a fixed length, cohorts, mentors, and a demo day. Demo day is when the startups pitch their company to outside investors. 

Startup accelerators have proliferated in the last ten years. According to the International Business Innovation Association, there are now around 7,000 of them worldwide. Exact definitions vary, but the NDRC is one of at least seven in Ireland. 

The NDRC doesn’t get a mention in the 55-page Supports for Indigenous Business report because it’s not run by the Department of Business, Enterprise and Innovation. It’s run by the Department of Communications, Climate Action and Environment. Its annual support from government comes to €3.9 million — which is 1.4 per cent of the Government’s annual support for Enterprise Ireland. 

The NDRC is operated by a private entity. It won a tender to provide support for commercial spin-offs from Universities in 2005 from the Department of Communications, Climate Action and Environment. That evolved into the NDRC, which was launched in 2007.

The original idea was that it would help build commercial spin-offs from academic research. The scope has since broadened out to include “companies and teams with the potential to grow internationally”.

In most ways, the NDRC operates like a normal accelerator. First, it picks promising young companies from its pool of applicants. It invests in them — its median investment is €30,000, according to Pitchbook — in exchange for around 8 per cent ownership. The startups then join a three-month course where they get advice and mentorship on various aspects of growing their business. At the end of the programme, the companies pitch to the outside world. 

The NDRC company has held the contract to deliver a startup accelerator for 11 years. In that time it’s received €43.5 million from the state.

Gold-plated

Let’s look at the cost of running the NDRC. In 2018, it received €3.9 million from the government, plus a further €1 million each from the proceeds of an investment and for running startup accelerators on behalf of others. That’s €5.96 million in what it calls total income.

In 2018, operating expenses came to €3.01 million, or 52 per cent of total income. €2.39 million went on staff compensation — that’s salaries, pensions and social insurance. There were 18 employees in 2018, so the average compensation per employee was €132,000.

Of the €2.39 million in staff costs, €979,000 went to directors and the top five managers. €305,000 went to Ben Hurley, the NDRC’s CEO. Subtracting key management pay from overall pay, we can see that the 13 staff outside the key management group made an average of €108,000. 

Enterprise Ireland’s budget is 55 times the size NDRC’s, and only one employee there makes more than €150,000— CEO Julie Sinnamon, who makes €190,000. The IDA’s budget is 36 times bigger, and its CEO Martin Shanahan makes €171,000. Neither Shanahan or Sinnamon are paid a bonus.

The NDRC says CEO Ben Hurley’s 2018 compensation included a one-off €90,000 bump which will revert in 2019. Asked to explain the one-off bump, through a spokesperson the NDRC said: “NDRC is not in a position where we can divulge information on internal contractual decisions in relation to individual members of NDRC staff”. In 2017, Hurley’s compensation was €188,000. He’s been CEO of the NDRC since its formation in 2007. 

The NDRC says pay reflects the specialised nature of its work: “NDRC requires a number of highly specialised employees to help deliver a pipeline of digital startups into the Irish economy”, it says.

So how does it compare to private sector accelerators? 

Eamonn Carey is the managing director (MD) of Techstars in London. Techstars is one of the biggest accelerator programs in the world, operating in more than 150 countries. Carey says of Techstars, “most MDs earn between £90-120,000, and have some upside in the form of carry” (carry is the MD’s share if the fund is sold at a profit). 

Based on this, salaries are higher at NDRC than Enterprise Ireland, or Techstars in the private sector, particularly among top managers.

The NDRC has 18 full-time staff. Techstars runs its accelerator program with two full-time staff. So did Wayra, a private accelerator which operated in Dublin up to 2015, and Venture Toolkit, an American accelerator.

Accelerators are lean because backing pre-seed startups is basically a crapshoot. It’s nearly impossible to tell which companies will make it and which won’t. The way accelerators normally maximise their chances of success is by keeping costs low and investing in lots of companies. 

Exits and returns

So NDRC’s expenses are high. What does it offer in return?

It’s not clear what yardstick to use when measuring NDRC. Is it strictly an accelerator — which would typically be light on staff, and be judged on returns? Or a venture capital fund? Or a government programme, which would be judged on its overall contribution to the nation on a cost-benefit basis?

NDRC itself seems somewhat unclear on how it should be judged. In its annual reports over the last nine years, key performance indicators change from year to year. The only metrics which have been reported consistently are follow-on investment, market cap of NDRC alumni, and direct jobs created. There are 24 other performance indicators which pop up in two or fewer reports and are not heard from again. In the 2018 report, NDRC reports €250 million in follow-on investment raised by NDRC companies at a €608 million market cap, along with 1,063 jobs created.

One straightforward way to judge an accelerator’s performance is how much its investments are worth. Having invested in 286 companies over 11 years, how much cash has the NDRC made when it sold its stakes? 

The NDRC doesn’t disclose this number in annual reports, but it can be pieced together from the accounts. In the 11 years to 2018, the NDRC received a €43.5 million in subventions from the government. And in that time, it’s made a total of €3.17 million from selling stakes in participating companies.

Expressed in terms of net internal rate of return — which includes management costs — NDRC has returned negative 24.8 per cent. Eamonn Carey of Techstars says: “Internal rate of return is a tricky metric for accelerators as there are a lot of factors that come into it — however, I would think most early-stage investors should be aiming for [positive] 30 per cent”. Although it is worth noting NDRC has had a couple of healthy exits in the last year.

But is that a fair way to judge it? Among its 286 investments, it has helped some notable Irish success stories like Tandem, Boxever, Senddr, Clearsight, Newswhip and Inscribe. If the NDRC made the difference for those companies, and they went out into the world creating hundreds of jobs, then perhaps the NDRC investment makes sense from the State’s perspective. 

That was more or less the finding of a report into the NDRC by Indecon, a consultancy. Measuring the broad benefit of the NDRC to the economy, it found the NDRC provided an economic benefit of €73.5 million relative to a total cost of €55.2 million. In the lingo of public sector economics, that’s a cost-benefit ratio of 1:1.3. A cost-benefit ratio greater than 1 indicates the program is delivering bigger benefits to the country than costs. It called the NDRC a “high-performance initiative” that is “consistent with international best practices”.

The Indecon report also says: “Target outcome and results have been greatly exceeded. While the metrics used were appropriate, it is in Indecon’s opinion that much higher targets should be set in the next intervention scheme to measure the effectiveness of State intervention… greater focus should be placed on net economic outcomes and on the financial return of the initial investments”.

“Class-leading operational efficiencies”

Let us now look at reporting. NDRC reported operational expenditure (opex) in its 2010-2012 annual reports (opex covers the things a company spends money on in its day-to-day business). A reasonable definition of opex would need to include salaries.

In its three annual reports up to 2012, NDRC did not include salaries from its opex calculations. In its 2010 report it said:

“In keeping with our best practice ethos, NDRC operational efficiency is vigilantly managed to ensure maximum capital is available for investment in collaborative innovation. As a result, NDRC invests 80 per cent of its available capital in collaborative translational research. NDRC limits its investment management, support and administration costs to 20 per cent.”

In 2011 it said it had “class-leading operational efficiencies” of 20 per cent. In the 2012 report it again pointed to “class-leading operational efficiencies” of 22 per cent. But once salaries are (properly) included, opex for 2010 jumps to 59 per cent, 2011 jumps to 40 per cent and 2012 jumps to 61 per cent. Opex numbers dropped out of the annual report entirely after 2012.

When I put this to the company, it said there was no discrepancy to account for. But it did not explain the 2010-12 opex figures.

The view on the ground

How do startups feel about it? Few I spoke to were willing to go on the record, even though most had positive things to say about their experience. The Irish startup scene is a small one. In particular, most spoke highly of the mentors at NDRC and felt it had accelerated their business.

A few criticisms came up. The first is that the NDRC didn’t have a full time chief financial officer (CFO) on staff. This matters because the NDRC is full of technology companies who don’t necessarily have a strong grasp of finance. Several told me they needed help with financial modelling, financial controls, and raising capital. But among the NDRC’s 18 full-time staff, this expertise isn’t provided. 

I asked the NDRC whether it employed a full-time financial person. It initially denied that it didn’t employ a full-time financial person — but, after several emails back and forth, it was also unwilling to confirm that it did. Two days later, I learned that the NDRC has just informed its members that it would shortly be appointing a CFO – on an outsourced basis.

A second criticism is that the NDRC didn’t help connect companies to venture capital investors once the programme had come to a close. The startups reporting having to chase down investment for themselves. The best accelerators, like Ycombinator in San Francisco for example, are deeply connected to the venture capital world. Ycombinator has an internal tool called Bookface which matches individual startups with their most suitable venture capital investors.

A third one is that the NDRC invests on tougher terms than the rest of the market. Where an accelerator like Wayra typically offered €50,000 for an eight per cent investment, the median NDRC offer is €30,000, according to Pitchbook (though terms vary from deal to deal). 

A fourth is around red tape. At the outset, NDRC has invoiced startups for the €25,000 cost of the programme, and simultaneously paid them the €25,000. Startups then need to register to get the VAT back on the cost of the program. Reportedly, it’s a headache.

A final criticism is that the programme, at least as implemented by NDRC in the Portershed Labs in Galway, isn’t sufficiently intense. Anna Downes, an alumni and CEO of VideoSherpa, says: “It’s meant to progress really fast. But it’s hard to do that if people are coming in and out for a day or half a day.”

Oman

In 2018, the NDRC got €507,000 from the Oman Technology Fund (OTF) to run an accelerator programme there. NDRC says: “Up to ten young ventures from Oman and the surrounding region were selected by OTF to participate”. NDRC gave “accelerator expertise and personnel throughout the three-month programme”, though the OTF did the investing. 

During 2018, the Irish government-funded NDRC hired one extra person. So how did it run an Omani accelerator program? Was the programme managed in its entirety by one extra employee?

Normally, the way a project like this might work is for a separate company to be created specially for the job — what’s called a special purpose vehicle. This has the benefit of keeping the two sets of accounts separate, so it’s clear what’s being spent on what. NDRC didn’t create an SPV for its Omani project, though it did create SPVs for its projects with Portershed and ARCLabs, accelerators in Galway and Waterford.

Asked to confirm no Irish taxpayer assets or employees were used to deliver the Omani accelerator, NDRC replied: “NDRC’s commercial activities with the Oman Technology Fund (OTF) to provide services towards their first seed-level investment programmes were entirely financed by OTF.”

What do we need?

The Department of Communications, Climate Action and Environment is in the process of reviewing tenders for the operation of the accelerator.

The rationale for getting the government involved is that there’s a market failure: not enough private investment in pre-seed startup companies, resulting in promising businesses failing before they get a chance. Is there really a market failure? When NDRC was set up in 2008 it was perhaps easier to make that case than it is today, when there are more than a dozen private accelerator and incubator programs in operation. The Indecon report maintains that the market failure is real: “Positive externalities that business start-ups attain, by creating jobs and stimulating the economy, that are not captured by private investors”. 

There’s evidence that accelerator programmes deliver wider benefits. Fehder and Hochberg find accelerators boost entrepreneurship in their region. Hallen, Bingham and Cohen find accelerators do accelerate companies’ progress. Winston-Smith and Hannigan find accelerator alumni are more likely to get follow on funding.

If we are to have a state-run accelerator program, what should be the yardstick? This needs to be defined better. By supporting highly successful Irish startups NDRC has, according to Indecon, generated €77 million for the economy. So perhaps generating economic activity should be the yardstick. 

It’s clear enough that by the standards of private sector accelerators, NDRC is expensive and its returns are relatively low compared to a number of metrics to date. Accelerators are usually small, lean, and commercially focused. NDRC is not. 

The question is whether a leaner NDRC would do better from both perspectives. A leaner, more commercially-focused NDRC would have more cash to invest.